RAISING OF FINANCE AND PROJECT FINANCING

RAISING OF FINANCE

Finance for a Project in India can be raised by way of

(A) Share Capital
(B) Long-ter borrowings
(C) Short-ter borrowings

Both share capital and long-ter borrowings are !sed to finance fi"ed assets pl!s the argin oney re#!ired to
obtain ban$ borrowings for wor$ing capital% &or$ing capital is financed ainly fro ban$ borrowings and fro
!nsec!red loans and deposits%

Share Capital consists of two broad categories of capital naely e#!ity and preference% '#!ity shares ha(e a fi"ed
par (al!e and can be iss!ed at par or at a prei! on the par (al!e% Shares cannot norally be iss!ed at a disco!nt%
)owe(er* in e"ceptional circ!stances iss!e of shares at a disco!nt is peritted pro(ided (a) the shares are of a
class already e"isting* (b) the disco!nt is a!thorised by the shareholders* and (c) the iss!e %is sanctioned by the
Central +o(ernent% ,orally the Central +o(ernent will not sanction a disco!nt e"ceeding -./%

0he corporates are now allowed to raise reso!rces for e"pansion plans% by iss!ing e#!ity shares with differential
(oting rights% 0he ain ad(antages of s!ch category of shares are 1
-% '#!ity can be raised witho!t dil!ting sta$e of the prooters%
2% Copanies can red!ce gearing-ratios%
3% 0he ris$ of hostile-ta$eo(ers is red!ced to a considerable e"tent%
4% 0he passing of yield in the for of high di(idends to the in(estors can be ens!red

0he following are the general disad(antages

-% 0he cost of ser(icing e#!ity capital will increase%
2% Poor corporate go(ernance ay be enco!raged%
3% If iss!ed at disco!nt* they ay raise the e#!ity b!rden%

Preference shares carry a fi"ed rate of di(idend (which can be c!!lati(e)% 0hese shares carry a preferential right to
be paid on winding !p of the copany% Preference shares can be ade con(ertible into e#!ity shares% Iss!e of
preference is not a pop!lar for of capital iss!e%

0he iss!e of capital by copanies is go(erned by g!idelines iss!ed by the Sec!rities and '"change Board of India
(S'BI) and the listing re#!ireents of the stoc$ e"changes%

Apart* fro e#!ity* there can also be (ario!s fors of pse!do e#!ity% 0he ost coon fors are f!lly or partly
con(ertible debent!res and debent!res* iss!ed with warrants entitling the holder to s!bscribe for e#!ity% 0here can
also be an iss!e of non-con(ertible debent!res%

0er finance is ainly pro(ided by the (ario!s All India 5e(elopent Ban$s (I5BI* IFCI* SI5BI* IIBI etc%)*
specialised financial instit!tions (6C0C* 05ICI* 0FCI) and in(estent instit!tions (LIC* 70I and +IC)% In
addition* ter finance is also pro(ided by the State financial corporations* the State ind!strial de(elopent
corporations and coercial ban$s% 5ebt instr!ents iss!ed by copanies are also s!bscribed for by !t!al f!nds
and financing acti(ities are also done by finance copanies%


Term Lending Institutions

0er lending instit!tions ay be categorised on the basis of their area of operations as !nder1
All India financial instit!tions consisting of%
Ind!strial 5e(elopent Ban$ of India (I5B-) ( proposed to be con(erted into a Coercial Ban$)%
Ind!strial Finance Corporation of India (IFCI)%
'8I9 Ban$
,ational Ban$ for Agric!lt!re and 6!ral 5e(elopent (,ABA65)%
Ind!strial In(estent Ban$ of India ()BI)%
0o!ris Finance Corporation of India (0FCI)%
Indian 6ailway Finance Corporation (I6FC)%
Coercial Ban$s%
6is$ Capital : 0echnology Finance Corporation Ltd%
Sall Ind!stries 5e(elopent Ban$ of India (SI5BI)%
Life Ins!rance Corporation (LIC)
+eneral Ins!rance Corporation of India (+IC) and its fo!r s!bsidiaries
7nit 0r!st of India
Power Finance Corporation Ltd%
,ational )o!sing Ban$
6!ral 'lectrification Corporation Ltd%
Infrastr!ct!re 5e(elopent Finance Corporation
)o!sing and 7rban 5e(elopent Corporation Ltd% ()75C.)
Indian 6enewable 'nergy 5e(elopent Agency Ltd% (I6'5A)%

0he instit!tions li$e LIC : +IC ay not be (ery !ch associated with the project appraisal b!t lend their f!nds in
consorti! with other all India financial instit!tions%
State le(el financial instit!tions consisting of 1
State Financial Corporations (SFCs)%
State Ind!strial 5e(elopent Corporations (SI5Cs)%
6egional 6!ral Ban$s : Co-operati(e Ban$s%

State le(el instit!tions confine their acti(ities within the concerned States and generally e"tend financial
accoodation to sall and edi! scale sectors%

Non Fund Facilities

0he role of the financial and ban$ing instit!tions is not erely confined to lending of f!nds% 0hey render non f!nd
based facilities as well li$e opening of letters of credit* iss!e of ban$ g!arantees* etc% Besides* there are pri(ate
in(estent copanies in(ol(ed in direct and indirect financing of the projects and also e"tending lease financing%

PROJECT FINANCING

Before ipleenting a new project or !nderta$ing e"pansion* di(ersification* odernisation or rehabilitation
schee ascertaining the cost of project and the eans of finance is one of the ost iportant considerations% For
this p!rpose the Copany has to prepare a feasibility st!dy co(ering (ario!s aspects of a project incl!ding its cost
and eans of finance% It enables the Copany to anticipate the probles li$ely to be enco!ntered in the e"ec!tion
of the project and places it in a better position to respond to all the #!eries that ay be raised by the financial
instit!tions and others concerned with the project%

Cost of ro!ect

It constit!tes a cr!cial step in project planning% 0he aggregate cost indicates the #!ant! of f!nds needed for
bringing the project into e"istence% 0herefore* cost of project sho!ld be fi"ed with great care and ca!tion% It fors
the basis on which the ;9eans of Finance< is wor$ed o!t% 0he calc!lation of the prooter<s contrib!tion is also done
on the basis of the cost of project% )ence* all ites which are necessary for the project sho!ld be incl!ded at this
stage itself% 0he oission < if s!bse#!ently detected* wo!ld ha(e to be financed by the prooters thesel(es%
Altho!gh* re#!est can be ade to the financial instit!tion for additional assistance* b!t it wo!ld res!lt in delaying of
the s!ction leading to tie and cost o(err!ns% Besides* it wo!ld also affect the credibility of the prooters%

0he e(al!ation of plant and achinery sho!ld also be ade with e"tree care and ca!tion as there is a possibility
of soe ites of plant and achinery being not incl!ded and it is at the tie of ipleentation of the project that
the lapse is detected and the prooter is forced to finance the oitted ites fro his own reso!rces%

Practically spea$ing* there is always a difference between the act!al cost and original estiated cost% Lea(ing aside
e"ceptional cases* the difference in the act!al cost and the original assessed cost ay be => per cent% If it is so h can
be ta$en for granted that the original e"ercise was done with d!e care% In a sall project say of the order of 6s% -
crore% or so this difference can be adj!sted deferring certain e"penses of the project which a not necessary prior to
the coenceent of coercial prod!ction% ?et in the larger si@ed projects say of 6s% -. crores or ore* a
difference of >--. per cent becoes significant so far as the absol!te #!ant! of f!nds < is concerned% 0his
necessarily leads to the possibility of o(err!ns in the project right fro the beginning% 0herefore it is* iperati(e to
arri(e at realistic fig!re of the cost of project%

0ie sched!le for ipleentation : the project is e#!ally iportant as h has direct bearing on the cost of project%
Longer the tie sched!le higher will be the cost% )ence* e(ery effort sho!ld be ade to red!ce the period of
ipleentation to the a"i! possible e"tent% In this direction !se be ade of control charts li$e bar charts*
P'60 and CP9 techni#!es% It sho!ld be reebered e(ery delay has a cog and this will res!lt in increase in the
cost of project* which in t!rn will affect the profitability of the project%

It is also iportant to #!ote realistic price of different fi"edAo(able assets% 0he financial instit!tions are (ery well
(ersed in assessing the cost of any project% )ence* prooters sho!ld a(oid o(er #!oting or !nder #!oting while*
fi"ing the* cost of project%

0he cost of project will !s!ally coprise of the following ites1

(i) Land and site de(elopent
(ii) (ii) Factory b!ilding
(iii) (iii) Plant and achinery%
(i() (i() 'scalation and contingencies
(() (() Bther fi"ed assets or iscellaneo!s fi"ed assets%
((i) ((i) 0echnical $now-how
((ii) ((ii) Interest d!ring constr!ction%
((iii) ((iii) Preliinary and pre-operati(e e"penses%
(i") (i") 9argin oney for wor$ing capital%

"eans of Finance

)a(ing established the total cost of project* prooters sho!ld wor$ o!t the eans of finance which will-enable
tiely ipleentation of the project% Finance will < be a(ailable fro se(eral so!rces and it is for the prooters to
select the ost s!itable so!rces after ta$ing into acco!nt all the rele(ant factors%

Financial Structure

0he financial str!ct!re refers to the so!rces fro which %the f!nds for eeting the project cost can be obtained* as
also the #!ant! which each so!rce will contrib!te towards the project cost% For this p!rpose it wo!ld be ad(isable
to $eep in (iew the following aspects%

(i) (i) 0he str!ct!re sho!ld be siple to operate in practice%
(ii) (ii) 0he plan sho!ld ha(e a practical bias and sho!ld ser(e as a wor$ing g!ideline for all project
forecasts%
(iii) (iii) &hile deciding the str!ct!re* the en(ironental constraints sho!ld be $ept in (iew% For e"aple*
the conditions pre(ailing in the capital ar$et* f!t!re prospects for earnings* ter-lending instit!tional r!les
and policies in operation* go(ernent g!idelines* etc%
(i() (i() 0he financial str!ct!re sho!ld ha(e an in-b!ilt fle"ibility which can ta$e care of circ!stances not
en(isaged initially% 0his is beca!se* howsoe(er well de(ised a plan way be* the o(err!ns* changes in the
project cost and ter lending instit!tions s!ggestions way necessitate a change in the financial plan
originally en(isaged% 0he prooters sho!ld < therefore* prepare a n!ber of alternati(e odels on the basis
of different pres!ptions%
(() (() 0he financial str!ct!re sho!ld be s!ch as to a$e opti! !se of all a(ailable reso!rces% As !se
of e(ery reso!rce in(ol(es costs* it is iperati(e that the reso!rces are p!t to e in the ost efficient
anner%
((i) ((i) 0he a(ailability of f!nds and the period* re#!ired for raising the are iportant while deterining
the financial str!ct!re%

Prearation of Financial Plan

In order to wor$ o!t the capital str!ct!re it is necessary to prepare a financial plan% 0he ethodology to be followed
in wor$ing o!t a financial plan re#!ires consideration* of the following iportant factors

(-) 5ebt '#!ity gearing
(2) Bwned f!nds
(3) Cost of capital
(4) (4) A(ailability of finance fro (ario!s so!rces%

(i# De$it% E&uit' gearing -0he finance re#!ired for eeting the cost of projects* can be di(ided into two
categories naely* (i) owned f!nds i%e% capital%C and (ii) borrowed f!nds i%e% loans% capital !s!ally called
<e#!ity<* consist of e#!ity and preference share capital as well as retained earnings i%e% reser(es% Borrowed
capital also called <debt<* consist of ter loans* deterred payents* debent!res* deposits fro the p!blic* etc%
0he !t!al relationship between debt and e#!ity is ofD greater iportance while deciding abo!t the f!nding
of a project%
(ii) O(ned Funds ) Bwned f!nds ainly coprise of e#!ity and preference capital% )owe(er* e#!ity capital
plays !ch significant role and fors the* ajor ch!n$ of owned f!nds% As the e#!ity capital bears no fi"ed
obligation of ret!rn* it is considered to be <high ris$ bearing capital<% 5i(idend on s!ch capital is payable
only if the copany a$es s!fficient profits and has ade#!ate disposable f!nds% &hile preference capital as
is $nown* carries a fi"ed ret!rn and ay be c!!lati(e or non-c!!lati(e* in character* preference
shareholders cannot e"pect to reap fr!its of s!ccess of the copany while on the other band they ay be
affected by the bad perforance of the copany%

Copared to e#!ity* the borrowings we !s!ally fi"ed incoe bearing% &hether it is ter loan or
debent!res* sec!redA!nsec!red E con(ertibleAnoncon(ertible* they carry a fi"ed obligation for the copany%

0herefore* it 3F> iportant for the copanyAprooters to wor$ o!t (ario!s cobinations of debt -e#!ity for
a gi(en cost of project% Altho!gh* theoretically to alternati(es ay be infinite there are certain instit!tional
nors which ha(e to be rec$oned while arri(ing at a proper or opti! debt-e#!ity gearing% 0hese nors
are gi(en in Chapter 3%

(iii) Cost of caital - It incl!des all types of f!nds proc!redAto be proc!red by a copany to eet the cost of
project and it incl!des e#!ity and preference capital* debent!res* ter loans* deposits* borrowings and
retained earnings% It depends !pon se(eral factors partic!larly the a(ailability of finance% For obtaining he
desired ao!nt of capital the copany has to copensate the s!pplier by tying di(idend or interest*
depending !pon the nat!re of capital* i%e%* owned f!nds or borrowings% )ence* the cost of capital is charged
periodically* payable 5 the s!ppliers in the for of di(idend or interest for hiring the capital% ,orally*
e(ery project has to be f!nded o!t of owned f!nds and borrowings% It will be e"treely rare to find projects
that are totally self-financed or wholly financed o!t of borrowed f!nds% )ence* !s!ally e(ery project will
ha(e a i" f owned f!nds and borrowingsC therefore* the iportant #!estion that arises in this conte"t is
what sho!ld be the proportion of owned f!nds and borrowings% It has to be the endea(o!r of the project
planners to wor$ o!t the ost beneficial str!ct!re of capital for the copany that is cost effecti(e and at the
sae tie eets with the re#!ireents of financial instit!tions%

0herefore* it is necessary that an e"ercise is cond!cted to ascertain the cost t different types of capital% It is
fairly easy to calc!late the cost of loansA debent!res% )owe(er* a coparati(e analysis will ha(e to be done
between different types of borrowings a(ailable to $now the cost and ad(antagesAdisad(antages of each
type of borrowing% Another coparison will ha(e to be done between the cost of owned f!nds (is-a-(is
borrowed f!nds% In this conte"t it ay be stated that ordinarily* the cost of e#!ity is higher than the cost of
the borrowed f!nds% 0he ajor reason being that the cost of borrowed f!nds* i%e%* interest is treated as a
charge on the profits of the copany* while on the other hand cost of e#!ity capital i%e%* di(idend is paid o!t
of the post-ta" profits of the copany% 0he difference in treatent is d!e to the pre(ailing incoe-ta"
policy of the +o(ernent%

0h!s the share of e#!ity capital as one of the so!rces of financing the capital cost of any project has to be
deterined at the project finalisation stage* itself% &hile deterining this share-of e#!ity in the financing
pattern* the following three iportant factors ha(e to be considered%

*i#De$t e&uit' ratio% 5ebt e#!ity ratio is one of the ost iportant paraeters on which reliance is placed
by the financial instit!tions while sanctioning loans for (ario!s projects% 0he effect of the 51 ' ratio on the
eans of finance is that lower the 51' ratio* higher is the re#!ireent of e#!ity contrib!tion of the
prooter and con(ersely* higher the 51' ratio lower is the re#!ireent of e#!ity contrib!tion%

For details refer to C+ater ,

*ii#Promoters- contri$ution -As stated earlier the debt e#!ity ratio deterines the ao!nt of e#!ity or the
capital to be arranged directly or indirectly by the prooters of the project% 0he entire ao!nt ay be
contrib!ted either by the prooters and their failies or part of the contrib!tion ay coe fro relati(es
and friends% 0he financial instit!tions ay also perit the prooters to introd!ce part of the contrib!tion by
way of interest free !nsec!red loans%

For details refer to C+ater ,

*iii#Stoc. E/c+ange guidelines: In case of listed copanies or those intending to be listed* they ha(e to
follow the g!idelines iss!ed by the Stoc$ '"change 5i(ision of the +o(ernent of India fro tie to tie%
According to these g!idelines certain ini! e#!ity has to be offered to the ebers of the p!blic so
that the e#!ity shares co!ld be listed on the Stoc$ '"changes%

Sources of Finance

For e(ery category* of capital there is a distinct so!rce of s!pply in the ar$et% 0herefore* it is necessary for the
prooters to identify these so!rces so that they can be approached for finance at the appropriate tie% A project will
re#!ire two types of f!nds1 - one* to finance p!rchase of io(able assets s!ch as land* b!ildings* plant and
achinery* etc%* and two* for carrying on day-do-day operations i%e wor$ing capital f!nds%

"a!or Funds of Long) Term Finance

0he ajor fors of long-ter finance a(ailable are1-

(a) 6!pee 0er Loans - 9ainly 5e(elopent Ban$s*
Financial Instit!tions and
In(estent Instit!tions% Also state
le(el instit!tions and ban$s%
(b) Foreign C!rrency - Coercial Ban$s* 5e(elopent
0er Loan Ban$s and Financial Instit!tions
(c) Asset CreditA)ire - 5e(elopent Ban$s* Financial
P!rchaseALeasing Instit!tions and Finance
Copanies
(d) S!ppliers< Credit - Ban$s and S!ppliers
(Foreign C!rrency)
(c) S!ppliersG Credit - Ban$s in conj!nction with
(Local thro!gh bill 5e(elopents Ban$s and
disco!nting) Financial Instit!tions
(f) ,on-con(ertible - 5e(elopent Ban$s* Financial
debent!res Instit!tions* In(estent
Instit!tions and 9!t!al F!nds
(g) '!ro Iss!esA'"ternal - Foreign So!rces
Coercial Borrowing


Sources of 0or.ing Caital Finance

0he so!rces of wor$ing capital finance are ainly the following1

Ban$ Finance
Coercial Paper
Fi"ed 5eposits
Inter-corporate 5eposits

0he le(el and ters of ban$ finance and coercial papers are go(erned by the c!rrent directi(es of the 6eser(e
Ban$ of India (6BI)%

0he ters on which a copany can collect fi"ed deposits fro the p!blic are go(erned in the case of finance
copanies by 6BI and in case of non-finance copanies by the Copanies Act%

Inter-corporate deposits are o!tside the p!r(iew of the reg!lations go(erning acceptance of deposits% As per new
Section 3F2A* inserted (ide Copanies (Aendent) Brdinance* -HHH w%e%f 3-st Bct% -HHI* the depositing
copany is s!bject to the liit that the aggregate (al!e of its loan* g!arantee sec!rity and in(estent with other
bodies corporate cannot e"ceed J./ of its paid-!p capital and free reser(es or -../ of its free reser(es whiche(er
is ore% F!rther* in respect of rate of interest* no loan shall be ade at a rate of interest lower than the pre(ailing
ban$ rate of interest%

Sources for Financing Fi/ed Assets

0he type of f!nds re#!ired for ac#!iring fi"ed assets ha(e to be of longer d!ration and these wo!ld norally
coprise of borrowed f!nds and own f!nds% 0here are se(eral types of long-ter loans and credit% facilities
a(ailable which a copany ay !tilise to ac#!ire the desired fi"ed assets% 0hese are briefly e"plained as !nder%
5etails are gi(en in respecti(e Chapters%

*1# Term Loan %)

(-) 6!pee loan%-6!pee loan is a(ailable fro financial instit!tions and ban$s for setting !p new projects as* well as
for e"pansion* odernisation or rehabilitation of e"isting !nits% 0he r!pee ter loan can be !tilised for inc!rring
e"pendit!re in r!pees for p!rchase of land* b!ilding* plant and achinery* electric fittings* etc%

0he d!ration of s!ch loan (aries fro > to -. years incl!ding a oratori! of !p to a period of 3 years% Projects
costing !p to 6s% >.. la$hs are eligible for refinance fro all India financial instit!tions and are financed by the
State le(el financial instit!tions in participation with coercial ban$s%

Projects with a cost of o(er 6s% >.. la$hs are considered for financing by all India financial instit!tions% 0hey
entertain applications for foreign c!rrency loan assistance for saller ao!nts also irrespecti(e of whether the
achinery to be financed is being proc!red by way of balancing e#!ipent* odernisation or as a coposite part of
a new project%

For the con(enience of entreprene!rs* the financial instit!tions ha(e de(ised a standard application for% All
projects whether in the nat!re of new<* e"pansion* di(ersification* odernisation or rehabilitation with a capital cost
!pto > crores can be financed by the financial instit!tion either on its own or in participation-with State le(el
financial instit!tions and ban$s%

For details refer to C+ater , 2 3

(b) Foreign C!rrency ter loan% - Assistance in the nat!re of foreign c!rrency loan is a(ailable for inc!rring foreign
c!rrency e"pendit!re towards iport of plant and achinery* for payent of re!neration and e"penses in foreign
c!rrency to foreign technicians for obtaining technical $now-how%

Foreign c!rrency loans are sanctioned by ter lending instit!tions and coercial ban$s !nder the (ario!s lines of
credits already proc!red by the fro the international ar$ets% 0he liability of the borrower !nder the foreign
c!rrency loan reains in the foreign c!rrency in which the borrowing has been ade% 0he c!rrency allocation is
ade by the lending financial instit!tion on the basis of the a(ailable lines of credit and the tie d!ration within
which the entire line of credit has to be* f!lly !tilised%

For details refer to C+ater 14

*5# Deferred a'ment guarantee *DPG# - Assistance in the nat!re of 5eferred Payent +!arantee is
a(ailable for p!rchase of indigeno!s as well as iported plant and* achinery% 7nder this schee g!arantee
is gi(en by concerned ban$Afinancial instit!tions abo!t repayent of the principal along with interest and
deferred instalents% 0his is a (ery iportant type of assistance partic!larly !sef!l for e"isting
profit-a$ing copanies who can ac#!ire additional plant and achinery witho!t !ch loss of tie% '(en
the ban$s and financial instit!tions grant assistance !nder 5eferred Payent +!arantee ore easily than
ter loan as there is no iediate o!tflow of cash%

*,# Soft loan% -0his is a(ailable !nder special schee operated thro!gh all-India financial instit!tions% 7nder
this schee assistance is granted for odernisation and rehabilitation of ind!strial !nits% 0he loans are
e"tended at a lower rate of interest and assistance is also pro(ided in respect of prooters contrib!tion*
debt-e#!ity ratio* repayent period as well as initial oratori!%

*3# Sulier-s line of credit -7nder this schee non-re(ol(ing line of credit is e"tended to the seller to be
!tilised within a stip!lated period% Assistance is pro(ided to an!fact!rers for prooting sale of their
ind!strial e#!ipents on deferred payent basis% &hile on the other hand this credit facility can be a(ailed
of by act!al !sers for p!rchase of plantAe#!ipent for replaceent or odernisation schees only%

*6# De$entures7- Long-ter f!nds can also be raised thro!gh debent!re with the objecti(e of financing new
!nderta$ings* e"pansion* di(ersification and also for a!genting the long-ter reso!rces of the copany
for wor$ing capital re#!ireents%

*8# Leasing7) Leasing is a general contract between the owner and !ser of the assets o(er a specified period of
tie% 0he asset is p!rchased initially by the lessor (leasing copany) and thereafter leased to the !ser
(lessee copany) which pays a specified rent at periodical inter(als% 0he ownership of the asset lies with
the lessor while the lessee only ac#!ires possession and right to !se the assets s!bject to the agreeent%
0h!s* leasing is an alternati(e to the p!rchase of an asset o!t of own or borrowed f!nds% 9oreo(er* lease
finance can be arranged !ch faster as copared to ter loans fro financial instit!tions% For details refer
to Chapter -I%

*9# Pu$lic deosits - 5eposits fro p!blic is a (al!able so!rce of finance partic!larly for well established large
copanies with a h!ge capital base% As the ao!nt of deposits that can he accepted by a copany is
restricted to 2> per cent of the paid !p share capital and free reser(es* saller copanies find this so!rce
less attracti(e% 9oreo(er* the period of deposits is restricted to a a"i! of 3 years at a tie%
Conse#!ently* this so!rce can pro(ide finance only for short to edi! ter* which co!ld be ore !sef!l
for eeting wor$ing capital re#!ireents% In other words* p!blic deposits as a so!rce of finance cannot be
!tilised for project financing or for b!ying capital goods !nless the pay bac$ period is (ery short or the
copany !ses it as a eans of bridge finance to be replaced by a reg!lar ter loan%

Before accepting deposits a copany has to coply with the re#!ireents of section >IA of the Copanies
Act* -H>J and Copanies (Acceptance of 5eposits) 6!les* -HF> that lay down the (ario!s conditions
applicable in this regard%

O(n Fund

*1# E&uit' :- Prooters of a project ha(e to in(ol(e thesel(es in the financing of the project by pro(iding
ade#!ate e#!ity base% Fro the ban$ersAfinancial instit!tions< point of (iew the le(el of e#!ity proposed by
the prooters is an iportant indicator abo!t the serio!sness and capacity of the prooters%

9oreo(er* the ao!nt of e#!ity that o!ght to be s!bscribed by the prooters will also depend !pon the
debt1 e#!ity nors* stoc$ e"change reg!lations and the le(el of in(estent* which will be ade#!ate to
ens!re control of the copany%

0he total e#!ity ao!nt ay be either contrib!ted by the prooters thesel(es or they ay partly raise the
e#!ity fro the p!blic. So far as the prooters sta$e in the e#!ity is concerned* it ay be raised fro the
directors* their relati(es and friends% '#!ity ay also be raised fro associate copanies in the gro!p who
ha(e s!rpl!s f!nds a(ailable with the% Besides* e#!ity participation ay be obtained fro State financial
corporationAind!strial de(elopent corporations%

Another iportant so!rce for e#!ity co!ld be the foreign collaborations% Bf co!rse* the participation of
foreign collaborators will depend !pon the ters of collaboration agreeent and the in(estent wo!ld be
s!bject to appro(al fro +o(ernent and 6eser(e Ban$ of India% ,orally* the +o(ernent has been
granting appro(als for e#!ity in(estent by foreign collaborators as per the pre(ailing policy% 0he e#!ity
participation by foreign collaborators ay be by way of direct payent in foreign c!rrency or s!pply of
technical $now-howA plant and achinery%

Aongst the (ario!s participants in the e#!ity* the ost iportant gro!p wo!ld be the general in(esting
p!blic% 0he e"istence of giant corporations wo!ld ipossible b!t for the in(estent by sall shareholders%
In fact* it wo!ld be o e"aggeration to say that the real fo!ndation of the corporate sector are the sall
shareholders who contrib!te the b!l$ of e#!ity f!nds% 0he e#!ity capital raised fro the p!blic will depend
!pon se(eral factors (i@% pre(ailing ar$et conditions* in(estors< psychology* prooters trac$ record* nat!re
of ind!stry* go(ernent policy* listing re#!ireents* etc%

0he prooters will ha(e to !nderta$e an e"ercise to ascertain the a"i! ao!nt that ay ha(e to be
raised by way of e#!ity fro the p!blic after as$ing into acco!nt the in(estent in e#!ity by the prooters*
their associates and fro (ario!s so!rces entioned earlier% Besides* soe e#!ity ay also be possible
thro!gh pri(ate placeent% )ence* only the reaining gap will ha(e to filled by a$ing an iss!e to the
p!blic%

*5# Preference s+are%- 0ho!gh preference shares constit!te an independent so!rce of finance* !nfort!nately*
o(er the years preference shares ha(e lost the gro!nd to e#!ity and as a res!lt today preference shares enjoy
liited patronage% 5!e to fi"ed di(idend* no (oting rights e"cept !nder certain circ!stances and lac$ of
participation in the profitability of the copany* fewer shareholders are interested to in(est oneys in
preference shares% )owe(er* section of the in(estors who prefer low ris$s-fi"ed incoe sec!rities do in(est
in preference shares% ,e(ertheless* as a so!rce of finance it is of liited iport and !ch reliance cannot
be placed on it%

Comliance (it+ Different La(s 2 Regulations

In this conte"t it wo!ld be pertinent to note that while initiating the process for a$ing a p!blic iss!e of e#!ity
Apreference shares* the prooters will ha(e to coply with the re#!ireents of different laws and reg!lations
incl!ding Sec!rities Contracts (6eg!lation) Act* -H>J* Copanies Act* -H>J and S'BI g!ide-lines etc%* and (ario!s
r!les* adinistrati(e g!idelines* circ!lars* notifications and clarifications iss!ed there !nder by the concerned
a!thorities fro tie to tie%

*,# Retained earnings 1-Plo!gh bac$ of profits or generated s!rpl!s constit!tes one of the ajor so!rces of
finance% )owe(er* this so!rce is a(ailable only to e"isting s!ccessf!l copanies with good internal
generation% 0he #!ant! and a(ailability of retained earnings depends !pon se(eral factors incl!ding the
ar$et conditions* di(idend distrib!tion policy of the copany* profitability* +o(ernent policy* etc%
)ence* retained earnings as a so!rce plays an iportant role in e"pansion* di(ersification or odernisation
of an e"isting s!ccessf!l copany% 0here are se(eral copanies who belie(e in financing growth thro!gh
internal generation as this enables the to f!rther consolidate their financial position% In fact* retained
earnings play a !ch greater role in the financing of wor$ing capital re#!ireents%

Seed Caital

In consonance with the +o(ernent policy which enco!rages a new class of entreprene!rs and also intends wider
dispersal of ownership and control of an!fact!ring !nits* a special schee to s!ppleent the reso!rce : of an
entreprene!r has been introd!ced by the +o(ernent% Assistance !nder this schee is a(ailable in the nat!re of
seed capital which is norally gi(en by way of long ter interest free loan% Seed capital assistance is pro(ided to
sall as well as edi! scale !nits prooted by eligible entreprene!rs%

Go:ernment su$sidies

S!bsidies e"tended by the Central as well as State +o(ernent for a (ery iportant type of f!nds a(ailable to a
copany for ipleenting its project% S!bsidies ay be a(ailable in the nat!re of o!tright cash grant or long-ter
interest free loan% In fact* while finalising the ean of finance* +o(ernent s!bsidy fors an iportant so!rce
ha(ing a (ital bearing on the ipleentation of any a project%

O$!ecti:e of t+is ;oo.

0he objecti(e of this* Boo$ is to pro(ide e(ery inforation on loan schees and facilities a(ailable fro financial
and ban$ing instit!tions* proced!re and preca!tions to be ta$en while a$ing loan applications* charging of
sec!rities and e"ec!tion of doc!ents and agreeents for this p!rpose%

PROJECT APPAISAL FOR TER" LOAN


A project report is essential before a decision for setting : !p of any project is ta$en% An entreprene!r !st st!dy
all aspects of the project incl!ding the prod!ct to be an!fact!red* technical process in(ol(ed in an!fact!ring*
a(ailability of infrastr!ct!re* plant and achinery* technology* s$illed labo!r* ar$eting arrangeents and
prospects of the prod!ct etc% An assessent of total cost of the project and proposed eans of financing with
ephasis on o(erall profitability of the project is also necessary% Project report !st* therefore* incl!de all these
inforation and co(er entire aspects of a project to stand scr!tiny by financial instit!tions who shall appraise the
project fro the following angles before ta$ing any decision to grant ter loans%

0echnical feasibility%
9anagerial copetency%
Financial and coercial (iability%
'n(ironental and econoic (iability%

It is* therefore* necessary that a proper project report is prepared e"aine all these details% For ind!strial projects*
help of e"pertsAcons!ltants ay be coissioned for preparation of a s!itable project report* which will enable the
prooter to arri(e at a correct decision% 0he project report shall co(er all the aspects as stated abo(e% &e shall now
a$e an attept to e"aine all the abo(e factors in details ephasising on iportant points that are re#!ired to be
highlighted while presenting papers to the financial instit!tion for its consideration and appro(al%

TEC<NICAL FEASI;ILIT=

All factors relating to infrastr!ct!ral needs* technology* a(ailability of achine* aterial etc% are re#!ired to be
scr!tinised !nder this head% Broadly spea$ing the factors that are co(ered !nder this aspect incl!de1
A(ailability of basic infrastr!ct!re%
LicensingA6egistration re#!ireents%
Selection of technologyAtechnical process%
A(ailability of s!itable achineryAraw aterialAs$illed labo!r etc%

;asic Infrastructure

0he ain points to be e"ained !nder this head are1

Land and its location% Land is the ost basic re#!ireent for setting !p of any project% 0he si@e of the
a(ailable land sho!ld not only eet the present re#!ireent b!t shall ta$e care of the f!t!re e"pansion plans as
well% 0he location of land is also (ital in as !ch as to deterine the transport facilities a(ailable in the area%
Projects located in well de(eloped ind!strial areas enjoy the benefits of de(eloped basic infrastr!ct!re readily
a(ailable to the%

;uildings% ,ecessary plans for factory b!ildings* plant roo* wor$shops* adinistrati(e bloc$s and
residential bloc$s etc% as considered necessary are to be finalised and pro(ided in the project cost%

A:aila$ilit' of (ater and o(er% &ater and power are other two (ery (ital re#!ireents% Soe projects
ay cons!e large #!antities of water* which shall be a(ailable either thro!gh !nicipal s!pply or
!ndergro!nd% Storage tan$s of ade#!ate capacity ay also be re#!ired and shall be pro(ided for in the project%
9any projects ha(e* of late* s!ffered d!e to erratic s!pply of< power in any States% Arrangeents for getting
the re#!ired power load sanctioned fro 'lectricity Board and the necessity of pro(iding alternati(e capti(e
power generation capacity need* to be (ery closely e"ained ill all the cases%

A:aila$ilit' of la$our% 0he a(ailability of labo!r is ainly dependent on the location of the project% 0he
cheap and ab!ndant s!pply of labo!r a$es !ch difference to the project ipleentation% For projects to be
set !p ill far fl!ng areas* special incenti(es ight be necessary to ind!ce the labo!r to shift to that area which
ay add to the cost of< project and its ipleentation

Licensing

+o(ernent of India has recently liberalised pro(isions relating to licensing of ind!stries to a great e"tent% As per
the Ind!strial Policy Stateent* only J ind!stries are s!bject to licensing by +o(t% of India* (i@%

-% 5istillation and brewing of alcoholic drin$s%
2% Cigars and cigarettes of tobacco and an!fact!red tobacco s!bstit!tes%
3% 'lectronic Aerospace and defence e#!ipentC all types%
4% Ind!strial e"plosi(es incl!ding detonating f!ses* safety f!ses* g!npowder* nitrocell!lose and atches%
>% )a@ardo!s cheicals%
J% 5r!gs and Pharace!ticals (according to odified 5r!g Policy Septeber* -HH4)%

A few an!fact!ring ind!stries where ore than ade#!ate capacity has already cell created in the co!ntry are
disco!raged by +o(t% of India and are p!t in the negati(e list% 0his list is aended fro tie to tie and ind!stries
incl!ded in the list are generally not e"tended any financial assistance by financial instit!tions% Special efforts
wo!ld* therefore* be necessary and soe cogent reasons will ha(e to he gi(en j!stify setting !p of s!ch projects

Tec+nolog'>Tec+nical Process

An iportant aspect of project e(al!ation is critical e"aination of< the technologyAtechnical process selected for
the project% 0he* ain points to he considered in this regard are as !nder1

A:aila$ilit'% 0he technical processAtechnology selected for the project !st be readily a(ailable either
indigeno!sly or necessary arrangeents for foreign collaboration !st be finalised% Foreign collaboration* if
not co(ered !nder a!toatic ro!te of 6BI* re#!ires prior perission fro +o(t of India and is generally
peritted in the following cases1
(a) &here indigeno!s technology is too closely held in India and is not a(ailable* or
(b) &here foreign collaboration is necessary for !pdation of e"isting ind!stry and odernisation
thereof* or
(c) &here the project is for iport s!bstit!tion or for setting !p of an e"port oriented !nit%

0he pro(isions regarding foreign technical collaboration with or witho!t financial collaboration ha(e also been
liberalised recently% 9any of foreign collaborations can be now appro(ed by 6eser(e Ban$ of India and
appro(al fro +o(ernent of India is not necessary% F!ll pro(isions in this regard !st be elaborated and for
s!bject atter of project report%

0he technical process selected is to be briefly stated in the project report and is to be critically copared with
other technical processes in operation for an!fact!re of siilar prod!cts to establish its s!periority o(er other
processes%

Alication% 0he selected technology !st find a s!ccessf!l application in Indian en(ironent and the
anageent (prooter) shall be capable of f!lly absorbing the technology% 0his is an iportant factor and
any projects ha(e failed beca!se of the wrong selection of technology which co!ld not be s!ccessf!lly
ipleented in Indian en(ironents%

Continuous udating% 0he selected technology shall not only be ode b!t the !nderlying technical
arrangeent !st pro(ide for its constant !pdation as a necessary safe-g!ard against the process becoing
obsolete% 0he 6 : 5 (6esearch and 5e(elopent) facilities re#!ired to be created for coplete absorption and
contin!o!s !pdation of technology need to be (ery closely e"ained to ens!re good long-ter prospects for the
project%

A:aila$ilit' of s.illed tec+nical ersonnel>training facilities% 0he foreign technical collaboration shall
pro(ide necessary training facilities to Indian* personnel who shall be in(ol(ed in project ipleentation and
s!bse#!ent r!nning of the project% 0he a(ailability of technically trained persons for the selected technical
process* indigeno!s or foreign* has to be ens!red in any case%

Plant si?e 2 roduction caacit'% 0he selection of plant si@e and prod!ction capacity is ainly
dependent on the total capital o!tlay by the prooter and also on the a(ailable ar$et for the prod!ct% 0his
aspect is* howe(er* (ery iportant in selecting the right technology which shall be s!itable for the en(isaged
scale of prod!ction% Creation of capacity for o(er prod!ction ay increase the capital cost with conse#!ent
interest load* which ay !ltiately effect the wor$ing of the project% 0he project ay fail solely on this gro!nd
despite the selection of the best technology%

A:aila$ilit' of mac+iner'% 0he a(ailability of plant and achinery re#!ired for setting !p of the project
after selection of technology is to be ens!red% Soe plants ay re#!ire a long lead tie which ay res!lt in
delay and conse#!ent cost o(err!n !psetting the financial planning in the beginning itself% It is also desirable
that the s!ppliers of plant !st gi(e a s!itable g!arantee for its perforance !p to the rated capacity% ,ecessary
arrangeents for ser(icing of the achinery* s!pply of spare parts and cons!ables are also to be e"ained so
that there are no prod!ction bottlenec$s d!e to fail!re of plant and achinery in the long r!n%

A:aila$ilit' of ra( material and consuma$les% 0he easy a(ailability of raw aterial and cons!ables is
a precondition for s!ccessf!l operation of any project% 0his aspect* therefore* needs considerable attention at the
planning stage itself% 0ie !p arrangeents with the s!ppliers of raw aterial ay be necessary if the s!ppliers
are few%

Iport of raw aterial ay be necessary in a b!nch re#!iring storing of e"cess in(entory for a long tie
forcing the !nit to arrange for additional wor$ing Capital th!s increasing the project cost% Iport of a partic!lar
type of raw aterial ay also be s!bject to licensing by Iport 0rade Control A!thoritiesC th!s bringing into a
sense of !ncertainty on its a(ailability d!e to change in +o(tGs policy% All these factors are (ery iportant and
detailed planning to ens!re easy a(ailability of re#!ired raw aterial is necessary% Financial instit!tions*
lending for the project* ha(e to be satisfied on this score as it ay pro(e (ital for s!ccessf!l ipleentation of
the project and its r!nning%

"ANAGERIAL CO"PETENCE

0he !ltiate s!ccess of e(en a (ery well concei(ed and (iable project ay depend on how< copetently it is
anaged% Besides project ipleentation* other iportant f!nctions re#!ired to be controlled can broadly be
classified as !nder1
Prod!ction
Finance
9ar$eting
Personnel%

A coplete integration of all these f!nctions within an organisation ay be the first step towards an effecti(e
anageent%

0he prooter of the project is to pro(ide necessary leadership and his #!alification* e"perience and trac$ record
will be closely e"ained by the lending instit!tions% 0he details of other projects s!ccessf!lly ipleented-by the
sae prooter ay pro(ide the necessary confidence to these instit!tions and help final appro(al of the project%

It is also necessary to pro(ide an organisation chart clearly defining the responsibility and decision-a$ing le(els
and the details of the arrangeents already adeAto be ade to an these positions by well #!alified professionals%
Proper planning and b!dgeting* participation of wor$ers in the anageent* decentralising decision-a$ing*
de(eloping effecti(e internal control syste etc% are soe of the factors which wo!ld help in better anageent of
any project%

CO""ERCIAL @IA;ILIT=

Any project can be coercially (iable only if it is able to sell its prod!ction at a profit% For this p!rpose it wo!ld
be necessary to st!dy deand and s!pply pattern of that partic!lar prod!ct to deterine its ar$etability%

Kario!s ethods s!ch as trend ethod* regression ethod for estiation of deand are eployed which is then to
be atched with the a(ailable s!pply of a partic!lar prod!ct% 0he prospects of e"porting the prod!ct ay also be
e"ained while assessing the deand% If the selling of the prod!ct has already< been tied !p with foreign
collaborators or with soe other !sers* the fact need to be highlighted% 0his factor shall definitely ha(e a positi(e
infl!ence on the coercial (iability of a project% ,ecessary factors which ay infl!ence the s!pply position s!ch
as licensing of new projects* introd!ction of new prod!cts* change in iport policy etc% shall also be ta$en into
cognisance while estiating the ar$eting potential of any prod!ct% 0his e"ercise shall be* cond!cted for a
s!fficiently long period say > to -. years to deterine the contin!ed deand of the prod!ct d!ring the c!rrency of
the loan granted by financial instit!tions%

0his factor will also help the prooter to ta$e a right decision in selecting the si@e of the plant and deterining the
capacity !tili@ation%

FINANCIAL @IA;ILIT=

Kario!s steps are in(ol(ed to deterine the financial (iability of a project as !nder1

Determination of Pro!ect Cost

A realistic assessent of project cost is necessary to deterine the so!rce for its a(ailability and to properly
e(al!ate the financial (iability of the project% For this p!rpose* the (ario!s ites of cost ay be s!b-di(ided to as
any s!b-heads as possible so that all factors are ta$en into acco!nt while arri(ing at the total cost% S!fficient
c!shions ay also be pro(ided for any inflationary increase e"pected d!ring the co!rse of project ipleentation%
0he ajor ites of cost are as !nder%

Land and Site de:eloment% 0he (ario!s s!b-heads for estiation of cost of land and its de(elopent
which are to be ta$en into consideration incl!de1
(i) (i) Cost of land or prei! payable on leasehold land%
(ii) (ii) 6egistration and other con(eyancing charges%
(iii) (iii) Cost of le(elling and de(elopent* if any%
(i() (i() Cost of laying approach road connecting the factory site to ain road%
(() (() Cost of internal roads in the factory%
((i) ((i) Cost of fencingAcopo!nd wall%
((ii) ((ii) Cost of gates etc%

Any other e"pendit!re for de(elopent of land to a$e it s!itable for the project is also to be specifically
pro(ided to arri(e at the final cost !nder this ite%

;uildings% Kario!s s!b-heads for estiation of e"pendit!re !nder this ite incl!de1

(i) (i) Factory b!ilding for the ain plant and achinery%
(ii) (ii) Factory b!ilding for a!"iliary ser(ices li$e stea s!pply* water* s!pply* laboratory* wor$shop
etc%
(iii) (iii) +odowns* wareho!ses and open yard facilities%
(i() (i() Adinistrati(e b!ildings and other iscellaneo!s non-factory b!ildings s!ch as canteen* g!est
ho!se* tie office etc%
(() (() Silos* tan$s* basin* cisterns and s!ch other str!ct!res which are necessary for installation of
plant and e#!ipent and other ci(il engineering wor$%
((i) ((i) +arages%
((ii) ((ii) Cost of se(er* drainage etc
((iii) ((iii) 6esidential #!arters for essential staff%
(i") (i") Architects< fee%

0he cost of constr!ction will ainly depend on the type of constr!ction en(isaged and also* to soe e"tent* on
the type of soil and its load bearing capacity% 0he constr!ction of residential #!arters for wor$ers and other $ey
staff ay be peritted only if the project is sit!ated in the less de(eloped area% 5etailed estiation of cost
!nder (ario!s s!b-heads gi(en abo(e ay preferably be obtained fro a rep!ted fir of ci(il
engineersAarchitects to a(oid any cost o(err!n at a later stage%

Plant 2 "ac+iner'% 0he cost of plant and achinery !st incl!de the transportation and other charges !p
to the site and also the erection charges% F!ll details with broad specification and n!ber of e#!ipents to be
p!rchased in respect of iported as well as indigeno!s achinery are to be gi(en separately% 0he nae of the
an!fact!rer and whether orders ha(e already been placed or not is also to be specified% 0he (ario!s s!b-heads
!nder this ajor head incl!de1
(i) (i) Cost of iported achinery incl!ding freight* ins!rance* loading and !nloading charges*
c!stos d!ty and transportation charges !p to site%
(ii) (ii) Cost of indigeno!s achinery incl!ding transportation charges !pto the site of the project%
(iii) (iii) 9achinery stores and spares%
(i() (i() Fo!ndation and erection charges%

Tec+nical .no()+o( fees which shall also incl!de ally e"penses on drawings etc% payable to foreign
collaborator%

E/enses on foreign% technicians and training of Indian technicians abroad%

"iscellaneous % fi"ed assets which incl!de1

(i) (i) F!rnit!re%
(ii) (ii) Bffice achinery and e#!ipent%
(iii) (iii) Kehicles s!ch as cars and tr!c$s%
(i() (i() 6ailway siding%
(() (() Laboratory* wor$shop and fire-fighting e#!ipent%
((i) ((i) '#!ipent for s!pply of power* s!pply and treatent of water etc%

0his is not an e"ha!sti(e list of iscellaneo!s assetsC the re#!ireent of which will differ fro project to
project% A reasonable assessent of all the iscellaneo!s fi"ed assets essentially re#!ired shall be ade to
deterine the act!al cost !nder this head%

It is iportant to note here that e"penses ay soeties be inc!rred to ac#!ire patents* trade ar$s* copyrights
etc%C the cost of which is to be incl!ded n the project cost !nder this head%

Preliminar' and caital issue e/enses% Soe e"pendit!re is to be inc!rred by the prooter for floatation
of the copany* preparation of the project report etc% Initial disb!rseent by way of ad(ertising and p!blicity*
printing of stationery and also as !nderwriting coission and bro$erage etc% towards capital iss!e wo!ld be
necessary and as s!ch will for a part of project cost% 6easonable estiation of s!ch e"penses wo!ld* therefore*
be necessary and shall be shown !nder this head%

Pre)oerati:e E/enses% A few e"penses will ha(e to be inc!rred in the pre-operati(e stage d!ring the
co!rse of project ipleentation and shall for part of project cost% S!ch e"penses incl!de o!tlay on1

(i) (i) 'stablishent incl!ding salary to staff%
(ii) (ii) 6ent* rates and ta"es
(iii) (iii) 0ra(elling e"penses%
(i() (i() Ins!rance d!ring constr!ction%
(() (() 9ortgage charges* if any%
((i) ((i) Interest on deferred payents and coitent charges on borrowings* if any%
((ii) ((ii) Bther iscellaneo!s start !p e"penses%

Pro:isions for contingencies% ,o estiation of cost e(en if done after a (ery detailed e"aination of all
the rele(ant aspects ay be perfect and it is necessary that a reasonable c!shion in estiation of total cost of the
project ay be pro(ided to eet any contingencies in f!t!re and a(oid o(er-r!n% 'stiates of cost !nder
(ario!s heads as already disc!ssed ight ha(e been ade either on the basis of fir contracts already entered
or on the basis of a(ailable ar$et rates which ay change d!e to inflation or otherwise at the tie of
placeent of fir orders% Soe ites of e"pendit!re ight ha(e been o(erloo$ed at the tie of estiation of
preliinary and pre-operati(e e"penses%

S!itable pro(isions for s!ch contingencies s!pported by (alid reasons !st be ade% 0he basis for calc!lation
of pro(ision need also be clarified to j!stify the o(erall cost of project%

"argin "one' for 0or.ing Caital% &or$ing capital re#!ireents of any project are et by
coercial ban$s% 0he part of wor$ing capital is* howe(er* re#!ired to be financed fro long-ter reso!rces%
0his part is generally referred to as argin for wor$ing capital and is incl!ded in the cost of project% Ban$s now
generally re#!ire that 2>/ of the total c!rrent assets (wor$ing capital) shall be the argin to be pro(ided fro
the long-ter* reso!rces and F>/ shall be financed by the% 5etailed disc!ssion on this aspect has been gi(en
in the s!bse#!ent chapters% It will be s!fficient here to add that necessary estiation for argin oney re#!ired
for wor$ing capital shall* be ade and incl!ded in the cost of project%

Sources of Funds>"eans of Financing

After estiation of the cost of a project* the ne"t step ob(io!sly will be to find o!t the so!rces of f!nds by eans of
which the project will be financed% 0he project will be financed by contrib!tion of the f!nds by the prooter
hiself and also raising loans fro others incl!ding ters loans fro financial instit!tions% 0he eans of financing
will incl!de1

Iss!e of share capital incl!ding ordinaryApreference shares%
Iss!e of sec!red debent!res%
Sec!red long-ter and edi!-ter loan<s (incl!ding the loans for which the application is being p!t !p to
the ter lending instit!tions)*
7nsec!red loans and deposits fro prooters* directors-etc%
5eferred payents%
Capital s!bsidy fro CentralAState +o(ernent%

If any additional f!nds are to be raised fro an alternati(e so!rce* the details there of ay also be pro(ided% 0he
prooters contrib!tion by way of share capital andAor loans is re#!ired to be shown separately%

Profita$ilit' Anal'sis

After deterining the cost of project and eans of financing* the (iability of the project will depend on its capacity
to earn profits to ser(ice the debt and capital% 0o !nderta$e the profitability analysis* it will be necessary to ra
estiates of the cost of prod!ction and wor$ing res!lts% 0hese estiation nor ade for a period of -. years and
projected profit and loss acco!nt for -. year is prepared to draw inference for the e"pected profit%

;rea.)e:en Anal'sis

'stiation of wor$ing res!lts pre-s!pposes a definite le(el of prod!ction and sales and all calc!lations are based on
that le(el% It ay* howe(er* not be possible to realise those le(els at all ties% 0he ini! le(el of prod!ction and
sale at which the !nit will r!n on <no profit no loss< is $nown as brea$ e(en point and the first goal of any project
wo!ld be to reach that le(el% 0he brea$-e(en point can be e"pressed in ters of (ol!e of prod!ction or as
percentage of plant capacity !tilisation%

0he cost of prod!ction ay be di(ided in two parts as !nder1

Fi/ed costs% 0hese costs are not related to the (ol!e of prod!ction and reain constant o(er a period of tie%
'"aples of s!ch costs incl!de rent of b!ilding* depreciation* interest on ter loans etc% salaries of peranent
eployees etc%

@aria$le costs% 0hese costs ha(e a direct relationship with the (ol!e of prod!ction% 0he costs will increase with
any increase in the le(el of prod!ction% '"aples of s!ch costs incl!de raw aterial* f!el and power* wages*
pac$aging etc%

0he concept of brea$ e(en point can w !nderstood by the following ill!stration 1
Installed capacity 1 -*..*... !nits
0otal fi"ed costs 1 6s%4*..*... per year
Sale price 1 6s%2. per !nit
Kariable cost 1 6s%-2 per !nit

0he sales re(en!e is first adj!stable towards reco(ering the (ariable costs and the e"cess ay then be !tilised to
co(er the fi"ed costs% 0he difference between the sale price and the (ariable costs is tered as <contrib!tion<% 0he
contrib!tion per !nit in the abo(e ill!stration will be1

Contrib!tion per !nitL Sale price-Kariable costs
L6s%2. - 6s%-2
L 6s%I per !nit

0he <contrib!tion< will be !tilised to co(er the total fi"ed costs and brea$-e(en point is reached when the
<contrib!tion< becoes e#!al to total fi"ed cost% 0he brea$ e(en point in ters of (ol!e of prod!ction ay th!s be
calc!lated as !nder1
0otal Fi"ed cost
Brea$ e(en in ters of (ol!e L
of prod!ction Contrib!tion per !nit

L 4*..*... M L >.*... !nits
I
0he brea$-e(en point in ters of plant capacity ay now be calc!lated as !nder1
0otal capacity 1 -*..*... !nits
Kol!e of prod!ction for brea$ e(en 1 >.*...

So Brea$ - e(en point in ters of plant capacity L >.*....
-*..*... N -..

L >./

0his is the ost pop!lar ethod of e"pressing the brea$-e(en point% It con(eys that the !nit will reach the <no profit
no lossG stage e(en at >./ capacity !tilisation thereby pro(iding a safety argin of >./ within which the !nit will
earn profit%

It shall be appreciated fro the abo(e disc!ssion that lower the brea$-e(en point* better it wo!ld be to carry o!t the
project% Lower brea$-e(en point ay be a desirable c!shion for any !nforeseen circ!stances which ay force the
!nit not to realise the e"pected le(el of prod!ction and sale%

Cas+ Flo(

After carrying o!t the profitability analysis and deterining the e"pected profits* a projected cash flow stateent
for a period of -. years is drawn% Cash flow stateent is* in fact* a narration of all the so!rces of cash a(ailable
d!ring the co!rse of operation within a period of tie (generally one operati(e year) and its possible !se
(de(elopent) d!ring that period% 0his helps to find o!t the total s!rpl!s f!nds created d!ring the operational year%
0his inforation helps to deterine the capacity of the project to ser(ice its debts and fi" the repayent periods of
loans granted for a partic!lar project and also to deterine the oratori! period for repayent of the loan% 0he
repayent of the loan is fro the s!rpl!s cash generated d!ring the operations in a year%

De$t Ser:ice Co:erage Ratio

5ebt ser(ice co(erage ratio is calc!lated to find o!t the capacity of the project ser(icing its debt i%e%* in repayent
of the ter borrowings and interest% 0he debt-ser(ice co(erage ratio (5SC6) is wor$ed o!t in the following
anner1

5%S%C%6% L ,et Profit after ta" = 5epreciation = Interest on long -ter borrowing<s
6epayent of ter borrowings d!ring the year = Interest on long-ter borrowings

0he higher 5%S%C%6% wo!ld ipart intrinsic strength to the project to repay its ter borrowings and interest as per
the sched!le e(en if soe of the projections are not f!lly realised% ,orally a ini! 5%S%C%6% of 21- is insisted
!pon by the ter lending instit!tions and repayent is fi"ed on that basis%

Sensiti:it' Anal'sis

It ay also be soeties necessary to carry o!t sensiti(ity analysis which helps in identifying eleents affecting
the (iability of a project ta$ing into acco!nt the different sets of ass!ptions% &hile e(al!ating profitability
projections* the sensiti(ity analysis ay be carried in relation to changes in the sale price and raw aterial costs* i%e%
sale price ay be red!ced by >/ to -./ and raw aterial costs ay be increased by >/ to -./ and the ipact of
these changes on 5SC6% If the new 5SC6* so calc!lated after changes* still pro(es that the project is (iable* the
financial instit!tion ay go ahead in f!nding the project% An ill!stration as to how sensiti(ity analysis wor$s is
gi(en below1

Estimated Profita$ilit' Statement

17Cost of Oerations and Income Statement

S%,o% Partic!lars I II III IK K KI KII KIII I8 8
I% I,CB9'1
Incoe fro fees
Incoe fro
)ostel fees
9isc% Incoe

0B0AL I,CB9'

II%'8P',5I076'
+eneral
Adinistration
Staff Salary
9aintenace :
9isc% '"pd%
Interest on Loan
Interest on other
Loan
5epreciation
Preliinary
'"penses &AB

0B0AL
'8P',5I076'

III% '8C'SS BF
I,CB9' BK'6
'8P5%

IK% 0A8A0IB,

K% ,'0 I,CB9'

KI%5IKI5',5

KII%,'0 I,BC9'
CAF 0B BAS

KIII%CAS)
ACC67ALS

8I% ,'0 CAS)
ACC67ALS

8% CAS)
6'076, B,
P6B9B0'6S
I,K'S09',0
/

H2%>2

I%J4
4%I4

-.J%.
.



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3



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MMMMMMMMMMMMMMM
5ebt ser(iceAyear
F!nd for 5ebt
Ser(ice
5SC6
A(erage 5SC6



0he a(erage 5SC6 wor$s o!t to 2%I2%

II7 Sensiti:it' Anal'sis (+en t+ere is decrease in income

In the sae project* now it is ass!ed that total incoe is decrease by -./% By this ass!ption* the a(erage 5SC6
wor$s o!t to 2%3> as below1 (6s% in
Lacs)
S%,o% Partic!lar I II III IK K KI KII KIII I8 8
14A DECREASE IN TOTAL INCO"E
-% Instit!tion 6!nning
'"penses
2% Bther Costs
3% 5epreciation
4% Preli% '"penses
>% 0otal Cost
J% 0otal Incoe
F% Incoe before ta"
I% 0a"ation
H% Incoe after ta"
-.%+ross Cash accr!als

MMMMMMMMMMMMMMMMMMM
5ebt ser(iceA?ear
F!nd for 5ebt
Ser(ice
5SC6
A(erage 5SC6
42%4.

43%2.
-2%H3
-%>.
-..%.3
H>%4.
-4%J3
.%..
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H%I.

MMMMM
M
43%2.

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2%3>

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F2%..
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2
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34%..

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F2%..

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.

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III Sensiti:it' Anal'sis (+ere is increase in Running Cost

In the second instance* instit!tional r!nning costs are increased by -./ whereas total incoe is decreased
by -./% 0he a(erage 5SC6* is th!s wor$s o!t to 2%-J as below1
(6s% In
Lacs)
S%,o% Partic!lar I II III IK K KI KII KIII I8 8
A7 14A INCREASE IN INSTITBTION RBNNING COST 2 14A DECREASE IN INCO"E%
-%Instit!tion
6!nning
'"penses
2% Bther Costs
3% 5epreciation
4% Preli% '"penses
>% 0otal Cost
J% 0otal Incoe
F% Incoe before
ta"
4J%J4

43%2.
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F
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3F2%J.
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.%..
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I% 0a"ation
H% Incoe after ta"
-.%+ross Cash
accr!als

MMMMMMMMMMMMMMMM
5ebt ser(iceA?ear
F!nd for 5ebt
Ser(ice
5SC6
A(erage 5SC6
-I%IF
>%>J


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43%2.

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>

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4
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4
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In both the sit!ations i%e% after applying sensiti(ity analysis* the lowest 5SC6 is 2%-J which is well abo(e -%> and as
s!ch project can be ta$en as (iable% And therefore is acceptable for f!nding%

Pro!ected ;alance S+eet

Bn the basis of profitability and cash flow stateents already drawn* the projected balance sheet for a period of -.
years is also prepared to $now the financial position of the project at any gi(en point of tie%

EN@IRON"ENTAL 2 ECONO"IC @IA;ILIT=

0he perforance of a project ay not only be infl!enced by the financial factors as stated abo(e% Bther e"ternal
en(ironental factors* which ay be econoic* social or c!lt!ral ay ha(e a positi(e ipact as well% 0he larger
projects ay be critically e(al!ated by the lending instit!tions by ta$ing into consideration the following factors1

'ployent potential%
7tilisation of doestically a(ailable raw aterials and other facilities%
5e(elopent of ind!strially bac$ward area as per +o(ernent policy%
'ffect of the project on the en(ironent with partic!lar ephasis on the poll!tion of water and air to be
ca!sed by it%
0he arrangeents for effecti(e disposal of effl!ent as per the +o(ernent policy%
'nergy conser(ation de(ices etc% eployed for the project%

Bther econoic factors which infl!ence the final appro(al of a partic!lar project are* ,et Present Kal!e based on
5CF* Internal 6ate of 6et!rn (I66) and 5oestic 6eso!rces Cost (56C)%

Net Present @alue

0he 5isco!nted Cash Flow (5CF) 0echni#!e which is ore coonly $nown as ,et Present Kal!e ethod (,PK)
ta$es into acco!nt the tie (al!e of oney for e(al!ating the costs and benefits of a project%% It recognises that
streas of cash inflows at different points of tie differ in (al!e% A so!nd coparison aong s!ch inflows and
o!tflows can be ade only when they are e"pressed in ters of a coon denoinator i%e% present (al!es% For
deterining present (al!es* an appropriate rate of disco!nt is selected and the cash flow streas then are con(erted
into present (al!es with the help of rate of disco!nt so selected% If ,PK is positi(e (i%e% difference between present
(al!es of inflows and o!tflows) the project is ta$en to be (iable and as s!ch proceeded with otherwise not% 0he
concept of ,PK shall be clear with the help of following e"aple1

Let !s ass!e that on an initial o!tlay of 6s%>.*...* a project<s cash inflows for ne"t se(en years are as below*
present (al!e being calc!lated at a 5isco!nt rate of -4/%

?ear Cash inflows P% K% factor at -4/ Present (al!es
- -2... o%IFF -.>24

2 -.... .%FJH FJH.

3 ->... .%JF> -.-2>

4 -3... .%>H2 FJHJ

> -4... .%>-H F2JJ

J -2... .%4>J >4F2

F --... .%4.. 44..

0otal present (al!e of cash inflows
Less1 Cash o!tflow
,PK

Since ,PK is positi(e the project ay be considered%

Internal Rate of Return

Internal 6ate of 6et!rn B66) is defined as the disco!nt rate which e#!ate the present (al!e of in(estent in the
project to the present (al!e of f!t!re ret!rns o(er the life of the project% 0his is an indicator of earning capacity of
the project and a higher internal rate of ret!rn indicates better prospects for the project% 0he present in(estent is
cash o!tflow which is ass!ed to be negati(e cash flow and the ret!rns (cash inflow) are ass!ed to be positi(e
cash flows 0he s! total of the disco!nted cash flows shall be @ero or as near to @ero a* possible% 0he rate of
disco!nt applied to bring the s! total to @ero as abo(e is the internal rate of ret!rn%

Domestic Resources Cost

5oestic 6eso!rces Cost (56C) helps to establish a relationship between the total doestic reso!rces in r!pees
spent for an!fact!ring a prod!ct a%* against the foreign e"change o!tlay that wo!ld be necessary to iport that
partic!lar prod!ct% It ay be ta$en as a eas!re of total r!pees spent to sa(e - !nit of foreign c!rrency (for iport
s!bstit!tion) or to earn a !nit of foreign c!rrency (for prod!cts to be e"ported)% 0his ay in t!rn be copared with
the e"change rate (parity rate) of the !nit of foreign c!rrency in r!pees to deterine if it is worthwhile to
an!fact!re the prod!ct in the co!ntry% If 56C is e#!al to or less than the parity rate of the !nit of foreign
c!rrency* it eans an!fact!ring the prod!ct in India is possible at a cost which is e#!al to or lower than the cost of
foreign e"change and it is worthwhile to ipleent the project% )owe(er* as foreign e"change is scarce* projects
with slightly higher 56C (than parity rate) ay also be appro(ed $eeping in (iew of other iportant factors s!ch as
eployent potential or +o(ernent policy to create an!fact!ring capacity at hoe d!e to strategic iportance
of the prod!ct or to gain a position in the international ar$et etc%

LENDING ;= ALL INDIA FINANCIAL INSTITBTIONS ) CO""ON FEATBRES AND
COORDINATION 0IT< ;ANCS



Ind!strial 5e(elopent Ban$ of India (I5BI) is an ape" body for de(elopent financing in the co!ntry% Ind!strial
Finance Corporation of India (IFCI) is also acti(ely in(ol(ed in project appraisal and ha(e de(eloped soe
coon strategies in this regard% Bther all India financial instit!tions naely Life Ins!rance Corporation* 7nit
0r!st of India and +eneral Ins!rance Corporation and its fo!r s!bsidiaries who also participate in project financing
are generally lending thro!gh all India financial instit!tions and are not that acti(ely associated with the appraisal of
the project as s!ch% All India Instit!tions generally in(est in large projects while projects in sall -scale or edi!
scale are left to be financed by state le(el instit!tions% Coercial ban$s are also in(ol(ed in ter lending in
consorti! with financial instit!tions% Financing of a project alost in(ol(es a definite pattern depending !pon the
project cost as !nder%

Projects costing !pto 6s% > crores

Projects costing !pto 6s% >... crores sho!ld norally be financed by state le(el ter lending instit!tions in
consorti! with coercial ban$s% Indirect assistance by way of refinance fro all India instit!tions to lending
instit!tions is* howe(er* a(ailable in s!ch projects%

Details are gi:en in C+ater 6

SFCs and SI5Cs loo$ forward to refinance facilities fro all India instit!tions to a!gent their reso!rces and as
s!ch confine their coitents to the abo(e le(el% 0here is* howe(er* no bar on SFCs and SI5Cs granting ter
loan facilities in e"cess of the ceilings as stated abo(e b!t in that case refinance fro all India instit!tions will not
be a(ailable%

)owe(er* for e"isting copanies all India instit!tions can pro(ide financial assistance e(en when the project cost is
below 6s% >.. lacs%

Projects with 0er Loan Coponent e"ceeding 6s% > crores

As a part of Project Finance* the Financial Instit!tions pro(ide ter loans in r!pees and in foreign c!rrency
repayable o(er >- -. years depending !pon debt ser(icing capacity of the borrower !nit* and sec!red by a charge
o(er the io(ableAo(able assets% Credit e(al!ation constit!tes the basis for sanction of assistance% 0he financing
can be done by instit!tions indi(id!ally or jointly%

Coercial Ban$ (is-a-(is +ranting of 0ers Loans

-% Coercial ban$s ay participate in granting ter loans in projects where total project cost does not
e"ceed 6s% >.. lacs% 0he ban$s in s!ch cases wo!ld be eligible for refinance fro all India instit!tions%
2% In other cases criterion is not lin$ed to the cost of the project b!t to the #!ant! of loan and the e"act
position is as !nder1
(a) A ban$ ay pro(ide ter finance not e"ceeding its pr!dential e"pos!re nor as prescribed by
6eser(e Ban$ of India fro tie to tie for indi(id!al borrowerAgro!p of borrowers%
(b) Ban$ and financial instit!tions ay pro(ide ter finance to all projects incl!ding infrastr!ct!re
projects witho!t any ceiling%

For lending to p!blic sector !nits* ban$s are to ens!re that s!ch p!blic sector !nits are registered !nder the
Copanies Act* -H>J* or are established as corporation !nder rele(ant Acts% S!ch !nits sho!ld be ade o!t of
incoe to be generated fro the project and not o!t of s!bsidies* ade a(ailable to the by the +o(ernent%

Pr!dential '"pos!re ,ors for Ban$s
-

As per g!idelines of 6eser(e Ban$ of India the a"i! e"pos!re of a ban$ for all its f!nd based and non f!nd
based credit facilities* in(estents* !nderwriting* in(estent in bonds and coercial paper and any other
coitent sho!ld not e"ceed -> per cent of its capital f!nds to an indi(id!al borrower incl!ding p!blic sector
!nderta$ings and 4. per cent of its capital f!nds to gro!p of borrowers% 0he pr!dential e"pos!re liit of ban$s to
the borrowers of a gro!p can e"ceed by -./ if the additional credit is on acco!nt of infrastr!ct!re projects (i%e%
power* teleco!nication* roads and transports)% F!rther* w%e%f% April -* 2..3* the e"pos!re liit of ban$s to single
borrowers can e"ceed by >/ if the additional credit is on acco!nt of infrastr!ct!re projects% 0hese liits are
referred to as pr!dential e"pos!re nors% For arri(ing at e"pos!re liit* the sanctioned liits or o!tstanding*
whiche(er is higher* shall be rec$oned% It ay* howe(er* be noted that while calc!lating e"pos!re* the non f!nd
based facilities are to be ta$en at -../ of the sanctioned liit or o!tstanding whiche(er is higher% 0he concept of
capital f!n: has been broadened to represent total capital i%e%* 0ier I and 0ier -- capital (sae as total capital
defined !nder capital ade#!acy standards) for the deterination of e"pos!re ceiling by ban$s% 0o ill!strate this
point let !s consider the following e"aple1

Capital f!nds of the ban$ 6s%2>. crores
'"pos!re to a borrower Liits sanctioned B!tstandings
(6s% In crores) (6s% In crores)

0er loan ->%.. -.%..
CC )p% (incl% &C0L) .>%.. .3%..
LAC -J%.. -.%..
MMMMMMMMMMMMM MMMMMMMMMMM
0otal 3J%.. 23%..
MMMMMMMMMMMMMMM MMMMMMMMMMM

9a"i! e"pos!re as per pr!dential nors for an indi(id!al borrower
incl!ding p!blic sector !nderta$ings O ->/ of Capital f!nds 6s% 3F%>. crores

'"pos!re on the basis of liits sanctionedA o!tstanding whiche(er is higher1

(i) F!nd Based 0L E ->%..
CC hyp% >%.. 6s% 2.%.. crores
(ii) ,on F!nd Based -../ of LAC Liit 6s% -J%.. crores
i%e% of 6s -J%.. crores or
crores whiche(er is higher
MMMMMMMMMMMM
0otal 6s% 3J%.. crores
MMMMMMMMMMMMM

9a"i! e"pos!re for this ban$ for borrowers !nder the sae gro!p sho!ld not e"ceed 6s% -.. crores (6s% -2>
crores for infrastr!ct!re projects relating to power* teleco!nications* roads and ports)%

,otes 1 0he e"pos!re liits are applicable to lending !nder consorti! arrangeents* where(er foralised%

'"eptions fro '"pos!re ,ors

-% -% Re+a$ilitation of Sic.>0ea. Industrial Bnits: 0he abo(e ceilings on singleAgro!p e"pos!re liits
are not applicable to e"istingAadditional credit facilities (incl!ding f!nding of interest and irreg!larities)
granted to wea$Asic$ ind!strial !nits !nder rehabilitation pac$ages%
2% 2% Food credit 1 Borrowers to who liits are allocated directly by the 6eser(e Ban$* for food credit* are
e"ept fro the ceiling%
3% 3% Loans against $an.-s o(n term deosits: Loans and ad(ances granted against the sec!rity of ban$<s
own ter deposits are e"cl!ded fro the p!r(iew of the e"pos!re ceiling%

9eaning of '"pos!re

'"pos!re incl!des credit e"pos!re (f!nded and non f!nded credit liits) and in(estent e"pos!re (!nderwriting
and siilar coitents) as well as certain types of in(estents in copanies%

*i# Credit e/osure - It coprises of the following eleents
all types of f!nded and non-f!nded credit liits%
facilities e"tended by way of e#!ipent leasing* hire p!rchase finance and factoring ser(ices%
ad(ances against shares* debent!res* bonds* !nits of !t!al f!nds* etc% to stoc$ bro$ers* ar$et
a$ers%
ban$ loan for financing prooters< contrib!tions bridge loans against e#!ity flowsAiss!es%
financing of Initial P!blic Bfferings (IPBs)%
*ii# In:estments e/osure - It coprises of the following eleents
in(estents in shares and debent!res of copanies and bonds iss!ed by PS7s ac#!ired thro!gh
direct s!bscription* de(ol(eent arising o!t of !nderwriting obligations or p!rchases fro secondary
ar$ets or on con(ersion of debt into e#!ity%
in(estents in Coercial Papers (CPs) iss!ed by Corporate BodiesAPS7s%
in(estent ade by the ban$s in bonds and debent!res of corporate which are g!aranteed by a PFI
will be treated as an e"pos!re by the ban$ on the PFI and not on the corporate%

9eaning of +ro!p

(i) 0he concept of <+ro!p< and the tas$ of*< identification of the borrowers belonging to specific ind!strial%
gro!ps is left to the perception of the ban$sAfinancial instit!tions% Ban$sAfinancial instit!tions are generally
aware of< the basic constit!tion of their clientele for the p!rpose of reg!lating their e"pos!re to ris$ assets%
0he gro!p to which a partic!lar borrowing !nit belongs* ay* therefore* be decided by the on the basis of
the rele(ant inforation a(ailable with the* the g!iding principle being coonality of anageent and
effecti(e control%
(ii) For identifying the gro!p to which a copany registered !nder section 2J(2) of 960P Act* -HJH belongs* a
reference ay be ade to the Ind!strial )o!se-wise list of copanies registered !nder the Act%
(iii) In respect of borrowers not co(ered by the 960P Act* the gro!p affiliation ay be decided by ban$s on the
basis of the principle e"plained abo(e%
(i() In the case of a split in the gro!p* if the split is foralised* the splinter gro!ps will be regarded as separate
gro!ps% If ban$s and financial instit!tions ha(e do!bts abo!t the bona fides of the split* a reference ay be
ade to 6BI for its final (iew in the atter to precl!de the possibility of a split being engineered in order to
pre(ent co(erage !nder the +ro!p Approach%

Credit '"pos!re to Ind!stry or Certain Sectors

Secific Sectors - Apart fro liiting the e"pos!res to indi(id!al or +ro!p of borrowers* as indicated abo(e* the
ban$s ay also consider fi"ing internal liits for aggregate coitents to specific sectors e%g%* te"tiles* j!te* tea%
etc% so that the e"pos!res are e(enly spread o(er (ario!s sectors% 0hese liits co!ld he fi"ed by the ban$s ha(ing
regard to tile perforance of different sectors and the ris$s percei(ed% 0he liits so fi"ed ay be re(iewed
periodically and re(ised* as necessary%

E/osure to Real Estate%
(i) (i) Ban$s sho!ld frae coprehensi(e pr!dential nors relating to the ceiling on the total
ao!nt of< real estate loans* singleA gro!p e"pos!re liits for s!ch loans* argins* sec!rity* repayent
sched!le and a(ailability of s!ppleentary finance and the policy sho!ld be appro(ed by the ban$<s
Board%
(ii) (ii) &hile fraing the ban$<s policy the g!idelines iss!ed by the 6eser(e Ban$ sho!ld he ta$en
into acco!nt% Ban$s sho!ld ens!re that the ban$ credit is !sed for prod!cti(e constr!ction acti(ity and
riot for acti(ity connected with spec!lation in real estate%

'"pos!re to 7nsec!red +!arantees and 7nsec!red Ad(ances

-% -% Ban$s ha(e to liit their coitent by way of !nsec!red g!arantees in s!ch a anner that 2. per cent of
the ban$<s o!tstanding !nsec!red g!arantees pl!s the total of o!tstanding !nsec!red ad(ances do not e"ceed ->
per cent of total o!tstanding ad(ances% +!arantees co!nter g!aranteed by another ban$ need not be ta$en into
acco!nt for the p!rpose of the nor%
2% 2% For the p!rpose of confiring to the abo(e nor* g!arantees co(ered by co!nter-g!arantees of the Central
+o(ernent and the State +o(ernents* p!blic sector financial instit!tions and ins!rance copanies will be
regarded as sec!red g!arantees%
3% 3% )owe(er* deferred payent g!arantees sho!ld be bac$ed by ade#!ate tangible sec!rity or by co!nter
g!arantees of the Central +o(ernent or the State +o(ernents or p!blic sector financial instit!tions* or by
co!nter-g!arantees of ins!rance copanies or other ban$s* pro(ided the co!nter-g!arantees of ins!rance
copanies or other ban$s* are thesel(es bac$ed by ade#!ate tangible sec!rity% &here the co!nter g!arantees
by coercial ban$s are bac$ed by ade#!ate tangible sec!rities* then all g!arantees* incl!ding deferred
payent g!arantees* will be treated as sec!red g!arantees%
4% 4% In e"ceptional cases* the ban$s ay gi(e deferred payent g!arantees on an !nsec!red basis for odest
ao!nts to first class c!stoers who ha(e entered into deferred payent arrangeents in consonance with
+o(ernent policy% B!t s!ch !nsec!red g!arantees sho!ld be accoodated within the a"i! ceiling
liits%

Pr!dential '"pos!re ,ors for Financial Instit!tions

Siilar credit e"pos!re nors as are applicable to ban$s shall also apply to ter lending instit!tions i%e% e"pos!re
ceiling for a single borrower will he liited to ->/ of capital f!nds and for a gro!p of borrowers it shall be 4./% In
the case of financing for infrastr!ct!re projects* the liit for a single borrower shall be e"tendable to 2./ and for a
gro!p shall be e"tendable to >./ of capital f!nds%

P6BPBSAL FB6 ASSIS0A,C'

All India financial instit!tions $eep a (ery close liaison aong thesel(es on project appraisal and ha(e e(ol(ed a
coon proced!re to a large e"tent% Assistance !nder noral project finance schee is e"tended by these
instit!tions generally on the sae ters and conditions% Proced!re in respect of Project 6eport* the appraisal and
disb!rseent proced!re and doc!entation reain alost sae !nder the noral schee% 0he feat!res that are
coon to all the lending instit!tions are disc!ssed here!nder followed by disc!ssion on special schees of
indi(id!al instit!tions in the s!bse#!ent chapters%

0he borrower has to s!bit the proposal along with project report to the ter lending instit!tions% 0he salient
feat!res of the proposal and project report ha(e been disc!ssed in Chapter 4% 0he papersAdoc!ents* to be sent
along with the proposal ha(e also been listed therein%

0he proposal shall be considered coplete only if f!ll inforation is pro(ided and necessary letter of
intentAind!strial licence* foreign collaboration appro(al etc% ha(e already been obtained and processing shall he
ta$en !p only when the proposal is coplete%

5'B0 'P7I0? 6A0IB

5ebt e#!ity ratio is a eas!re of reso!rces that can he obilised by the prooter (this also helps to red!ce
dependence on borrowed f!nds which a ha(e an ad(erse effect on profitability d!e to hea(y interest cost in the
initial stages) with his own efforts and financial instit!tions lay a great ephasis an try to $eep it to the ini!
le(el for the projects being financed by then Broad nors for the ini! acceptable le(el of debt e#!ity ratio
ha(e also been specified and the project ay be appro(ed within these nors%

0here is* howe(er* a difference of opinion as to what constit!tes a debt an e#!ity for the p!rpose of calc!lation of
this iportant ratio% 0he o acceptable principles applied for calc!lation of debt and e#!ity are specified below1

'#!ity is s! total of the following ters1

Share capital
Brdinary paid-!p share capital%
Irredeeable preference share capital%
6edeeable preference capital pro(ided redeption is d!e after the years%
Prei! on iss!e of shares%

6eser(es And S!rpl!s
Free reser(es incl!ding any s!rpl!s in profit and loss acco!nt
)owe(er* any acc!!lated losses* preliinary e"penses not written off* arrears of !nabsorbed
depreciation and any intangible assets are to be ded!cted fro free reser(es% 7nrealisable in(estents are
also to be ded!cted fro free reser(es%
5e(elopent rebate reser(e%
In(estent allowance reser(e%
5ebent!re redeption reser(e%
5i(idend e#!alisation reser(e%

Any s!ch other reser(e shall also be ta$en as free reser(e%

P!asi '#!ity
Ao!nt of CentralAState s!bsidy%
Long ter !nsec!red interest free loans fro +o(ernent or +o(ernent agencies s!ch as sales-ta"
loan etc%
Long ter !nsec!red interest free loans fro prooters pro(ided s!ch loans are s!bordinated to the
loans fro financial instit!tions%
,on ref!ndable deposits in the case of co-operati(es%

,ote1 Assistance pro(ided by 6is$ Capital and 0echnology Finance Corporation Liited (6C0C) !nder 6is$
Capital Assistance Schee and other seed capital pro(ided by other instit!tions !nder siilar schees wo!ld
be treated as e#!ity for the p!rpose of deterining of debt e#!ity ratio%

5ebt is the s! total of the following ites1

6edeeable preference shares where redeption is d!e between one to three years%
Con(ertible and non con(ertible debent!res e"cept that part of con(ertible debent!res which is
cop!lsorily to be con(erted to e#!ity%
Long- ter (repayable after -2 onths) interest bearing loans* deposits fro +o(ernentA +o(ernent
Agencies A Prooter
5eferred payents not falling d!e within a period of -2 onths%
Long ter loans (repayable after -2 onths)% (0he loan which has been applied for is also to be
incl!ded to deterine% debt after the financial assistance has been e"tended)%

,ote1 6edeeable preference shares where the period of their redeption reains only -2 onths or less are
treated neither as debt nor e#!ity b!t a c!rrent liability%

,ors of debt e#!ity ratio

0he norally acceptable debt e#!ity ratio nor is -1>1- e"cept for large projects where the debt e#!ity ratio co!ld
go !pto 21-

Notes%
(i) (i) 0he abo(e nors are to be ta$en only as broad g!ideline or a genera indicator and the e"act ratio
in a partic!lar project is to be decide depending !pon (a) tile nat!re of the ind!stry* (b) the si@e of the
project (c) the gestation period* (d) the profitability potential* (e) the debt ser(ice capacity of the project* (f)
the ris$ attendant on the project ill (iew of factor s!ch as bac$gro!nd of the prooters* nat!re of
technology eployed li$ely deand for the prod!ct* (g) c!rrent capital ar$et conditions an econoic
sit!ation etc%
(ii) (ii) 0he nors are not applicable to shipping ind!stry (incl!ding trawlers)%
(iii) (iii) 0he nors of debt-e#!ity ratio for joint sector projects are to be the sae as followed in* the case
of projects prooted in pri(ate sector% )owe(er joint sector projects* if prooted in association with Large
)o!ses* the nors of debt e#!ity ratio in relation to s!ch projects are to be the sae as applicable to
projects prooted by Large )o!ses as indicated abo(e%

P6B9B0'6<S CB,06IB70IB,

0he prooter !st ha(e his own financial sta$e in a project to ens!re his sincerity in ipleentation of the project
and his contin!ed interest thereafter% 0he share* the prooter shall bring as percentage of total cost of project inter
alia depends !pon the reso!rces of the prooter* the type of the project and its si@e%

0he prooters are e"pected to bring in a"i! possible contrib!tion% Contrib!tion can be in the for of share
capital* internal generation d!ring the period of ipleentation of the project* additional capital or !nsec!red
depositsA loans to be bro!ght or arranged by prooters%

0he nors for ini! prooters< contrib!tion are as !nder1

I% I% 0he ini! le(el of prooters< contrib!tion shall be 2./ of the project cost ((aries fro
schee to schee)%
II% II% Core prooters for the abo(e p!rpose consist of ain prooters* their faily ebers* relati(es*
gro!p copanies !nder their anageent friends and associates* e#!ity contrib!tion by Ind!strial 5e(elopent
Corporations (I5Cs) etc%
III% III% 0he e#!ity contrib!ted by core prooters shall be co(ered by non disposable !nderta$ings to the
financial instit!tions%
IK% IK% ,on core prooters< contrib!tion co!ld incl!de contrib!tion to e#!ity by I5Cs* 9!t!al F!nds etc%
(witho!t non-disposal !nderta$ings) with b!y bac$ arrangeent with prooters%
K% K% &here (ent!re capital copanies are called !pon to a$e contrib!tions t the e#!ity to help
prooters a$e Lip their stip!lated contrib!tion project cost* the financial instit!tions do not insist on
f!rnishing non disposable* shortfall !nderta$ings% )owe(er* where (ent!re capita copanies thesel(es are
prooters of (ent!res* their contrib!tion to e#!ity will be co(ered by non-disposable !nderta$ings and they will
also be re#!ired to f!rnish the shortfall 7nderta$ings%
KI% @I7 For large si@ed projects (i%e%* project costing ore than 6s% 2.. crores)* a ini! prooters<
contrib!tion of not less than -./ of the project cost is accepted%


SC)'57L' BF 6A0'S BF I,0'6'<S0* F''S A,5 B0)'6 C)A6+'S I, 6'LA0IB, 0B P6BQ'C0 FI,A,C'

I7 Rate of Interest on Ruee Loan%

Based on 9ini! 0er Lending 6ate fi"ed fro tie to tie% Act!al rate within the pre(ailing rate band depends
!pon creditworthiness of borrower and ris$ perception% Interest is payable #!arterly%

II% 6ate of interest on Foreign C!rrency Loan

Floating rate based on LIBB6 depending !pon the so!rce of the c!rrency pl!s a fi"ed spread according to the ris$
perception and at!rity of the loan% 0he e"act rate can he fo!nd o!t only at the tie of e"ec!tion of foreign
C!rrency loan agreeent% 0he e"change fl!ct!ation ris$ in these loans is borne by the borrower%

III% 6ehabilitation Finance

0he rates of interest for f!nded interest ter loan* e"isting ter loan and fresh rehabilitation ter loan* are s!bject
to change fro tie to tie and latest position ay be ascertained fro concerned Financial instit!tion%

IK% 7nderwriting Coission

2%>/ of the !nder written ao!nt%

K% 7p-Front Fee

(In s!bstit!tion of the practice of -%./ of the loan ao!nt coitent charge)

In respect of Loans !nder Project Finance%

KI% Coitent Charges

.%2>/ on the !ndrawn portion of loan payable fro the date of signing of die loan agreeent%


+','6AL CB,5I0IB,S APPLICABL' FB6 ASSIS0A,C'

0here are certain general conditions which are applicable for assistance !nder tile Schee% 0hese relate to
coposition of Board of 5irectors* 9anageent set-!p* +o(ernent appro(als and sanctions* payent of di(idend*
sale or p!rchase of assets* selling arrangeent etc% Specific condition as ay be applicable to indi(id!al cases are
con(eyed separately%

CB,K'60IBILI0? CLA7S'

0he andatory con(ertibility cla!se which enabled financial instit!tions to con(ert a part of ter loans into e#!ity
for new projects has been dispensed with in A!g!st* -HH-%

0he <con(ertibility cla!se< is not applicable* e"cept in o(err!n or defa!lt or rehabilitation cases%

,B9I,A0IB, .F 5I6'C0B6

All India financial instit!tions norally reser(e the right to appoint their noinee directors on the Boards of
assisted concerns% 0he act!al appointents are* howe(er* ade generally after !t!al cons!ltation aong the
instit!tions depending !pon the e"tent of their cobined shareholdings* the si@e of aggregate assistance etc%
5etailed g!idelines are iss!ed to the noinee directors appointed by instit!tions% 0hey are not to interfere in the
day-to-day affairs of the assisted concern* b!t are e"pected to $eep thesel(es f!lly ac#!ainted with the affairs of
the assisted concern and e"tend f!ll co-operation to the anageent% 0hey ha(e also to ens!re that* aong other
things* the following iss!es are re(iewed at periodical Board eetings1

Financial perforanceC
Payent of d!es to instit!tionsC
Payent of stat!tory and other d!es to +o(ernentC
Inter-corporation in(estents incl!ding deposits* loans and ad(ancesC
0ransactions in sharesC
Contracts* p!rchase and sale of raw aterials* finished goods% 9achinery* ect%C and
9ajor ites of e"pendit!re partic!larly those relating to anageent%
In the interest of healthy growth of the corporate sector* the instit!tion e"pands that anageent of e(ery assisted
concern de(elops proper organisational set-!p with a s!itably board-based Board of 5irectors to ser(e the
operations of the concern as a whole% 0he Board of 5irectors ay constit!te s!itable coittees to loo$ into
specific f!nctional area% At least one of the on the Board of an assisted concern is e"pected to be incl!ded in the
ore iportant of these coittees%

6'PA?9',0 P'6IB5 BF LBA,S

0he financial instit!tions ha(e a fle"ible approach in respect of fi"ation of repayent period is based on the debt
ser(ice co(erage ratio of 21- is generally ens!red% 0he repayent period ay be fi"ed initial - to 3 years as
oratori! period% Projects ha(ing the repayent period red!ced to e(en J years incl!ding% 0he period of
repayent ay he accelerated by the warranted by profitability and cash flow of borrowing concern% 0he borrowing
concern can pre pay the o!tstanding loan or loan instalent with the prior appro(al of Instit!tions%

5BC79',0A0IB, A,5 5ISB76S'9',0 BF 67P'' 0'69 LBA,

After the project has been appro(ed by the financial instit!tions* a foral financial letter of intent is iss!ed in
fa(o!rs of the applicant%

0he letter of intent is iss!ed to the applicant in the prescribed for enclosing therein the following other papers1

Special ters and conditions as applicable to the financial assistance%
+eneral conditions as applicable to financial assistance%
Specien copy of coon loan agreeent%
5raft of the resol!tion to be passed by the Board of 5irectorR of the borrower f accepting the letter
of intent%

Bn receipt of letter of intent the applicant !st scr!tinise the papers and ay see$ any additional clarification
fro the lending instit!tion* if necessary% If the ters of s!ction are acceptable* the copany ay
si!ltaneo!sly ta$e the following steps1

0o con(ene a board eeting for acceptance of letter of intent and passing the -board resol!tion% 0he
foral acceptance to the lending instit!tion is to be con(eyed within 3. days fro the date of iss!e of intent
letter%
0o finalise a final drawal sched!le depending !pon the progress of project ipleentation% 0he drawal
sched!le is also to be intiated to the lending instit!tion along with the acceptance%
0o con(ene the +eneral Body 9eeting of the copany* if necessary* to pass resol!tion for a(ailing of
the loan !nder section 2H3(-)(d) of Copanies Act* -H>J%
0o obtain draft copies of other loan doc!ent s!ch as deed of hypothecation andAor letter of
g!arantees* !nderta$ing for disposal of shareholding ac#!ired for eeting shortfall in Project Cost*
declaration for creation of joint ortgage by deposit of title deed etc% as re#!ired as per ters of sanction%
0o con(ene a board-eeting to appro(e all the loan doc!ents and get necessary a!thority of the
board for e"ec!tion of doc!ents%
0he disb!rseent of loan is f!rther s!bject to pre-disb!rseent conditions as stated in <+eneral
conditions applicable to financial assistance being coplied with ,ecessary !nderta$ings* certificates fro
legal ad(isors andAor stat!tory a!ditors where(er necessary !st be got ready and s!bitted to the lending
instit!tion%
All loans are s!bject to creation of a (alid ortgage of all io(able properties in fa(o!r of the
lending instit!tion% Creation of ortgage generally in(ol(es a lengthy proced!re and lending instit!tion
ay agree to release the loan against personal g!arantee of the prooters pending creation of final charge
o(er the sec!rity% 0he atter in this regard !st be got cleared and draft for personal g!arantee be obtained
fro the lending instit!tion%
All the doc!ents are then to be e"ec!ted by a!thorised persons in the legal departent of the lending
instit!tion%

DIS;BRSE"ENTAND BTILISATION OF LOAN

0he lending instit!tion shall get all the doc!ent e"ec!ted%
0he disb!rseent of the loan by the lending instit!tion ay be in stages depending !pon the progress
in project ipleentation and will be s!bject to copliance of pre-disb!rseent and other special
conditions% Prooter has to first bring in a s!bstantial part of his contrib!tion (generally a ini! of
>./) before any disb!rseent of loan by the financial instit!tion% An a!ditor<s certificate ay also be
re#!ired for this p!rpose certifying the paid !p capital of the copany at the tie of disb!rseent%

A progress report on project ipleentation gi(ing details of e"pendit!re already inc!rred !nder (ario!s heads
and a f!nds flow stateent showing therein the phased re#!ireent of f!nds for tiely e"ec!tion of the project
!st also be s!bitted to the lending instit!tion% 0he lending instit!tion will e(al!ate these reports and finalise
a disb!rseent sched!le which will f!rther be s!bject to re(iew fro tie to tie on the basis of progress in
project ipleentation%

All the disb!rseents are ade by che#!e drawn in fa(o!r of the borrower and the date of che#!e is
ta$en as the date of disb!rseent of loan%
All these che#!es are re#!ired to be deposited in a <special ban$ acco!nt< to be aintained for this
p!rpose% 0he f!nds lying in this acco!nt are not s!bject to the right of set off or lien by the ban$% For this
p!rpose a letter fro the ban$ forgoing his right of set off or lien !st be obtained fro the ban$ and
deposited with lending instit!tion%
0he borrower !st $eep proper record of withdrawals fro this special acco!nt and also a!thorise his
ban$ to re(eal all the inforation as re#!ired to the lending instit!tion regarding operations in this acco!nt%
0he borrower is also re#!ired to f!rnish a stateent showing the anner in which the loan already
disb!rsed has been !tilised% 0he stateent is to be s!bitted to the lending instit!tion at the end of each
onth following the onth in which the loan onies are disb!rsed
'ntire loan is not disb!rsed as long as final sec!rity by way of ortgage of io(able property is not
created% 7s!ally -./ of the sanctioned loan is withheld and disb!rsed only when all the foralities in this
regard are copleted%

C)A6+I,+ BF S'C76I0I'S

All loans by financial instit!tions are sec!red by1
A first ortgage and charge in fa(o!r of the lending instit!tions of all the borrowerGs io(able
properties* both present and f!t!reC and
A first charge by way of hypothecation in fa(o!r of lending instit!tion of all borrower<s o(ables
(e"cept boo$ debts)* incl!ding o(able (e"cept boo$ debts)* incl!ding o(able achinery spares* tools
and accessories* present and f!t!re s!bject to prior charges created andAor to be createdC

In fa(o!r of borrower<s ban$ers on the borrowerGs stoc$s of raw aterials* sei-finished and
finished goods* cons!able stores and s!ch other o(ables as ay he agreed by the lending
instit!tions for sec!ring the borrowings for wor$ing capital re#!ireents in the ordinary co!rse of
b!sinessC and
Bn specific ites of achinery p!rchasedA to be p!rchased !nder deferred payent facilities to the
borrower and as peritted by lending instit!tions%

0he hypothecation agreeent is got e"ec!ted in(ariably before any disb!rseent% 0he borrowers sho!ld*
howe(er* ta$e iediate steps for creation of ortgage to entitle hiself to a(ail the entire sanctioned
loan% Creation of ortgage wo!ld in(ol(e the following steps1

Scr!tiny of title deeds of all io(able properties and !tation certificates by the legal
departent of the tending instit!tion to deterine the ownership and clear ar$etable title of borrower
o(er these properties% Copies of all title deeds* !tation certificates and other rele(ant doc!ents
sho!ld be proptly ade a(ailable to the lending instit!tion to enable it to carry o!t these (erifications%
In(estigation of records of local land a!thoritiesA6egistrar<s office is rele(ant to ens!re that the
property !nder in(estigation is free fro all enc!brances% 0his e"ercise will also be cond!cted by the
legal departent of the lending instit!tion%
Bbtention of the a!thority of the Board for creation of ortgage and signing the declaration in
prescribed for% 0he board<s resol!tion in this regard shall also a!thorise the personApersons who ha(e
to deposit the original title deeds with the lending instit!tion for creation of ortgage%
Bbtaining of incoe-ta" clearance !nder section 2I-(-) of Incoe-ta" Act for the creation of
ortgage% 0he incoe-ta" clearance certificate is also to be s!bitted to the legal departent of the
lending instit!tion%
5epositing of all the original title deeds* !tation certificates etc% with the legal departent of the
lending instit!tions and f!rnishing the necessary declaration in the prescribed for d!ly signed by
a!thorised person(s)%

&ith the copletion of all foralities as abo(e the ortgage charge is created% ,e(ertheless the legal
departent of the lending instit!tion will co!nicate to the borrower regarding final creation of sec!rity
and the date fro which the ortgage is deeed to be created%

It ay once again be ephasised here that all the steps for creation of ort ag charge !st be copleted as
early as possible% )owe(er* penal rate of interest O-/ higher than the noral rate shall be charged by the
lending instit!tion on the entire o!tstanding loan till the date of creation of ortgage%

6egistration of Charge
Partic!lars of all charges created o(er the assets of the copany are re#!ired to be registered with the
6egistrar of Copanies !nder section -2> of Copanies Act*-H>J within 3. days of creation of charge%
0he copany sho!ld therefore* arrange to file partic!lars of charge created by it in the prescribed for ;IG
and for -3 with the 6egistrar of Copanies within the stip!lated tie% Partic!lars of both the
hypothecation charge o(er the o(able property as created by ;5eed of )ypothecationG and ortgage charge o(er
io(able properties are re#!ired to be s!bitted and registered with t 6egistrar of copanies%

CB-B65I,A0IB, B'0&'', BA,SS A,5 ALL I,5IA FI,A,CIAL I,S0I070IB,1 SA,C0IB,I,+ BF 0'69 LBA,S A,5
&B6SI,+ CAP00AL LI9I0S B? BA,SS

0er loans for setting !p of any new project or for odernisation* di(ersification or e"pansion of e"isting !nits are
sanctioned by all India financial instit!tions with or witho!t sharing s!ch ter loans with ban$s% &or$ing capital finance
is now in ode a(ailable to the copanies already assisted by the financial instit!tion% Copanies ha(e to depend !pon
coercial ban$s for finance of their wor$ing capital loan coponent% For this p!rpose co-ordination between ban$s
and all India financial instit!tion is iportant so that ban$s are able to sanction wor$ing capital liits to s!ch !nits
e"peditio!sly% 6eser(e Ban$ iss!ed detailed g!idelines in this regard in -HII iportant aspects of these g!idelines to
ban$s which are of interest to the borrower a disc!ssed here!nder%

Association of Commercial ;an.s (it+ t+e Pro!ect Araisal Bnderta.en $' All India Financial Institutions

0he ban$s which is to ta$e !p the a"i! share of ter loans aong the ban$ andAor the wor$ing capital finance
sho!ld be identified and associated with the appraisal e"ercise initiated by lead financial instit!tion% 0he prooter is
free to choose s!ch a ban$ who (the ban$) will be in(ol(ed in all aspects of appraisal%

&here ore than one ban$ is to share ter loan an or wor$ing capital re#!ireents d!e to the large project si@e* the
prooter has to identify other ban$s in cons!ltation with lead ban$% It sho!ld* howe(er* be !nderstood that the ban$
who shares ter loans !st also gi(e facilities for wor$ing capital% Bther ban$s associated with the project !st
accept the appraisal jointly finali@ed by lead financial instit!tion and the lead ban$% 0his nor is* howe(er* being
rela"ed on case to case basis%

0he association of the ban$ ha(ing the a"i! share of ter loan aong the ban$s andAor wor$ing capital
finance with the project appraisal will ens!re that assessent of wor$ing capital re#!ireents is in accordance with
the general approach adopted by ban$s aw is in confority with the g!idelines iss!ed by 6eser(e Ban$ of India in
this behalf% It wo!ld also ens!re that ade#!ate argin oney for wor$ing capital is pro(ided in the project cost%

Financing of Cost O:errun of Pro!ects

0er loan re#!ireents d!e to cost o(err!n sho!ld be et by the financial instit!tions and ban$s which had
participated in the original financing of the project by e"tending additional ter loans on a pro rata basis and the
tending ban$ !st be associated with the o(err!n appraisal carried o!t by lending financial instit!tion% Bther ban$s
ay also be bro!ght in to share cost o(err!n financing%

Sanction of Timel' 0or.ing Caital Facilities and Release of Funds for "eeting Need)$ased Re&uirements

5epending !pon the* #!ant! of wor$ing capital finance re#!ired (is-a-(is other rele(ant factors* the ban$
associated with the appraisal of project ay either eet the wor$ing capital re#!ireent of the entreprene!r hiself
or enter into consorti! agreeent with other ban$s% 0his consorti! of ban$s sho!ld be si!ltaneo!sly finalised
while appraisal for ter loan is being copleted% 0he wor$ing capital liits are to be sanctioned by the lending
ban$ either as sole financing ban$ or !nder consorti! arrangeents- iediately after sanction of ter loans%
&here* howe(er* ban$s ha(e not* for any reason* participated in the appraisal of the project* the lead financial
instit!tion will $eep the ban$ which is to pro(ide a"i! wor$ing capital finance infored abo!t the appraisal
and sanction of loan assistance to the project% An <in-principle< sanction of wor$ing capital liits sho!ld be
co!nicated by that ban$ to the borrower as well as to the lead financial instit!tion soon after the sanction of ter
loan assistance%

0he assessent of the lead ban$ of the initial wor$ing capital liit sho!ld be accepted by other participating ban$s
in the consorti! in order to a(oid delay%

In order to ob(iate diffic!lties which inade#!ate wor$ing capital liits ay create for the prooter* the lead ban$
!st re(iew the liits already sanctioned abo!t J onths before the coenceent of coercial prod!ction%
&hile sanctioning s!ch liits ban$s are re#!ired to ta$e into acco!nt the re#!ireents for wor$ing capital for
achie(ing the le(el of prod!ction en(isaged for the second year of prod!ction% Ban$s !st co!nicate the foral
sanction at least three onths before the coenceent of coercial prod!ction% 0he release of f!nds !nder the
sanction will* howe(er* be dependent !pon act!al needs of the borrower on one hand and b!ild !p of chargeable
assets on the other hand%

Stiulation of S+orter Period for Rea'ment of Term Loans E/tended $' ;an.s

6epayent sho!ld continence si!ltaneo!sly for all lenders* b!t the ter loans gi(en by ban$s ay he li#!idated
o(er a shorter period of > to J year after coenceent of coercial prod!ction in noral projects and o(er a
period of F to I years in case of capital intensi(e projects% 0he stip!lation of shorter repayent period will not*
howe(er* apply to deferred payent g!arantees iss!ed by ban$s%

Pro(ision of Ade#!ate 9argin 9oney by Financial Instit!tions &hile Cop!ting the Project Cost

In order that the b!ild !p of prod!ction in stages (till the !nit reaches noral le(el of operation) does not s!ffer on
acco!nt of pa!city of short-ter f!nds* ban$s adopt a realistic and fle"ible approach and release wor$ing capital
finance coens!rate with the increasing tepo of operations% &here* d!e to !nforeseen de(elopents* the argin
oney is fo!nd to be inade#!ate or has been eroded and where it coes in the way of sanctioning of need based
wor$ing capital* the lead ban$ sho!ld disc!ss with the borrower along with the lead instit!tion* the injection of
additional long ter f!nds to a$e !p the deficiency% &here* the borrower is !nable to iediately obilise long
ter f!nds* the ban$s ay ta$e into acco!nt all rele(ant factors and allow hi to a$e !p the deficiency in argin
within a tie frae of -2 onths or 24 onths in e"tree cases%

Iss!e of 5eferred Payent +!arantees* (5P+s) by Ban$s '"cl!si(ely for Financing of Project

&here all -India financial instit!tions are not in(ol(ed in pro(iding financial assistance* the ban$s ay eet the
entire financial re#!ireent by way of deferred payent g!arantees to projects for odernisationAdi(ersificationA
e"pansion of e"isting !nits% In s!ch cases* howe(er the concerned ban$ or the lead bati$ sho!ld a$e a detailed
appraisal of the project and assess the ris$s in(ol(ed before sanctioning the deferred payent g!arantees%

Stiulation of ;an. Guarantees Against Term Loan Granted $' Financial Institutions

Ban$ ay iss!e g!arantees fa(o!ring financial instit!tions for the ter loans e"tended by the latter* s!bject to strict
copliance of stip!lated conditions in this regard%

Co)ordination $et(een Financial Institutions and ;an.s in case of "odernisation>E/ansion>Di:ersification
of E/isting Bnits

In the case of projects in(ol(ing odernisationAdi(ersificationAe"pansion of e"isting !nits* the lead ban$ !nder the
consorti! arrangeent sho!ld in(ariably be infored by the lead financial instit!tion abo!t the approach ade by
the borrower and lead ban$ !st in(ariably be associated with the detailed appraisal% Bther aspects s!ch as sharing
pattern between financial instit!tions and ban$s etc% will be the sae as in case of setting !p of< new !nits%

+rant of 0er Loans for Iport of Second )and 9achinery

Iport of second hand achinery is s!bject to copliance with the reg!lation fraed by the go(ernent of India
fro tie to tie% Ban$s ay grant tern loans for iport of second hand achinery pro(ided the sae is in
confority with s!ch reg!lations% S!ch proposals will* howe(er* be closely scr!tinised and d!e preca!tion be ta$en
before granting the ter loan facilities%

PROPOSAL FOR FINANCIAL ASSISTANCE


I5BI and IFCI had de(ised a coon application for for see$ing project finance assistance and had also drawn
!p detailed e"planatory notes for g!iding entreprene!rs to fill !p the application for% ,ow-a-days* these
instit!tions do not insist for coon loan application% 0he applicant is re#!ired to f!rnish coplete details of the
project incl!ding financial assistance needed in the project report itself which sho!ld be forwarded to the lending
instit!tion along with re#!est letter% For project screening and sanction* I5BI !ses a For $nown as Project Loan
Application For (Appendi" 4%-)% Project report sho!ld be prepared in s!ch a way so as to facilitate f!rnishing of
inforation in Project Loan Application For%

Project Loan Application For of I5BI

Project Loan Application for of I5BI starts with <Bac$gro!nd Inforation< re#!ired to be f!rnished on the
following atters

(i) ,ae of the Ind!strial concern%
(ii) Constit!tion of the applicant copany and the sector to which it belongs%
(iii) Ind!strial Classification%
(i() 5ate of IncorporationA6egistrationACoenceent of B!siness%
(() Addresses of 6egd% Bffice* Controlling Bffice and Project Location%
((i) Project Profile%

Bac$gro!nd Inforation is followed by Parts I to K which need to be filled !p on the following lines%
Part-I re#!ires inforation in respect of prooterAcopany as !nder1

(i) Prooter profile%
(ii) Copany bac$gro!nd* in case of e"isting copany%
(iii) 9anageent Str!ct!re%
(i() Shareholding pattern of the copany on a partic!lar date%

Part II re#!ires f!rnishing of technical inforation in respect of Project% It incl!des inforation on technical
arrangeents* location and site* inp!ts of prod!ction and ipleentation sched!le%

In Part III* inforation regarding ar$et i%e% deand o!tloo$* s!pply o!tloo$* ar$et potential both in respect of
doestic and global ar$ets and selling arrangeents is f!rnished%

In Part IK* financial inforation i%e% cost of project eans of financing* so!rces and !ses of f!nds and perforance
indicators for the first > year<s of operation is f!rnished%

In Part K* inforation with regard to socio-econoic ipact of the project i%e%* econoic considerations* social
considerations* en(ironental considerations and stat!s of +o(ernents consents%
P6BQ'C0 6'PB60

Since the appraisal of the project is carried on the basis of inforation gi(en in the project report as well as
anne"!res attached thereto* it is pertinent that coplete and precise inforation is gi(en in the first instance itself so
as to a(oid any delay in processing% Inforation in the project report sho!ld be so str!ct!red that no diffic!lty is
faced while copleting the project loan application for% )owe(er* it !st be clearly !nderstood that the scope of
inforation to be f!rnished in project report is not liited to filling of loan application for b!t it !st be as
detailed as possible co(ering each and e(ery aspect of the project* howsoe(er* in!te it ay be%

0he proposal is treated as coplete only after the entreprene!rs ha(e obtained basic +o(ernent clearances* s!ch
as Letter of Intent* C%+% clearance and appro(al for foreign collaboration* etc%* where(er applicable* and ha(e also
resol(ed* in soe cases* certain basic iss!es s!ch as financing pattern for the project* capability of prooters to
raise their contrib!tion* selection of si@e for the project* s!itability of process technology to be adopted* a(ailability
of re#!isite #!ality and #!antity of raw aterials* a(ailability of ade#!ate power partic!larly in the case of power
intensi(e projects and ar$et aspects* where(er ar$et ay be a constraint or in case where b!nching of
applications is in(ol(ed% Soe of these basic iss!es are of s!ch rele(ance in the case of certain projects that they
need to be resol(ed before ta$ing !p detailed appraisal so that it does not becoe infr!ct!o!s%

List of (ario!s partic!lars to be gi(en in project report is gi(en below

-% +eneral details abo!t the ind!strial concerns* projects and financial assistance applied for%
2% Bio-data of prooters with past history%
3% Partic!lars of the ind!strial concern coprising
(i) A brief history%
(ii) List of s!bsidiaries%
(iii) List of holding copany%
(i() List of other gro!p copanies where s!bsidiaryAholding relationship does not e"ist%
(() 5irectors< bio-data%
((i) F!ll details of re(al!ation of assets together with reasons therefor%
((ii) Bio-data of $ey technical and e"ec!ti(e staff%
((iii) '"isting long-ter and short-ter borrowings%
(i") List of shareholders owning or controlling >/ or ore of e#!ity shares%
(") ,ote on copany<s ta" stat!s%
("i) 9an!fact!ring facilities%
("ii) Partic!lars of prod!ction and sales%
("iii) Locational ad(antages%
("i() '"isting re#!ireent of (ario!s !tilities and ser(ices%
("() 5etails of e"ports and incenti(es
("(i) 5etails of ins!rance
("(ii) 5etails of pending litigation%
("(iii) 6 : 5 acti(ities%
4% Partic!lars of the project coprising

(i) (i) Capacity%
(ii) (ii) Process%
(iii) (iii) 0echnical arrangeents%
(i() (i() 9anageent
(() (() Locations of land
((i) ((i) B!ilding%
((ii) ((ii) Plant 9achinery%
((iii) ((iii) 6aw aterial
(i") (i") 7tilities incl!ding power* water* stea copressed air f!el etc7D transport%
(") (") 'ffl!ents%
("i) ("i) Labo!r%
("ii) ("ii) P!arters for labo!r ho!sing%
("iii) ("iii) Sched!le of ipleentation%
("i() ("i() Bther projects of the concern%

>% >% Cost of the project%
J% J% 9eans of financing%
F% 9ar$eting and selling arrangeents%
I% Profitability and cash flow%
H% 'conoic consideration%
-.% +o(ernent consents%
--% Letter addressed to the ban$er of the applicant a!thorising the ban$ to di(!lge all inforation abo!t
the prooter to financial instit!tions%
-2% -2% Partic!lar of e"isting debent!res and long-ter sec!red loan%
-3% -3% Partic!lars of e"isting cash creditAo(erdraft arrangeents%
-4% -4% 5istrib!tion of shareholding%
->% ->% Partic!lars of factory and non-factory b!ilding
-J% -J% Partic!lar of achinery iported or to be iported for the project
-F% -F% Partic!lars <of achinery already ac#!iredAproposed to be ac#!ired fro indigeno!s
so!rces !nder the project
-I% -I% 6e#!ireents of raw aterials* cheicals and coponents%
-H% -H% 'stiated cost of the project%
2.% 2.% 'stiate of contingency pro(ision%
2-% 2-% 9argin oney for wor$ing capital%
22% 22% 9eans of financing
23 Proposals for raising share capital* loans : debent!res%
24 So!rce of f!nds in respect of e"pendit!re already inc!rred%
2>% 'stiate of cost of prod!ction%
2J% 'stiates of wor$ing res!lts%
2F% 'stiate of prod!ction and sales%
2I% Calc!lation of wage and salaries at a"i! prod!ction%
2H% 7nit cost of prod!ction%
3.% 3.% Cash flow stateent%
3-% 3-% Projected Balance Sheet

0he following doc!ents are norally re#!ired to be enclosed with the proposal for financial assistance%

-% -% Copy of 9eorand! and Articles of AssociationABye LawsA Partnership deed%
2% 2% Certified copies of 9eorand! and Articles of Association of the prooter copany%
3% 3% A!dited balance sheets and profit : loss acco!nts for the last fi(e years of the prooter copany%
4% 4% Copy of agreeents* if any* entered into aong the prooters%
>% >% Copies of the a!dited balance sheets and profit and loss acco!nts for last fi(e years of the holding
copany%
J% J% Certified copies of agreeent with the 9anaging 5irectorA&hole tie 5irectorAChief '"ec!ti(e%
F% Certified copies of appro(al of the Central +o(ernent for the appointent of 9anaging 5irectorA&hole
tie 5irectorAChief '"ec!ti(e%
I% Certified copies of a!dited balance sheets and profit and loss acco!nts for the last fi(e years together with
profora of balance sheet and profit and loss acco!nt of as recent a date as possible%
H% H% Brganisation chart showing lines of a!thority%
-.% -.% Copy of the project reportAfeasibility* if any* copy of the process flow chart with aterial balance*
!tilities and process paraeters%
--% --% Copies of p!blished broch!res highlighting the acti(ities of the collaborator and balance sheets for
last three years%
-2% -2% Copy of collaboration agreeent%
-3% -3% Copy of +o(ernent appro(al for the collaboration%
-4% -4% Copy of +o(ernent appro(al for a(ailing of the ser(ices of foreign technicians%
->% ->% Copy of p!blished aterial on cons!ltants%
-J% -J% Copy of agreeent with cons!ltants%
-F% -F% Copy of +o(ernent appro(al in case of foreign cons!ltants%
-I% -I% Proposed organisation chart indicating the lines of a!thority%
-H% -H% Copy of SaleALease case 5eed of land%
2.% 2.% Copy of soil test report%
2-% 2-% Copy of +o(ernent order con(erting the land into ind!strial land* if applicable
22% 22% Location ap%
23% 23% Site plan showing the conto!r lines* the internal roads* power recei(ing station* railway siding*
t!be wells etc%
24% 24% 9aster plan showing location of b!ilding roads* power recei(ing station* railway siding t!be well
etc%
2>% 2>% '#!ipent layo!t plan of b!ilding indicating the flow of aterial%
2J% 2J% Copy of agreeent with architects%
2F% 2F% Copy of p!blished write !pAbroch!re on architects%
2I% 2I% Layo!t of the plant and achinery indicating the flow of aterial%
2H% 2H% Copy of agreeent for ining lease%
3.% 3.% '"perts< report regarding the #!antity and (al!e of the reser(es%
3-% 3-% Copy of letter of sanction for power%
32% 32% Copy of agreeent with electricity board%
33% 33% Copy of electrical layo!t of the plant%
34% 34% A note on power generation* deand and s!pply in the State present and projected%
3>% 3>% Layo!t for the water syste%
3J% 3J% Copy of the letters of sanction of water by !nicipalAlocal a!thorities%
3F% 3F% Copy of the water analysis report%
3I% 3I% Layo!t of the stea syste%
3H% 3H% Layo!t plan for copressed air* f!el etc%
4.% 4.% Copies of letter of allotent of coalAf!rnace oil fro the concerned a!thorities%
4-% 4-% Copy of appro(al fro concerned a!thorities for the proposed arrangeents for effl!ents%
42% 42% P'60 Chart%
43% 43% Copies of letter sanctioning financial assistance%
44% 44% Copy of ar$et s!r(ey reports* if any* cond!cted by the copany or independent cons!ltants%
4>% 4>% Copy of the agreeent with selling agents%
4J% 4J% Copies of licencesAconsents etc% recei(ed fro the +o(ernent%
4F% 4F% Copies of letter fro s!ppliers agreeing to s!pply the copanies< re#!ireents%
4I% 4I% Copies of iport licence for ites to be iported%
4H% 4H% Certified copies of a!dited balance sheets and profit and loss acco!nts for the last three years in
respect gro!p copanies incl!ding s!bsidiaryAholding copanies%

EEPLANATOR= NOTES ON CERTAIN CRBCIAL ASPECTS OF PROJECT REPORT

17 GENERAL IDEA ON PROJECT AND PRODBCT

Gi(e a general idea of the project* s!ch as the prod!ct* capacity and any o!tstanding feat!res*
whether the prod!ct is being prod!ced for the first tie in the co!ntry andAor in(ol(es technological
inno(ation or is e"port-orientedAiport-s!bstit!ti(e or defence-oriented or it is prooted by technical
entreprene!rs or based on locally a(ailable raw aterials% Indicate clearly the nat!re of the project i%e%
whether-it is a new project or an e"pansion schee or a odernisation andAor di(ersification schee%
0he capacity indicated in the letter of intent or ind!strial licence sho!ld ordinarily tally with the
capacity proposed to be installed% If there is a difference* e"plain the reasons there for in respect of each of
the prod!cts being an!fact!redAproposed to be an!fact!red by the copany and steps ta$enAproposed to
be ta$en to increase the licensed capacity%

57 PRO"OTERS

0he instit!tions wo!ld li$e to ha(e f!ll inforation on the prooters* s!ch as age* ed!cation
#!alifications* fields of specialisation* if any* and e"perience in ind!stry or b!siness etc% If the prooters
are to be considered as technician entreprene!rs* the reasons for doing so ay be e"plained% 0ile
inforation ay be f!rnished separately in respect of each of the ain prooters% In the case of joint sector
projects* besides inforation on the pri(ate sector prooters* brief write-!ps on the acti(ities of the
SI5CASIIC associated with the project ay be f!rnished together with copies of ann!al reports and
acco!nts for last three years and other rele(ant p!blished aterial%
Partic!lars of all the directors of the applicant concern (i%e% tile copany for which assistance is
so!ght) ay be gi(en in the following Perfora 1

,ae of the Age Address ,ae of copaniesA
5irector firs in which interested
and nat!re of interest

0he instit!tions wo!ld li$e to ha(e the ban$ers< report oil the applicant copany on each of the
prooters and in respect of all the copaniesA firs with which they are acti(ely associated i%e% as
Chairan* 9anaging 5irector* &hole-tie 5irector* 0r!stee* 9anaging Partner* Partner etc% For this
p!rpose* the letter(s) ay be copleted in all the abo(e cases and addressed to the ban$ers before
s!bitting the application% a!thorising the to disclose the rele(ant inforation to any or all of< the
financial instit!tions* s!ch as I5BIAIFCIALICA70IA+IC% Copies of the letters to ban$s are to be enclosed
with the proposal%

,7 PARTICBLARS OF T<E INDBSTRIAL CONCERN

+i(e a brief history of*< the concern incl!ding any changes in naes* b!siness anageent etc%
Also indicate any ergers* reorganisation etc% which too$ place in the past%
If any of the assets ha(e been re(al!ed or written off at any tie d!ring the e"istence of* the
copany f!rnish f!ll details of s!ch re(al!ation together with reasons therefor%
5escribe an!fact!ring facilities separately at each plant and f!rnish fig!res of licensed capacity*
installed capacity* prod!ction and sales of each ajor prod!ctAprod!ct gro!p d!ring the last fi(e years%
+i(e details of any pending litigation either by or against the copany%
In case of new copanies which ha(e approached the instit!tions for assistance at a later stage
when the project has already ade s!bstantial progress in the ipleentation of the project* as far as
possible sae details which are applicable to e"isting ind!strial concerns ay he gi(en%

37 PARTICBLARS OF T<E PROJECT

F!rnish as detailed inforation as is possible on the project as the basic inforation will assist the instit!tions to
assess the (iability of the project% It is li$ely that soe arrangeents ha(e already been ade towards project
ipleentation* s!ch as ac#!isition of land* appointent of cons!ltants etc% In s!ch cases* gi(e f!ll partic!lars of
the arrangeents ade along with copies of rele(ant doc!ents% &here(er the arrangeents are not finalised* gi(e
details of the arrangeents proposed% It ay be ens!red that d!e consideration has been gi(en to the (ario!s aspects
of project ipleentation and operation and that satisfactory arrangeents ha(e been ade therefore%

A% Capacity

+i(e the capacity in respect of each of the proposed prod!cts%
Indicate <9a"i! Prod!ction 'n(isagedT based on the a"i! prod!ction ass!ed in the
profitability stateents etc% Also indicate the n!ber of shifts on the basis of which this capacity is
ass!ed% In case the installed capacity is ore than the licensed capacity* steps ta$enAproposed to be ta$en
for reg!larising the position ay be indicated%
&hen a new !nit is set !p* the capacities of (ario!s sections of the plant sho!ld norally atch
the o(erall capacity of the !nit% Indicate the capacities proposed to be installed in the ajor sections and
also f!rnish details of achine loading* process cycle tie* assebly line balancing and other partic!lars% If
the capacity in any section is in e"cess of the o(erall capacity* e"plain the reasons therefore and j!stify the
need to install s!ch e"cess capacity% Specifically indicate that the ind!strial licence co(ers the e"cess
capacity%
In the case of engineeringAa!toobile and other prod!cts gi(e details of proto-type de(elopent
and testingAappro(al* if any* re#!ired to be obtained fro +o(ernent or other bodies% Indicate ISI or other
rele(ant specifications to which the prod!ct wo!ld confor%

B% Process

,ae a new copanies !sing the sae process as proposed by the applicant and also elaborate on
the ajor technical andAor other flired by the copanies !sing the process%

C% 0echnical arrangeents

0echnical arrangeents incl!de the arrangeents ade for obtaining $now-how* basic design
engineering* detailed engineering* selection of e#!ipent s!ppliers and contractors* constr!ctionAerection
s!per(ision* trial r!ns and staff% 0he copany itself and part thro!gh collaborators and cons!ltants ight
!nderta$e part of these jobs% '"plain in detail the arrangeents ade proposed to be ade for each of the
ser(ices re#!ired for the project% F!rnish details of the collaborators and cons!ltants%

5% 9anageent

+i(e separate write-!ps on the organisational set-!p d!ring the constr!ction stage and the
operational stage%
+i(e the bio-data of senior personnel (especially of departental heads and abo(e) already
appointed and the ini! #!alifications and e"perience e"pected of other senior personnel proposed to
he recr!ited% A chart showing the organisational set-!p en(isaged when the copany goes into prod!ction
ay be attached% 0he chart sho!ld indicate the f!nctions of each departent* the naes and designations of
officials (if appointed) heading the departents etc% and the strength of the s!pporting staff%

'% Location

&hile selecting the site for the project* the ad(antages and disad(antages of the site ight ha(e
been ta$en into consideration% 'n!erate in detail the ad(antages and disad(antages which were weighed
by the !nit before selecting the site and also highlight each of the factors which were considered ost
ad(antageo!s for the project* s!ch as good transport facilities* nearness to ar$et* a(ailability of raw
aterials* water* power* labo!r etc% For instance* in e"plaining the transport facilities that ight be
a(ailable for the project* describe the national and state highways passing nearby* specifying the distances
fro the site of iportant b!siness centres* nearest railway station* whether the railway line is on the broad
ga!ge or on etre-ga!ge etc% F!rnish dataAinforation collected by the copany to establish the s!itability
of the site with reference to rainfall* floods* cyclones* earth#!a$es etc%
5escribe in detail the topography of the land ele(ation with reference to nearest highway etc%

0he area of land re#!ired for the project ay be gi(en separately for (a) factory b!ilding* (b) ancillary
b!ildings* (c) open storage space* (d) ho!sing colony* (e) area re#!ired for f!t!re e"pansion* and (f) any
other p!rpose to be specified% 0he following inforation ay be f!rnished in this respect 1

(a) 0otal area and cost therefore* incl!ding con(eyance charges% If the cost is higher than the c!rrent ar$et
price* e"plain the reason for s!ch (ariation%
(b) &hen the land is ac#!iredAproposed to be ac#!ired fro a n!ber of owners* indicate the area and the cost
of each plot%
(c) It is li$ely that part of the cost of land is payable in deferred instalents or in $ind* s!ch as by iss!e of
shares% Indicate the ao!nts paid in different fors s!ch as cash* other than cash deferred payents etc% In
case the land is ta$en on lease basis* gi(e separately the ao!nt of initial prei! and the ann!al lease rent
(e) If the land is ac#!iredAproposed to be ac#!ired fro any of the prootersAdirectors of the copany or their
relati(es* gi(e f!ll partic!lars* s!ch as the relationship* area of plot* cost etc% Also indicate the date of
ac#!iring and price paid and e"penses inc!rred by the prooterAdirector etc%
(f) If the land for the project has been earlier !sed for agric!lt!ral p!rposes* it ay be necessary to obtain the
perission of the State +o(ernent for con(erting it into non-agric!lt!ral land% Contact the Ind!strial
5epartent of the State +o(ernent and obtain the appro(al of the copetent a!thority and enclose a copy
of s!ch appro(al%

F% B!ildings

It ay be e"plained how the b!ildings are proposed to be constr!cted i%e% whether thro!gh a
contractor* by the !nit<s own organisation etc% In case the b!ildings are to be constr!cted thro!gh
contractors* describe the process of selection of the contractor(s) and the reasons for selecting the
contractor(s)%
If no architect is proposed to be appointed* please gi(e reasons why s!ch an appointent is not
considered necessary% &hile gi(ing the pas e"perience of the architects also gi(e details of iportant wor$
handled by the and the fees charged therefore%

+% Plant and 9achinery

Pro(ide details as to how the (i) achineryAe#!ipent* and (ii) achineryA e#!ipent s!ppliers
ha(e been selected% 0he e#!ipent ight ha(e been selected on the ad(ice of collaborators* t!rn-$ey
contractors* technical ad(isersAcons!ltants* prooters etc% Siilarly the achineryAe#!ipent s!ppliers
ight ha(e been s!ggested by the collaborators* cons!ltants etc% or selected thro!gh copetiti(e bids +i(e
f!ll details incl!ding degree of sophisticationAobsolescence of the ain e#!ipentC and also e"plain the
ad(antages of selecting the s!pplier(s)%

)% 6aw 9aterials

+i(e detailed specification preferably incl!ding any ind!strial standard of raw aterials re#!ired
by the !nit% In the case of raw aterialsA cheicals* which are in short* s!pply* indicate the special
arrangeents* which the copany proposes to a$e for obtaining the indigeno!s* and iported raw
aterials%
In the case of a!toobile and engineering ind!stries gi(e coplete list of parts indicating
seperately details of an!fact!red bo!ght-o!t sei-finished (BBSF)* bo!ght-o!t finished (BBF) and
proprietary coponents% +i(e a write-!p on ancillary de(elopent for s!pply of coponents and alternate
so!rces in (iew of critical coponents%

I% 7tilities

Power
0he power re#!ireents of the project co!ld be et either fro the State 'lectricity Board (i%e%
p!rchase power) or partly fro the 'lectricity Board and partly thro!gh internal generation% +i(e separately
the #!ant! of power re#!ireents e"pected to be et by the 'lectricity Board and the #!ant! of own
generation proposed% 0he s! total of power a(ailable sho!ld at least be e#!al to the project re#!ireents%
F!rnish partic!lars of the electrical s!b-station fro which power wo!ld be ade a(ailable* its
distance fro plant site* progress in e"tending the s!pply line* (oltage at which power wo!ld be ade
a(ailable and other ters s!ch as how the cost of e"tending the s!pply line wo!ld be borne etc%
Standby arrangeents are generally eant only for eeting eergency sit!ations% S!ch
arrangeents ay be e"plained in details* gi(ing the capacity of the generator and the e#!ipent proposed
to be operated with the standby generator%
+i(e details of electricity tariff payable to the 'lectricity Board%

&ater
'"plain in detail the proposed arrangeents for obtaining the water re#!ireents for the project%
In the case of t!be-wells* gi(e the n!ber of t!be-wells proposed to be s!n$ and their capacities% If water is
to be drawn fro ri(er etc%* gi(e partic!lars regarding water flow in the ri(er d!ring onsoon and lean
season* the length of the pipe line* n!ber of reser(oirs and their capacities etc% Also e"plain whether the
water has been analysed and fo!nd s!itable for !se by the !nit% If any water treatent is proposed* e"plain
the arrangeents en(isaged and the capital cost thereof

Stea
Indicate the areas where the stea will be !sed% If part of the stea is re#!ired to the !sed for
generation of power* gi(e details%

Comressed AirD Fuel etc7
+i(e inforation separately regarding the re#!ireents and so!rces of s!pply of copressed air*
f!rnace oil* coal etc%

Q% 'ffl!ent

Soe of the !nits ha(e r!n into diffic!lties for not ha(ing ta$en ade#!ate and tiely eas!res for
proper disposal of solid* li#!id andA or gaseo!s effl!ents% It !st be ens!red that there e"ist ade#!ate
arrangeents for treating all the effl!ents% Pro(ide coplete details of s!ch arrangeents%
'"plain in detail the special characteristics* s!ch as al$aline* acidic* to"icApoisono!s etc% of the
effl!ents which are harf!l to any li(ing organis or (egetation and the arrangeents proposed for their
treatent and disposal%

S% Labo!r

'"plain in detail the plans for recr!iting and training labo!r and s!per(isory personnel%

L% P!arters and Labo!r )o!sing

+i(e partic!lars of the #!arters proposed to be constr!cted for the (ario!s categories of
eployees%

In the case of ho!sing for labo!r* it is possible to eet part of the e"pendit!re thro!gh +o(ernent<s
ind!strial ho!sing schees% 0his ao!nt ay be indicated% Besides the constr!ction of ho!sing* indicate
the arrangeents proposed to be ade for ho!sing of essential staff and whether any accoodation is
a(ailable for others in the nearby (illageAtown%

9% Sched!le of Ipleentation

0he proposed sched!le of ipleentation ay be gi(en separately for each acti(ity% Also* gi(e a
brief write-!p on the physical Progress ade as at the tie of a$ing proposal for assistance%

It will be necessary to s!pport the sched!le of ipleentation by a bar diagra indicating the ajor
acti(ities% In the case of large projects* it will be ad(antageo!s to prepare a P'60 chart showing the
ipleentation sched!le and the critical path%
,% Bther Projects of the Concern

If the prooters and Aor the applicant copany is planning to ta$e !p any ore schees either
si!ltaneo!sly with this project or in the near f!t!re* gi(e partic!lars of s!ch schees* indicating* inter alia*
the project cost* proposed eans of financing and the arrangeents ade for eeting the cost of the
schees and personnel for ipleenting and operating the project%

67 COST OF T<E PROJECT

7tost care needs to be ta$en while fi"ing cost of project beca!se based on this aspect <eans of
financing< are decided% 'ach and e(ery eleent of cost* which is e"pected to for part of the project* sho!ld
be incl!ded%
0he ao!nt of e"pendit!re already inc!rred and the e"pendit!re proposed to be inc!rred !nder
(ario!s beads ay be gi(en in separate col!ns% Both r!pee cost and r!pee e#!i(alent of foreign e"change
cost* if foreign e"change is in(ol(ed and totals thereof ay be gi(en !nder e"pendit!re already inc!rred
and e"pendit!re proposed to be inc!rred% 0he rates at which foreign c!rrencies ha(e been con(erted into
Indian r!pees ay be indicated in a footnote%

87 "EANS OF FINANCING

In the case of e"isting copanies* cash generation fro the e"isting acti(ities ay be
a(ailable for financing part of the project cost% 0his ao!nt ay be shown against <internal cash
accr!als< in the eans of finance% It sho!ld be clearly established that the a(ailability of internal
accr!als as en(isaged is ass!red by gi(ing rele(ant facts and fig!res%
Indicate the ao!nt of foreign e"change proposed to be obtained fro different so!rces* s!ch as
foreign c!rrency loans fro IFCIAICICI* free foreign e"change fro +o(ernent of India* iport fro
6!pee payent area* +o(ernent-to-+o(ernent credit* s!ppliers< credit etc%
0he total contrib!tion* which will be bro!ght in by the prooter gro!p incl!ding contrib!tion
fro SI5CASIIC etc%* which for part of the prooters< contrib!tion* sho!ld be indicated clearly%
7nder their stat!tes I5BI and IFCI are prohibited fro financing concerns in which their directors
or their relati(es are s!bstantially interested% A coplete list of persons who wo!ld be contrib!ting towards
the prooters< share of the share capital and the contrib!tion of each one of the ay there against be
f!rnished% In case any of the I5BIAIFCI directors or his relati(es wo!ld be s!bscribing to the shares
reser(ed for the prooters* this ay be specifically indicated% 0he shareholders s!bscribing to the
prooters< contrib!tion will be called !pon to gi(e an !nderta$ing for non-disposal of shares to the
instit!tions%
Sec!rity for ter loan assistance will norally be a first pari pass! charge on all the
o(able and io(able assets of the copany* present and f!t!re* s!bject to charge in fa(o!r of
ban$ers (on specified o(ables) for wor$ing capital re#!ireents% )owe(er* if for any partic!lar
reason any additionalAdifferent sec!rity is proposed to be offered* it ay be e"plained%

97 "ARCET AND SELLING ARRANGE"ENTS

0he entreprene!r shall ens!re that there is a reasonable ar$et potential for the prod!ct before ta$ing a decision to
set !p facilities for its an!fact!re% 0he fact that the ind!strial licence etc% has been gi(en by go(ernent does not
necessarily ean that the ar$et aspect has been f!lly e"ained% 0he !nit wo!ld be well ad(ised to !nderta$e a
coprehensi(e ar$et s!r(ey to establish the ar$et potential to the satisfaction of the instit!tions% Iportant
points are gi(en as !nder1

5escribe the prod!ct* its ajor !ses and present and f!t!re ar$et prospects% If the prod!ct is a
new one intended to s!bstit!te an e"isting prod!ct* e"plain the special #!alitiesAfeat!res of the prod!ct
(is-a-(is the e"isting prod!ct* which wo!ld be s!bstit!ted% Bring o!t clearly the ad(antages of the !nit<s
prod!ct (is-a-(is the prod!cts of its copetitors%
+i(e data on the present installed capacity li$ely to aterialise in each of the ne"t few years and
c!rrent prod!ction and e"pected prod!ction for the ne"t few years% Fig!res of e"isting capacity and
prod!ction wo!ld be a(ailable fro p!blications li$e the 9onthly Statistics of Prod!ction (p!blished by the
Central Statistical Brganisation)* +!idelines to ind!stries (by 5+05) etc% Soe of the so!rces for the
estiates of f!t!re deand are p!blications of the Planning Coission* B+0I)* Chabers of Coerce
and Ind!stry* State 5irectorates of Ind!stries* State Ind!strial 5e(elopent Corporations etc% 0here are a
n!ber of cons!ltancy organisations in the co!ntry which wo!ld also be able to !nderta$e a detailed
ar$et st!dy on behalf of the applicant%
If it is proposed to e"port a part of the prod!ction (either beca!se of a stip!lation in the ind!strial
licence or for any other reason)* gi(e data regarding the e"port ar$et* international prices d!ring the last
2A3 years etc% 0he inforation ay incl!de fig!res of the co!ntry<s e"port of the prod!ct to the (ario!s
co!ntries for the past few years and projected e"port deand ade by the '"port Prootion Co!ncils*
5e(elopent Co!ncils* 0rade 5e(elopent A!thority etc%
If the b!l$ of the prod!ction is e"pected to be sold to a few cons!ers* or the prod!ct is
sophisticated and has a liited ar$et* please indicate the long-ter arrangeents* if any* ade with s!ch
cons!ers or dealers in the prod!cts%
0he price ass!ed for the prod!ct is iportant in deciding the (iability of the project% It is
ad(isable to ass!e a price soewhat lower than the net price realised by other e"isting an!fact!rers%
Bften* a new entrant in the ar$et wo!ld ha(e to offer his prod!cts at a relati(ely lower price in
order to attract c!stoers and to get established in the ar$et% In the case of prod!cts for which prices
fl!ct!ate at short inter(als* it is preferable to ass!e a reasonable price based inter alia on the a(erage price
for the pre(io!s few #!artersAonths* depending on the periodicity of fl!ct!ation<s% It !st be noted that it
is diffic!lt for a copany to realise the price pre(ailing d!ring the periods of teporary shortages%
If raw aterials are to be obtained fro the agric!lt!ral sector (s!ch as s!garcane* raw cotton
etc%)* or the finished prod!cts are to be !sed in agric!lt!ral fars (s!ch as fertilisers* pesticides etc%)* it is
generally necessary to start an ed!cational capaign of a seeding prograe for the benefits of the farers
!ch before the project goes on strea% '"plain the steps ta$enAproposed to be ta$en by the copany in
this regard%

F7 PROFITA;ILIT= AND CAS< FLO0

0he brea$-e(en point is the ini! le(el of prod!ction at which a project wo!ld reach a no
profit no loss position% For calc!lating the brea$-e(en point* fig!res ay be ta$en fro the profitability
stateent for the year in which the a"i! capacity !tilisation is e"pected to be achie(ed for the first
tie% 'nclose wor$-sheet and indicate the basis of cop!tation%

G7 ECONO"IC CONSIDERATIONS

It is all the ore iportant for the instit!tions to assess the econoic benefits fro the project
accr!ing to the co!ntry* partic!larly in ters of foreign e"change earnings%
F!rnish the international prices (f%o%b prices e"ports and c%i%f% for iports) of the finished prod!ct
and of the ajor aterial inp!ts s!ch as raw aterials etc% It is not necessary that the copany sho!ld be
iporting or e"porting the coodities% 0he fig!res of international prices are re#!ired by the instit!tions
for calc!lating the benefits accr!ing to the co!ntry by indigeno!sly prod!cing or by e"porting the prod!cts
abroad% 0he data for this p!rpose co!ld be obtained fro% e"port prootion co!ncils* ind!stry associations*
leading iportersA e"porters* foreign trade jo!rnals etc% and the so!rces fro which data ha(e been obtained
ay be indicated%
Also e"plain the copany<s assessent in detail of the scope for ancillary ind!stries to coe !p in
the area as a res!lt of the setting !p of the proposed project%


14% GO@ERN"ENT CONSENTS

If any special conditions ha(e been iposed in any of the appro(als indicate how far these
conditions ha(e been coplied with and steps ta$en to coply with the sae% If the copany has ade any
representation for deletionAwai(er of the stip!lations* copies of correspondence e"changed ay be
enclosed%

11% DECLARATIONS

All the declarations !st be signed by the 9anaging 5irector or a 5irector a!thorised to do so

FOREIGN CBRRENC= LOANS FRO" FINANCIAL INSTITBTIONS
AND ;ANCS

I% FB6'I+, C766',C? LBA,S F6B9 FI,A,CIAL I,S0I070IB,S

In the case of large projects in(ol(ing hea(y capital e#!ipents* foreign c!rrency loans are eerging as an
iportant so!rce of project finance% 0he 5epartent of 'conoic Affairs* +o(ernent of India* specifically
perits borrowings in foreign c!rrencies in respect of specific projects% &hile s!bitting the application to the
coittee appro(ing capital goods iports* the entreprene!r is re#!ired to specifically ention foreign c!rrency
loans a* so!rce of finance% It is therefore* iportant that the foreign c!rrency loans so!rce of project finance are
identified well in tie%

&hile identifying the foreign c!rrency loans as a possible so!rce of project finance* the entreprene!r sho!ld ta$e
into acco!nt 1 (a) the options a(ailable the international ar$etC and (b) the cost effecti(e financing alternati(es a
foreign c!rrency e"pos!re anageent%

0here are two types of e"ternal so!rces a(ailable for raising foreign c!rrency borrowings1

(i) f!nds that can be raised on fi"ed rates of interest (i%e% fi"ed borrowings)C and%
(ii) f!nds that can be raised on floating rates of interest (i%e% floating-rate borrowings)%

Fi"ed-rate borrowings ins!late the borrower against o(eents in the interest rates% Floating-rate borrowings* on
the other hand* enable the borrow to ta$e ad(antage of downward o(eents in the interest rates%

Fi"ed-rate Borrowings

0he ost coonly !sed ethods of raising fi"ed-rate f!nds for financing capital goods iports are 1 (a) B!yer<s
creditC (b) S!pplier<s credit and (c) Fi"ed-rate loans%

*a# ;u'er-s credit

7nder a b!yer<s credit arrangeent* a specific long-ter loan is granted by a designated lending agency in the
e"porter<s co!ntry to the b!yer in the iport* co!ntry against a g!arantee by an acceptable ban$ or financial
instit!tion% 0he s!pplier recei(es payent for the e"ports on his deli(ering to the lending agency the re#!isite
doc!ents specified in the loan agreeent and the relati(e coercial contract% 0he lending agency realises the
payent fro the b!y (iporter) in instalents as and when they fall d!e% Brdinarily* the s!pplier of his obligation
rec$ons the period credit as the d!ration fro the date of copletion
%
*$# Sulier-s credit

S!ppliers credit* on the other hand* is e"tended to the s!pplier (e"porter) by the financial instit!tions (in the
e"porter-co!ntry) to finance his deferred recei(ables% 0he b!yer is re#!ired to pro(ide the re#!isite g!arantee fro
an acceptable ban$ or financial instit!tion in the iporter co!ntry%

Credit ay also be e"tended by the s!pplier (e"porter) directly to his b!yer (iporter) on the deferred payent
ters against his pro(iding a g!arantee as abo(e% In this case* the s!pplier will realise the proceeds of his e"ports by
disco!nting the bills of e"change (drawn on and accepted by the b!yer) with his ban$er or the designated
+o(ernent agency in his co!ntry% S!ch credits howe(er* are not really s!pplier<s credit in the technical sense%
0hese are in the nat!re of trade credit%

0echnically both s!pplier<s credit and b!yer<s credit are e"tended by the lending agency in the e"porter<s co!ntryC
when it is granted to the s!pplier (e"porter)* it is a s!pplier<s creditC and when it is granted to the b!yer (iporter) it
is a b!yer<s credit%

*c# Fi/ed)rate loans

In addition to the abo(e two ethods* fi"ed-rate loans can also be raise thro!gh coercial ban$s% S!ch loans are
norally arranged for a period !pto I years and are priced at a specific spread abo(e the going rate in the concerned
co!ntry of the chosen c!rrency%

Coparati(e Cost Ad(antage

Bf the abo(e three types of credit* s!pplier<s credit ay* in any cases* pro(e to be ore e"pensi(e as the s!pplier
is li$ely to add a prei! in the price #!oted for the goods or in the rate of interest so as to copensate hi for the
additional cost inc!rred by hi in the process% As against this b!yer<s credit ay be relati(ely cheaper as the
s!pplier !nder this arrangeent is paid off iediately and the lender realises die payent fro the b!yer as per
agreed ters% 0he interest rate #!oted on the fi"ed-rate loans by the coercial ban$s will depend !pon the
copetiti(e edge of the concerned ban$ in the partic!lar '!ro-c!rrency ar$et

9ethods of 6aising Foreign C!rrency Loans

0here are two ethods of raising foreign c!rrency loansC (i) thro!gh Financial Instit!tions !nder Lines of credit :
(ii) directly fro abroad% In this Chapter we shall disc!ss foreign c!rrency loans thro!gh financial instit!tion only%
6aising foreign c!rrency loans abroad directly i%e% e"ternal coercial borrowings will be disc!ssed in the ne"t
Chapter%

Lines of Credit

0he all India financial instit!tions ha(e arranged (ario!s lines of credit in different foreign c!rrencies fro (ario!s
international de(elopent agencies and ban$s incl!ding &orld Ban$ and foreign c!rrency loans are sanctioned as
apart of project finance o!t of these lines of credit% 0he salient feat!res of foreign c!rrency loans sanctioned by all
India financial instit!tion are as !nder1

0he rates of interest on foreign c!rrency loans are either fi"ed or floating depending !pon the ters
and conditions applicable on the line of credit o!t of which a partic!lar foreign c!rrency loan is sanctioned%
Bther ters and conditions incl!ding repayent period are also dependent on the original line of credit
and entire repayent has to be within the terinal date of original credit to the financial instit!tion%
All foreign c!rrency loan attract a !nifor !p front fee of - /p%a% fro the date of iss!ance of letter of
intent by the financial instit!tion%
Con(ertibility cla!se is not applicable in case of foreign c!rrency loans%

0he (ario!s steps in(ol(ed for a(ailing of foreign c!rrency loan are as follows1

0he lending instit!tion will iss!e letter of intent for foreign c!rrency loans%
0a$e steps to get capital goods clearance fro Secretariat of Ind!strial Assistance and for obtaining
iport licence fro the 5irector +eneral of Foreign 0rade* where applicable%
Con(ene Board eeting to accept the letters of intent iss!ed by the lending instit!tion and con(ey
acceptance to the instit!tion by sending copy of Board 6esol!tion passed in this regard%
Bbtain copy of foreign loan agreeent and g!arantee agreeent etc% as re#!ired in ters of sanction
fro the lending instit!tion and arrange proper e"ec!tion of sae by a!thorised persons to the satisfaction
of the instit!tion%
Bbtain necessary application fors for iss!ance of iport letters of credit%
Payent in respect of iported achinery will be directly ade by the instit!tions to the o(erseas
s!ppliers against letters of credit opened by the by disb!rsing the loan%

'fforts are* howe(er* being ade to rationalise the proced!re and bring !nifority by adopting a coon approach
to foreign c!rrency loans and a beginning in this regard has already been ade% F!ll details of the proced!re are
gi(en in the later part of this chapter%
S'L'C0IB, BF FB6'I+, C766',C?

Foreign c!rrency loans a(ailed fro financial instit!tions are repayable in Foreign c!rrency itself and the borrower
in s!ch cases is e"posed to e"change fl!ct!ation ris$s% Selection of foreign c!rrency th!s gains iportance% Long-
ter prospects as regard to stability in the (al!e of foreign c!rrency (is-a-(is the interest rates applicable on the
loan !st be analysed before selecting the foreign c!rrency%

Another iportant factor in this regard which needs caref!l e"aination the c!rrency of loan and c!rrency of
payent at the tie of iport of achinery etc% i%e% against a loan in 7S U* the payent of the foreign s!pplier of
achinery can be ade in Qapanese ?en% 0his is a (ery diffic!lt sit!ation for the iporter as total r!pee o!tlay will
not only be effected by a change in e"change rates of dollar (is-a-(is Indian r!pees b!t will also be effected by a
change in Qapanese ?en-7S U rate% For e"aple* if Qapanese ?en appreciates by abo!t 3./ a 7S U* the liability in
7S U will increase by 3./ witho!t any corresponding increase in Qapanese ?en liability%

Iport of capital goods ay generally in(ol(e a long tie and letters credit are opened with relati(ely longer
coitent period and change in rate between the c!rrency of in(oicing and c!rrency of loan ay play a with the
financial planning of a project% In sit!ations as #!oted in the e"aple* the (ery s!ccessf!l copletion of the project
ay be endangered to e"tra load of 3./ re#!ired to eet the iport coitent% It is* therefore absol!tely
necessary to foresee s!ch sit!ations% 0he ideal sol!tion to the abo(e proble is to ens!re that the c!rrency of
in(oice and c!rrency of loan are or the sae%
'8C)A,+' 6ISS

Fro the disc!ssions in the preceding paragraphs we can identify following ris$s for the prooter while a(ailing
foreign c!rrency loans%

Fl!ct!ation in the parity rate between the c!rrency of in(oicing c!rrency of loan*
(0he ris$ is carried fro the date of p!rchase contract of achine the date of settleent of payent%)
'"change rate fl!ct!ation in the c!rrency of loan in ter of Indian r!pees%
(0he ris$ is carried fro the date of a(ailing of loan till the instalent is repaid on red!cing scale%)

)ow to Co(er the Foreign '"change 6is$V

Co(ering the foreign e"change ris$ is tered as hedging the ris$% copany does not want to hedge* it eans it is
ta$ing a (iew that the f!t!re o(eents of e"change rates will o(e in its fa(o!r% If the copany adopts policy of
hedging e(erything* and the spot rates o(e in fa(o!r of the copany* the copany will lose o!t or inc!r the
opport!nity cost by hedging the e"pos!re if the rates o(e against%

0here ay be partial hedging where a (iew is ta$en that only those e"pos!res where it is anticipated that ris$ of
losses co!ld e"ceed the opport!nity to gain need to be hedged% )owe(er* it is pr!dent going by the past e"perience
to fi" a liit which co!ld be left !nhedged% &hile the cost of hedging is #!ite rele(ant in the conte"t* the ris$ factor
ight ta$e a hea(y toll and hence basically it is !ndeniable that e"change ris$s ha(e to be hedged in the c!rrent
scenario%

0here are any techni#!es pro(ided by ban$s and financial instit!tions which offer hedges in any fors as !nder

*i# For(ard Contracts
0his is a !s!al hedge e"tended to c!stoers% Ban$s offer forward e"change contracts both for sale and p!rchase
transactions to c!stoers with a at!rity date for a fi"ed ao!nt at a deterined rate of e"change at the o!tset%
,orally contracts are entered in India for a period where the at!rity period of the hedge does not e"ceed the
at!rity of the !nderlying transaction% 0he c!stoer has the option to choose the c!rrency of the tenor%

6oll B(er Forward '"change Contracts

6oll o(er forward contract is one where forward e"change contract is initially boo$ed for the total ao!nt of loan
etc% to be re-paid% As and when instalent falls d!e* the sae is paid by the c!stoer in foreign c!rrency at the
e"change rate fi"ed in forward e"change contract% 0he balance ao!nt of the contract is rolled o(er (e"tended) till
the d!e date for the ne"t instalent% 0he process of e"tension contin!es till loan ao!nt has been re-paid% B!t the
e"tension is a(ailable s!bject to the cost being paid by the c!stoer* th!s !nder the echanis of roll o(er contract
the e"change rate protection is pro(ided for the entire period of the contract and the c!stoer has to bear the roll
o(ercharges* if any% 0he cost of e"tension (roll o(er) is dependent !pon the forward differentials pre(ailing on the
date of e"tension% 0h!s* the c!stoer effecti(ely protects hiself against the ad(erse spot e"change rates b!t he
ta$es a ris$ on the forward differentials (i%e% prei!Adisco!nt)% Altho!gh spot e"change rates and forward
differentials are prone to fl!ct!ationsD yet the spot e"change rates being ore (olatile* the c!stoer gets protection
against the ad(erse o(eent of e"change rates%

&e can appreciate that there is not !ch difference between rolling o(er of the forward e"change contract and
e"tension of forward e"change contract* e"cept that in the case of forer the e"change contract is e"tended for the
balance ao!nt left after the instalent has been reitted while in the case of latter the e"change contract for the
entire ao!nt is e"tended% 0he cash inflows and o!tflows are #!ite large and so also interest on the sae%
0herefore* soeties if the foreign c!rrency appreciates contin!o!sly the e"tension of forward sale contract t!rns
o!t to be a costly affair%

As per e"change control reg!lations* the forward contracts can be rolled o(er for periods less than si" onths also%
0he interest* as in the case of e"tension* on inflows has to be paid to the c!stoer% Siilarly* on cash o!tflows ban$
is entitled to reco(er* interest%

*ii# Currenc' Futures
A f!t!re contract is an agreeent to b!y or sell a standard #!antity of specific financial instr!ent at a f!t!re date
and at an agreed price% A corporate can ta$e !p a f!t!re contract which is opposite to his foreign c!rrency
transaction e"pos!re% )owe(er* the f!t!res are re(iewed on a daily basis based on spot rate 0herefore* the (al!es of
the f!t!res contract (aries depending on the agreed price% )ence* the res!ltant spot rate will deterine the loss or
gain on the transaction e"pos!re and can be co!nteracted by the res!ltant loss or gain* on f!t!res contract%

*iii# Currenc' Otion
C!rrency option gi(es the right b!t no obligation to the b!yer of the option to sell (p!t option) or b!y (call option) a
specific ao!nt of foreign c!rrency a pre-deterined price called stri$e price% 0here are tailor-ade options which
can be pic$ed !p o(er the co!nters of the ban$s% 0he b!yer of an option has pay a price-prei! for conferring the
abo(e right by the option writer i%e% ban$s%

Foreign C!rrency-6!pee Swaps

A swap is a financial transaction in which two co!nterparts agree e"change streas of payents or cash flows o(er
a period of tie with a (iew to achie(ing o(erall cost red!ction for both parties%

A!thorised dealers ay arrange foreign c!rrency-r!pee swaps between corporates who r!n e"pos!res arising o!t of
their long-ter foreign c!rrency coitents%

)edging of Loan '"pos!res

A!thorised dealers can offer hedging prod!cts to Indian corporates witho!t the +o(ernent<s or the 6eser(e Ban$<s
prior appro(al% S!ch appro(al is a not re#!ired to !nwind hedge transactions* the a!thorised dealers ha(ing be
allowed to reit !pfront preia as well as other charges incidental to the hedge transaction witho!t prior appro(al
of the 6eser(e Ban$%

According to F'9 (Foreign '"change 5eri(ati(e Contracts) 6eg!lation 2...* a!thorised dealers can offer interest
rate swaps* c!rrency swaps* co!p swaps* foreign c!rrency option* p!rchase of interest rate capsAcollars a forward
rate agreeents (F6A) to corporates% 0he prod!cts will ha(e to offered by way of boo$ing the transaction o(erseas
or in a bac$-to-bac$ basis A!thorised dealers sho!ld ens!re* before entertaining the corporate<s re#!est that 1

(i) (i) the contract does not in(ol(e r!pee*
(ii) the 6eser(e Ban$ has accorded the final appro(al for borrowing in foreign c!rrencyC
(iii) the notional principal ao!nt of the hedge does not e"ceed the o!tstanding ao!nt of the foreign c!rrency
loanC
(i() the at!rity of the hedge does not e"ceed the reaining life to at!rity of the !nderlying loanC and
(() (() the Board of 5irectors of the corporate has appro(ed the financial liits and a!thorised designated
officials to concl!de the hedge transactions%

Interest rate swaps allow copanies to o(e fro a fi"ed interest rate to a floating rate* or (ice (ersa* in the sae
c!rrency% In a c!rrency swap* when corporates find the r!ling interest rate of a partic!lar c!rrency lower than the
interest rate of a c!rrency in which they re#!ire a loan* they can ta$e a loan in the fa(o!rable c!rrency and protect
thesel(es against ad(erse o(eents%

Co!pon Swaps allow o(ing fro fi"ed interest rate in a partic!lar c!rrency to a floating rate in another c!rrency%

&ith a forward rate agreeent* a copany can protect itself against ad(erse interest rate o(eents% Interest rate
swaps do the sae b!t they ha(e to be bo!ght fro a ban$ at a price% For protection on the asset side* the interest
rate floor is a(ailable to ban$s%

Foreign C!rrency Bption Contract is an agreeent wherein the holder has the right to ac#!ire or sell* specified
ao!nt of foreign c!rrencyC at a specified price (also $nown as e"ercise price or stri$e rate) at which the option can
be bo!ght or sold and within the specified tie frae (also referred to as e"piration date or at!rity date)%

Proced!re for Forward '"change Contracts and 5eri(ati(e Contracts ha(e been laid down !nder 6BI directions*
iss!ed (ide AP (5I6 Series) Circ!lar ,o% -H* dt% 24%-%2..2 and ,o% 32* dt% 2-%-.%2..2* consolidated !nder 9aster
Circ!lar ,o% -A2..3-.4* dt% -%F%2..3* rele(ant e"tracts gi(en later%

5eterinants of Bptions Kal!e

*i# Sot rate1 0he effect of this (ariable on the option price is #!ite e(ident% In case of call option* higher the
spot rate higher will be the option price (preia) and (ice (ersa% A p!t option becoes less (al!able with
the rise in spot price and (ice (ersa%

*ii# Stri.e rice1 A call option tends to (ary iensely with the stri$e rate% &ith the rise in stri$e rate* the call
option tends to lose (al!e% 0his is beca!se the holder stands to lose when he e"ercises the call option% A p!t
option o(es in direct relation with the stri$e rate and with the rise in stri$e rate* the holder tends to gain on
e"ercising the option%

*iii# *iii# Time of e/iration 1 &ith the increase in the tie of e"piration* both call and p!t option gain
(al!e% 0his is beca!se the option with larger tie to e"piration other things being held constant will ha(e
higher

Caps and Collars

9ajor international ban$s agree to reib!rse to the borrower the cost of LIBB6 e"ceeding a partic!lar le(el d!ring
the c!rrency of the loan% 0his le is referred to as the <Cap<%

0he fee (or ins!rance prei!) to be paid by the borrower wo!ld depend !pon the difference between the cap and
the c!rrent rate* the period for which the contract is to r!n* the anticipated interest (olatility* etc% 0he higher the cap
the lower the feeC on the contrary* the longer the period of the contract* the higher will be the fee payable%

0he cost can be red!ced if the borrower si!ltaneo!sly agrees to a floor the LIBB6% In that case* if the act!al
LIBB6 is less* the difference will ha(e be paid to the ins!rer% &hen a contract specifies both the cap and the floor
referred to as a <collar< or a <band<% 0his co!ld be considered as the si!ltaneo!s p!rchase of a series of call options
and sale of a series of p!t options on LIBB6% 0he two stri$e prices -naely* the cap and the floor * - can be so
chosen that the cost of the collar is @ero%

6BI 6eg!lations on '"change 6is$ 9anageent

0he 6eser(e Ban$ has iss!ed Foreign '"change 9anageent (Foreign '"change 5eri(ati(e Contracts)
6eg!lations* 2...* te"t gi(en in Appendi" -.%-

6BI +!idelines on '"change 6is$ 9anageent
H

Forward Contracts

A71 A person resident in India ay enter into a forward contract with a!thorised dealer in India to hedge an
e"pos!re to e"change ris$ in respect transaction for which sale andAor p!rchase of foreign e"change is peritted
!nder the Act* or r!les or reg!lations or directions or orders ade or iss!ed there!nder s!bject to following ters
and conditions

(a) (a) the a!thorised dealer thro!gh (erification of doc!entary e(idence satisfied abo!t the gen!ineness of
the !nderlying e"pos!re* irrespecti(e of the transaction being a c!rrent or a capital acco!nt transaction F!ll
partic!lars of contract sho!ld be ar$ed on s!ch doc!ents ! proper a!thentication and copies thereof
retained for (erification% )owe(er* a!thorised dealers ay allow iporters and e"porters boo$ forward
contracts on the basis of a declaration of e"pos!re s!bject to the conditions entioned in paragraph A%2 of
this circ!lar%
(b) (b) the at!rity of the hedge does not e"ceed the at!rity of the !nderlying transaction*
(c) (c) the c!rrency of hedge and tenor are left to the choice of the c!stoer*
(d) (d) where the e"act ao!nt of the !nderlying transaction is not ascertainable the contract is boo$ed on the
basis of a reasonable estiate*
(e) (e) foreign c!rrency loansAbonds will be eligible for hedge only after - appro(al is accorded by the
6eser(e Ban$ where s!ch appro(ed* necessary or loan identification n!ber is gi(en by the 6egional
Bffice of the 6eser(e Ban$*
(f) (f) +lobal 5epository 6eceipts (+56s) will be eligible for hedge after iss!e price has been finalised*
(g) (g) balances in the '"change 'arner<s Foreign C!rrency(''FC) acco!nts sold forward by the acco!nt
holders shall reain earar$ed deli(ery and s!ch contracts shall not be cancelled% 0hey ay* howe(er be
rolled-o(er*
(h) (h) forward contracts boo$ed in respect of foreign c!rrency e"pos!res residents failing d!e
within one year ay be cancelled and reboo$ed% 0his facility ay be ade a(ailable only to
c!stoers who s!bit details e"pos!re to a!thorised dealers in the prescribed forat% Forward
cont boo$ed to co(er e"pos!res falling d!e beyond one year once cancelled cannot be reboo$ed%
A!thorised dealers ay contin!e to offer this facility witho!t any restrictions in respect of e"port
transactions% All for contracts ay be rolled o(er at on-going ar$et rates%
(i) (i) S!bstit!tion of contracts for hedging trade transactions ay be peritted by an a!thorised
dealer on being satisfied with the circ!stance* !nder which s!ch s!bstit!tion has becoe
necessary%

A75 A!thorised dealers ay also allow iporters and e"porters to boo$ for contracts on the basis of a
declaration of an e"pos!re and based on perforance s!bject to the following conditions1 <

(a) 0he forward contracts boo$ed in the aggregate sho!ld not e"ceed liits wor$ed o!t on the basis of the
a(erage of the pre(io!s financial years< (April to 9arch) act!al iportAe"port t!rno(er% 0his is s!bject to
the condition that at any point of tie forward contracts so boo$ed shall not e"ceed >./
-
of the liit within
a cap of 7S -.. illion%
2
0hese eligible liits are to be cop!ted separately for e"port and iport
transactions%
(b) Any forward contract boo$ed witho!t prod!cing doc!entary e(idence will be ar$ed off against this
liit%
(c) Iporters and e"porters sho!ld f!rnish a declaration to the a!thorised dealer regarding ao!nts boo$ed
with other ban$s !nder this facility%
(d) An !nderta$ing ay be ta$en fro the c!stoer to prod!ce s!pporting doc!entary e(idence before the
at!rity of the forward contract%
(e) IportersAe"porters desiro!s of a(ailing liits higher than 7S U -.. illion ay forward their applications
to the Chief +eneral 9anager 6eser(e Ban$ of India* '"change Control 5epartent* Fore" 9ar$ets

5i(ision* Central Bffice* 9!bai-4.. ..- (Fa" ,o% 22J--42F* e-ail ecdcofdOrbi%org%in) j!stifying the need for
higher liits% Forward contracts boo$ed !nder the enhanced liits will be on a deli(erable basis% 5etails of the
iportAe"port t!rno(er of the past three years delayed realisationsA payents d!ring these years and e"isting liits
d!ly a!thenticated by the a!thorised dealer* ay also be f!rnished the prescribed forat%

A7, A forward contract cancelled with one a!thorised dealer can be reboo$ed with another a!thorised dealer s!bject
to the following conditions1

(a) the switch is warranted by copetiti(e rates on offer* terination ban$ing relationship with the a!thorised
dealer with who the contract was originally boo$ed* etc%
(b) the cancellation and reboo$ing are done si!ltaneo!sly on the rity date of the contract *
(c) the responsibility of ens!ring that the original contract has been cancelled rests with the a!thorised dealer
who !nderta$es reboo$ing the contract%

A73 A!thorised 5ealers ay also enter into forward contracts with residents respect of transactions denoinated in
foreign c!rrency b!t settled in Indian 6!pees% 0hese contracts shall be held till at!rity and cash settleent wo!ld
ade on the at!rity date by cancellation of the contracts% Forward co co(ering s!ch transactions once cancelled*
are not eligible to be reboo$

Contracts other than Forward Contracts

A76A!thorised dealers in India ay enter into contracts* other than forward contracts with residents in India in
accordance with the following pro(ision

(i) A person resident in India who* has borrowed foreign e"change accordance with the pro(isions of Foreign
'"change 9anageent (Borrowing and Lending in Foreign '"change) 6eg!lations* 2...* ay enter into
an Interest rate swap or C!rrency swap or Co!pon Swap or Foreign C!rrency option or Interest rate cap or
collar (p!rchases) or Forward 6ate Agreeent contract with an a!thorised dealer in India or with a branch
o!tside Indian a!thorised dealer for hedging his loan e"pos!re and !nwinding fro s!ch hedges1

Pro(ided that
(a) the contract does not in(ol(e the r!pee
(b) final appro(al has been accorded or loan identification n!ber by the 6eser(e Ban$ for borrowing
in foreign c!rrency%
(c) the notional principal ao!nt of the hedge does not e"ceed o!tstanding ao!nt of the foreign
c!rrency loan%
(d) 0he at!rity of the hedges does not e"ceed the !ne"pired at!rity of the !nderlying loan%

(ii) A person resident in India* who owes a foreign e"change or r!pee liability* ay enter into a contract for
foreign c!rrency-r!pee swap with an a!thorised dealer in India to hedge long ter e"pos!re !nder the following
and conditions1

- % ,o swap transactions in(ol(ing !pfront payent of r!pees or its e#!i(alent* in any for shall be
!nderta$en%
2% Swap transactions ay be !nderta$en by ban$s as interediaries by atching the re#!ireents of corporate
co!nter-parties
3% &hile no liits arc placed on the a!thorised dealers for !nderta$ing* to facilitate c!stoers to hedge their
foreign e"change e"pos!re liits ha(e been p!t in place for swap transactions facilitating c!stoers to ass!e a
foreign e"change liability* thereby res!lting in s!pply in the ar$et% &hile atched transactions ay be
!nderta$en* a liit of 7S U >. illion is placed for net s!pply in the ar$et on acco!nt of these swaps% Positions
arising o!t of cancellation of swaps by c!stoers need rec$oned within the cap%
4% &ith reference to the specified liits for swap transactions facilitating c!stoers to ass!e a foreign
e"change liability* the liit will be reinstated on acco!nt of cancellationA at!rity of the swap and on
aorti@ation the ao!nts aorti@ed%
>% In the case of swap str!ct!res where the prei! is inb!ilt into the cost* a!thorised dealers sho!ld ens!re
that s!ch str!ct!res do not res!lt increase in ris$ in any anner% F!rther* s!ch str!ct!res sho!ld not res!lt in net
receipt of prei! by the c!stoer%
J% 0he abo(e transactions if cancelled* shall not be reboo$ed or re-entered* by whate(er nae called%

NOTE 1
(i) A!thorised dealers sho!ld not offer le(eraged swap str!ct!res clients%
(ii) A!thorised dealers sho!ld not allow the swap ro!te to be s!rrogate for forward contracts for those
who do not #!alify for forward co(er%
(iii) A person resident in India ay enter into a foreign c!rrency contract with an a!thorised dealer in
India to hedge foreign e"change e"pos!re arising o!t of his trade 1

Pro(ided that in respect of cost effecti(e ris$ red!ction strategies li$e range forwards* ratio-range forwards or any
other (ariable by whate(er nae called there shall not be any net inflow of prei!% 0hese transactions ay be
freely boo$ed andAor cancelled%

E/lanation 1 0he contingent foreign e"change e"pos!re arising o!t of s!bission of a tender bid in foreign
e"change is also eligible for hedging !n s!b-paragraph%

A78 (i) A!thorised dealers sho!ld ens!re that the Board of 5irectors of the corporate has drawn !p a ris$
anageent policy* laid down clear g!idelines for concl!ding the transactions and instit!tionalised the
arrangeents for a period cal re(iew of operations and ann!al a!dit of transactions to (erify copliance with the
reg!lations% 0he periodical re(iew reports and ann!al a!dit report sho!ld be obtained fro the concerned Corporate
by the a!thorised dealers%

(ii) Cross c!rrency options sho!ld be written on a f!lly co(ered bac$-to bac$ basis% 0he co(er transaction ay be
!nderta$en with a ban$ o!tside India* an off-shore ban$ing !nit sit!ated in a Special 'conoic Wone or an
internationally recogni@ed option e"change or another a!thorised dealer in India%

(ii) (ii) A!thorised dealers desiro!s of writing options* sho!ld obtain one tie appro(al* before
!nderta$ing the b!siness* fro the Chief +eneral 9anager '"change Control 5epartent* (Fore" 9ar$ets
5i(ision)* 6eser(e Ban$ of India* Central Bffice* 9!bai 4.. ..-
-

)edging of coodity price ris$ in the International Coodity 9ar$ets

A79 (i) 6esidents in India* engaged in iport and e"port trade* ay hedge the price ris$ of all coodities in the
international coodity e"changesAar$et% Applications for coodity hedging ay be forwarded to 6eser(e
Ban$ for consideration thro!gh the International Ban$ing 5i(ision of an a!thorise dealer along with its
recoendation gi(ing the following details1
-% A brief description of the hedging strategy proposedC naely1
(a) 5escription of b!siness acti(ity and nat!re of ris$
(b) instr!ents proposed to be !sed for hedging
(c) naes of coodity e"changes and bro$ers thro!gh who ris$ is proposed to be hedged and
credit lines proposed to be a(ailed% 0he nae and address of the reg!latory a!thority in the co!ntry
concern ay also be gi(en
(d) si@eAa(erage ten!re of e"pos!re andAor total t!rno(er in a year* together with e"pected pea$
positions thereof and the basis of calc!lation%

2% copy of the 6is$ 9anageent Policy appro(ed by the 9anageent co(eringC
(a) ris$ identification
(b) ris$ eas!reents
(c) g!idelines and proced!res to be followed with respect to re(al!ation andAor onitoring of positions
(d) naes and designations of officials a!thorised to !nderta$e transactions and liits

3% any other rele(ant inforation%
A one-tie appro(al will be gi(en by 6eser(e Ban$ along with the g!idelines for !nderta$ing this acti(ity%

Coodity )edging by entities in Special 'conoic Wones

(ii) +eneral perission has been granted to entities in <Special 'conoic Wones< to !nderta$e hedging transactions
in the o(erseas coodity e"changesAar$ets to hedge their coodity prices on e"portAiport* s!bject condition
that s!ch contract is entered into on a stand-alone basis%
-

,B0'1 0he ter Tstand aloneT eans the !nit in S'W is copletely isolated fro financial contacts with its parent
or s!bsidiary in the ainland within the S'Ws as far as its iportAe"port transactions are concerned%

C!rrency Bptions and F'5AI +!idelines

0he salient feat!res of F'5AI +!idelines are as !nder1
-% 0he International C!rrency Bption 9ar$et (ICB9) Agreeent 2Ith A!g!st* -HH2 of British Ban$ers<
Association London with odifications in wording in regard to the applicability of law and j!risdiction
sho!ld be !sed in preparing doc!entation for c!rrency option contract between the ban$ers and c!stoers
in India%
2% 0he ban$s sho!ld obtain re#!est letter fro the c!stoer as per specien pro(ided by F'5AI which inter-
alia contains a declaration that there is already no forward e"change co(er or foreign option in place against
the e"pos!re%
3% 0he c!stoers sho!ld be re#!ired to confir all transaction ban$s as per standard ICB9 confiration
forat% Confiration be e"changed between the originating ban$ and the co!nterpart ban$%
4% 0he c!stoers sho!ld co!nicate notice of e"ercise contract two wor$ing days in ad(ance before the
deli(ery pro(ided in the ICB9 doc!ent and s!ch e"ercise and options sho!ld be !pto 4 p%% IS0 on the date of
e"ercise% ,otice of e"ercise gi(en by facsiile transission%
>% Foreign C!rrency Bptions can be concl!ded as per the present reg!lation only o(er the co!nter (B0C)%
J% 0he ban$ ay write '!ropean or Aerican Bptions (p!t and call Bptions only) in respect of c!stoers
transactions and co(er thesel(es with the o(erseas branchesAcorrespondent ban$s accordingly%
F% Bption prei! ay be paid and recei(ed in foreign e"change% In the case of prei!s on options bo!ght
by A!thorised 5ealers charge the prei! to the c!stoer by $eeping a spread%
I% 0he factors that sho!ld be rec$oned for deterining the ao!nt are stri$e price* at!rity period of the
contract* c!rrency (olatility* interest rate differentials and ar$et condition%
H% 0he prei! ao!nt once collected is not ref!ndable* not withstanding the fact that the option contract
between c!stoer and the ban$ andAor between the ban$ and the co!nterpart ban$ abroad becoes
ipossible of perforance for what e(er reason* incl!ding +o(ernent prohibitory order%
-.% -.% Bption prei! ay be reitted witho!t the prior appro(al of 6eser(e Ban$%
--% Appropriate acco!nting entries sho!ld be passed for options bo!gh and sold and prei! ao!nts recei(ed
and paid% Bption e"pos!re sho!ld appear in the acco!nts as a contingent ite%
-2% 0he acco!nting proced!re sho!ld deal with the entire processing cycle% It sho!ld necessarily in(ol(e the
aintenance of the following acco!nts1
(a) Contingents (Bptions p!rchasedAsold)C
(b) (b) Prei! (6ecei(ableApayable acco!nts)C
(c) (c) 6e(al!ation Acco!ntsC and
(d) ProfitALoss Acco!nts%
-3% Liits sho!ld be set for c!stoer e"pos!resC co!nterpart liits for options p!rchased sho!ld also be laid
down%
-4% Bptions ay be bo!ght fro o(erseas and sold to other a!thorised dealers in India%
->% 9eber ban$s sho!ld obtain the re(al!ation rates fro the co!nterparty ban$s abroad i%e% the foreign
branch of the ban$ of the o(erseas correspondent ban$ with who a!thorised dealer has arrangeent%
-J% Bptions written and options p!rchased sho!ld be ailed at s!itable periods so as to coincide with the dates
on which e(al!ation of foreign e"change position is done%

BB0AI,I,+ FB6'I+, C766',C? LBA, F6B9 I5BI

I5BI grants direct foreign c!rrency loans to ind!strial concerns !nder its Project Finance Schee as also !nder its
'#!ipent Finance Schee% &hile the loans !nder the forer Schee for part of assistance related to projects*
loans !nder the latter schee are intended for financing iport of capital goods and e#!ipent (not related to any
specific projectAschee as s!ch) thro!gh a siplified proced!re% I5BI also considers foreign c!rrency loans !nder
its Corporate Loan Schee* for eeting capital e"pendit!re and long-ter wor$ing capital% In respect of
!nitsAcopanies already assisted by I5BI* foreign c!rrency loan ay be pro(ided for eeting loan coponent of
wor$ing capital finance !nder assisted by I5BI<s &or$ing Capital Loan Schee% 0he salient* feat!res of the schee
are spelt o!t here in after%

5I6'C0 FI,A,C' SC)'9'
'ligibility

Any ind!strial concern which #!alifies for I5BI<s assistance !nder stat!te and en(isages iport of capital goods for
a project is eligible for a(ailing of foreign c!rrency loan fro I5BI pro(ided the proposed iport is appro(ed by
the Iport Licensing A!thority and allocated to &ill or co(ered !nder Bpen +eneral Licence% 0he project sho!ld
also satisfy the !s!al appraisal nors of I5BI% 0he foreign c!rrency loans are sanctioned on the basis of the
re#!ireents of assisted projects and there is no ceiling on the #!ant! of loans% Foreign c!rrency loans are e"ept
fro the pre(iew of con(ertibility cla!se%

So!rces of Foreign C!rrency Finance

I5BI raises foreign c!rrency borrowings fro (ario!s so!rces* s!ch as '!ro ar$et* international instit!tions*
doestic bond ar$ets of foreign co!ntries and e"port credit agencies% 0he so!rce to be allocated to a partic!lar
foreign c!rrency loan sanctioned by I5BI depends on the co!ntry fro where the goods are to be iported and the
a(ailability of foreign c!rrency f!nds fro a partic!lar so!rce at the tie when the borrower desires to open letters
of credit

0ers and Conditions

0he ters and conditions of a foreign c!rrency loan depend !pon so!rce of foreign c!rrency f!nds to be allocated to
it% ,orally* at the tie of sanction only a tentati(e indication is gi(en by I5BI regarding the specific so!rce that
ay be allocated% ,e(ertheless* as I5BI wo!ld li$e to !tilise its reso!rces* on a first-coe-first-ser(ed basis* the
allocation is norally fired !p to specific line of credit at the tie of e"ec!tion of loan agreeent% 0he ter and
conditions are finalised at that stage% It is* howe(er* possible that e(en after the loan agreeent is signed and letter
of credit is iss!ed* the so!rce of the f!nds ay change% S!ch sit!ation co!ld arise when there is a large tie lag
between the tie of opening of letter of credit and the payent against shipping doc!ents d!ring which period the
partic!lar so!rce of f!nds co!ld ha(e been e"ha!sted% In case of projects where the ao!nts of foreign c!rrency
loans large* I5BI ay li$e to offer a i" of c!rrencies depending on a(ailability of f!nds !nder its credit lines% For
this p!rpose* I5BI reser(es the right to change the so!rce of foreign c!rrency financing and alter the ters and
condition accordance with s!ch so!rce%

0ers and Conditions for +rant of Loans o!t of Foreign C!rrency 6eso!rces

I5BI grants loans in (ario!s foreign c!rrencies o!t of its '!ro-5ollar* Qapanese ?en* 5e!tsche 9ar$* etc%
borrowings%

Amount of Loan 1 0he loan ao!nt will be norally a(ailable !p e"tent of foreign e"change cost (C%I%F% (al!e) of
the capital goodsAe#!ipent be iported%

Rate of Interest1 Floating rate based on LIBB6 depending !pon the so!rce of the c!rrency pl!s a fi"ed spread
according to the ris$ perception and at!rity of loan%

Bfront Fee 1 7pfront fee will be* le(ied at the rate of -/ p%a% fro the date of Letter of Intent iss!ed by I5BI%

Rea'ment1 0he repayent period will norally be synchronised with the relati(e repayent coitents of
I5BI in respect of the foreign c!rrency f!nds !tilised for grant of loan% 0he period of repayent will range !pto -.
years (incl!ding oratori!) as appropriate lo each case%

Securit' 1 0he loans will be generally sec!red by a first charge on the assets of the borrowing copany incl!ding
hypothecation of capital goods to be iported%

Proced!re for Sanctions and 5isb!rseent of Foreign C!rrency Loans I5BI

General1 Applications for foreign c!rrency loans sho!ld be s!bitted I5BI<s Project Finance 5epartent in
9!bai (or to 6egional Bffices at ,ew 5elhiACalc!ttaAChennaiA+!wahatiA9!bai for projects with a total cost !p
6s%F crores) in the prescribed for% 0he foreign c!rrency loans will be considered on the basis of the !s!al appraisal
nors% 0he copany is thereafter re#!ired to e"ec!te a Loan Agreeent in the prescribed for* for a(ailing of the
foreign c!rrency loan%

Oening of Letters of Credit%% I5BI opens letters of credit against its c sanctions of foreign c!rrency loans witho!t
see$ing argin or ban$ g!arantee% After e"ec!tion of the Loan Agreeent* applications for opening of letters of
credit in the prescribed for sho!ld be s!bitted to the +eneral 9anager* Project Finance 5epartent* 9!bai%
0he applications sho!ld be signed by borrower<s officials a!thorised in this behalf and sho!ld be d!ly s!pported the
following doc!ents1

(a) 6esol!tion a!thorising the signatories for the p!rposeC
(b) '"change control copy of iport licenceC
(c) P!rchase orderC
(d) S!pplier<s confirationC
(e) Appro(al fro I5BI on behalf of 6BI for Foreign C!rrency Borrowings fro the '"change Control angle%

Currenc' of Pa'ment%% 0he ris$ arising o!t of e"change fl!ct!ation is to borne by the borrower% All d!es will*
therefore* be calc!lated with reference the c!rrency in #!estion and con(erted into r!pees at the e"change rate
pre(ailing on d!e dates and reco(ered in e#!i(alent r!pees% 0h!s* !p front *will be calc!lated on the ao!nt of
rele(ant foreign c!rrency agreed to be ade a(ailable by I5BI for financing iport and the ao!nt of interest and
repayent of instalents d!e will be calc!lated in ters of c!rrency in which the loan is ade and con(erted into
r!pees at the e"change rate pre(ailing on d!e dates

APP',5I8 -.%-
0e"t of Foreign '"change 9anageent (Foreign '"change 5eri(ati(e Contracts) 6eg!lations* 2...
H
In e"ercise of the powers conferred by cla!se (h) of s!b-section (2) of section 4F of the Foreign '"change
9anageent Act* -HHH (42 of -HHH)* the 6eser(e Ban$ a$es the following reg!lations* to proote orderly
de(elopent aintenance of foreign e"change ar$et in India* naely*

-%Short title and coenceent

(-) 0hese 6eg!lations ay be called the Foreign '"change 9anageent reign '"change 5eri(ati(e Contracts)
6eg!lations* 2...%
(2) 0hey shall coe into force on the -st day of Q!ne* 2...%

57Definations7

In these 6eg!lations* !nless the conte"t re#!ires otherwise*

(i) (i) ;Act< eans the Foreign '"change 9anageent Act* -HHH (42 of -HHH)C
(ii) (ii) ;a!thorised dealer< eans a person a!thorised as a!thorised dealer !nder s!b-section (-) of section
-. of the ActC
(iii) <Cash deli(ery< eans deli(ery of foreign e"change on the day of transactionC
(i() <Forward contract< eans a transaction in(ol(ing deli(ery* other than Cash or 0o or Spot deli(ery* of
foreign e"changeC
(() <Foreign e"change deri(ati(e contract< eans a financial transaction or an arrangeent in whate(er for
and by whate(er nae* called* whose (al!e is deri(ed fro price o(eent in one or ore !nderlying
assets* and incl!des*

(a) a transaction which in(ol(es at least one foreign c!rrency other than c!rrency of ,epal or Bh!tan*
or
(b) a transaction which in(ol(es at least one interest rate applicable to a foreign c!rrency not being a
c!rrency of ,epal or Bh!tan* or
(c) a forward contract*
b!t does not incl!de foreign e"change transaction for Cash or 0o or Spot deli(eriesC
((i) <6egistered Foreign Instit!tional In(estor (FII)< eans a foreign instit!tional in(estor registered with
Sec!rities and '"change Board of IndiaC
((ii) <Sched!le< eans a sched!le anne"ed to these 6eg!lationsC
((iii) <Spot deli(ery< eans deli(ery of foreign e"change on the second wor$ing day after the day of transactionC
(i") <0o deli(ery< eans deli(ery of foreign e"change on a wor$ing day ne"t to the day of transactionC
(") the words and e"pressions !sed b!t not defined in these 6eg!lations shall ha(e the sae eanings
respecti(ely assigned to the in the Act%
,7 Pro+i$ition7

Sa(e as otherwise pro(ided in these 6eg!lations* no person in India shall enter into a foreign e"change deri(ati(e
contract witho!t the prior perission of he 6eser(e Ban$%

37 Permission to a erson resident in India to enter into a Foreign E/c+ange Deri:ati:e contract7

A person resident in India ay enter into a foreign e"change deri(ati(e contract in accordance with pro(isions
contained in Sched!le I* to hedge an e"pos!re to ris$ in respect of a transaction perissible !nder the Act* or r!les
or reg!lations or directions or orders ade or iss!ed there!nder%
-

67 Permission to a erson resident outside India to enter into a Foreign E/c+ange Deri:ati:e contract7

A person resident o!tside India ay enter into a foreign e"change deri(ati(e contract with a person resident in India
in accordance with pro(isions contained in Sched!le II* to hedge an e"pos!re to ris$ in respect of a transaction
perissible !nder the Act* or r!les or reg!lations or directions or orders ade *or iss!ed there!nder%*

87 Commodit' +edge7

6eser(e Ban$ ay* on an application ade in accordance with the proced!re specified in Sched!le Ill* perit
s!bject to s!ch ters and conditions as it ay consider necessary* a person resident in India to enter into a contract
in a coodity e"change or ar$et o!tside India to hedge price ris$ in a coodity%
-

2
Pro(ided that a !nit in the Special 'conoic Wone (S'W) ay* witho!t prior appro(al of the 6eser(e Ban$* enter
into a contract in a coodity e"change or ar$et o!tside India to hedge the price ris$ in the coodity on
e"portAiport* s!bject to the condition that s!ch contract is entered into on a Xstand abo(eY basis%


'"planation 1 0he ter Tstand-abo(eT eans that the !nit in the S'W is copletely isolated fro financial contacts
with its parent or s!bsidiary in the ainland or within the S'W(s) as far as its iportAe"port transactions are
concerned%

97 Remittance related to a Foreign E/c+ange Deri:ati:e contract7

An a!thorised dealer in India ay reit o!tside India foreign e"change in respect of a transaction* !nderta$en in
accordance with these 6eg!lations* in the following cases* naely

(a) option prei! payable by a person resident in India to a person resident o!tside IndiaC
(b) reittance by a person resident in India of ao!nt incidental foreign e"change deri(ati(e contract entered
into in accordance 6eg!lation 4*
(c) reittance by a person resident o!tside India of ao!nt incident foreign e"change deri(ati(e contract
entered into in accordance 6eg!lation >C
(d) any other reittance related to a foreign e"change deri(ati(e cost appro(ed by 6eser(e Ban$%

SC)'57L' I
*See regulation 3#
Foreign e"change deri(ati(e contract perissible for a person resident in India
1

A% Forward Contract

A person resident in India ay enter into a forward contract with an a!thorised dealer in India to hedge an e"pos!re
to e"change ris$ in respect of a transaction for which sale andAor p!rchase of foreign e"change is peritted !nder
the Act* or r!les or reg!lations or directions or orders ade or iss!ed there!nder* s!bject to following ters and
conditions

(a)
2
Zthe a!thorised dealer thro!gh (erification of doc!entary e is satisfied abo!t the gen!ineness of the
!nderlying e"pos!re otherwise peritted by the 6eser(e Ban$ fro the tie to tie
(b) the at!rity of the hedge does not e"ceed the at!rity !nderlying transaction*
(c) the c!rrency of hedge and tenor are left to the choice c!stoer*
(d) where the e"act ao!nt of the !nderlying transaction ascertainable* the contract is boo$ed on the basis of a
reasonable estiate*
(e) foreign c!rrency loansAbonds will be eligible for hedge only after final appro(al is accorded by the 6eser(e
Ban$ where s!ch appro(al is necessary*
(f) in case of +lobal 5epository 6eceipts (+56s) the iss!e price been finalised*
(g) balances in the '"change 'arner<s Foreign C!rrency (''FC) acco!nts sold forward by the acco!nt holders
shall reain ar$ed for deli(ery and s!ch contracts shall not be cancelled% 0hey ay* howe(er* be rolled-
o(er*
-
Z(h) contracts in(ol(ing the r!pee as one of the c!rrencies* cancelled shall not be re-boo$ed e"cept as otherwise
peritted the 6eser(e Ban$ fro tie to tie altho!gh they can be rolled o(er at on-going rates on or
before at!rity% Contracts co(ering e"port transactions ay be cancelled* re-boo$ed or rolled o on-going
rates witho!t any restrictions*[
(i) s!bstit!tion of contracts for hedging trade transactions ay be pen by an a!thorised dealer on being
satisfied with the circ!stances which s!ch s!bstit!tion has becoe necessary%
2
Z(j) a person resident in India ay* s!bject to the ters and conditions prescribed by 6eser(e Ban$ of India*
enter into a forward contract with an a!thorised dealer in India to hedge an e"pos!re e"change ris$ in
respect of transactions denoinated in foreign c!rrency b!t settled in Indian r!pees%[

B% Contract other than Forward Contract

2% (-) A person resident in India who has borrowed foreign e"change accordance with the pro(isions of Foreign
'"change 9anageent (Borrowing and Lending in Foreign '"change) 6eg!lations* 2...* ay enter into
an Interest rate swap or C!rrency swap or Co!pon Swap or Foreign C!rrency Bption or Interest rate cap or
collar (P!rchases) or Forward 6ate Agreeent (F6A) contract with an a!thorised dealer in India or with a
branch o!tside India of an a!thorised dealer for hedging his loan e"pos!re and !nwinding fro s!ch hedges
Pro(ided that -
(a) the contract does not in(ol(e r!pee%
(b) the 6eser(e Ban$ has accorded final appro(al for borrowing in foreign c!rrency*
(c) the notional principal ao!nt of the hedge does not e"ceed o!tstanding ao!nt of the foreign
c!rrency loan* and
(d) the at!rity of the hedge does not e"ceed the !ne"pired at!rity of the !nderlying loan%

(2) A person resident in India* who owes a foreign e"change or r!pee liability* ay enter into a contract for
foreign c!rrency-r!pee swap with an a!thorised dealer in India to hedge long-ter e"pos!re
(3) 0he contract entered into !nder s!b-paragraph (2)* if cancelled shall not be reboo$ed or re-entered*
by whate(er nae called%

3% (-) A person resident in India ay enter into a foreign c!rrency option contract with an a!thorised dealer in
India to hedge foreign e"change e"pos!re of s!ch person arising o!t of his trade 1

Pro(ided that in respect of cost effecti(e ris$ red!ction strategies li$e range forwards* ratio-range forwards
or any other (ariable by whate(er nae called there shall not be any net inflow of prei!% '"planation -
0he contingent foreign e"change e"pos!re arising o!t of s!bission of a tender bid in foreign e"change is
also eligible for hedging !nder this s!b-paragraph%

(2) A transaction !nderta$en !nder s!b-paragraph (-) ay be freely boo$ed andAor cancelled%

SC)'57L' II
*See regulation 6#
Foreign e/c+ange deri:ati:e contracts ermissi$le for a erson resident outside India
-

- % A 6egistered Foreign Instit!tional In(estor (FII) ay enter into a forward contract with r!pee as one of the
c!rrencies with an a!thorised dealer in India to hedge its e"pos!re in India
Pro(ided that
2
Z(a) the (al!e of the hedge does not e"ceed the ar$et (al!e of the !nderlying debt or e#!ity
instr!ents* pro(ided forward contracts once boo$ed shall be allowed to contin!e to the original
at!rity e(en if the (al!e of the !nderlying portfolio shrin$s* for reasons other than sale of
sec!rities%[
(b) forward contracts once cancelled shall not he reboo$ed b!t ay be rolled-o(er on or before the
at!rity*
(c) the cost of hedge is et o!t of repatriable f!nds andAor inward reittance thro!gh noral ban$ing
channel*
(d) all o!tward reittances incidental to hedge are net of applicable Indian ta"es%

2% A non-resident Indian ay enter into forward contract with r!pee as one of the c!rrencies* with an
a!thorised dealer in India to hedgeC
(a) the ao!nt of di(idend d!e to hiAit on shares held in an Indian copanyC
(b) the balances held in Foreign C!rrency ,on-6esident (FC,6) acco!nt or non-resident '"ternal
6!pee (,6') acco!ntC
(c) the ao!nt of in(estent ade !nder portfolio schee in accordance with the pro(isions of the
Foreign '"change 6eg!lation Act* -HF3 or !nder notifications iss!ed there!nder or is ade
accordance with the pro(isions of the Foreign '"change 9anageent (0ransfer or Iss!e of Sec!rity
by a Person 6esident B!tside India) 6eg!lations*2...
1
and in both cases s!bject to the ters a
conditions specified in the pro(iso to paragraph - of this Sched!le
2
Z2%A A non-resident Indian ay* s!bject to conditions prescribed by 0he 6eser(e Ban$ of India fro
tie to tie* enter into cross c!rrency (not in(ol(ing the r!pee) forward contracts to con(ert the
balances held in FC,6(B) acco!nts in one foreign c!rrency to another foreign c!rrency in which
FC,6(B) deposits are peritted to be aintained%

3
Z3% A!thorised dealers ay offer forward contracts to persons resident o!tside India to hedge the
in(estents ade in India since Qan!ary* -* -HH3* s!bject to (erification of the e"pos!re in India%
0hese forward contracts once cancelled are not eligible to be reboo$ed%[

2
Z3A% A person resident o!tside India ay* s!bject to conditions prescribed by the 6eser(e Ban$ of India
fro tie to tie* enter into a forward* sale contract with an a!thorised dealer in India to hedge the
c!rrency ris$ arising o!t of his proposed foreign direct in(estent in Indian%
3B% A person resident o!tside India ha(ing Foreign 5irect In(estent in India ay* s!bject to the condition that
forward co(er shall be ta$en only after the rate has been appro(ed by the Board* enter into forward
contracts with r!pee as one of the c!rrencies to hedge the c!rrency ris$ on di(idend recei(able by hi fro
the Indian copany%[

SC)'57L' III
*See Regulation 8#
Procedure for alication for aro:al for +edging of commodit' rice ris.
4

- % A person resident in India* engaged in e"port-iport trade*
>
Zor as peritted by the 6eser(e Ban$[ who
see$s to hedge price ris$ in respect of any coodity incl!ding gold*
J
Zb!t e"cl!ding oil and petrole!
prod!cts[* ay s!bit an application to the International Ban$ing 5i(ision of an a!thorised dealer gi(ing
the following details%

(i) A brief description of the hedging strategy proposedC naely1
(a) description of b!siness acti(ity and nat!re of ris$C
(b) instr!ents proposed to be !sed for hedgingC
(c) naes of coodity e"change and bro$ers thro!gh who the ris$ is proposed to be
hedged and credit lines propose( be a(ailed% 0he nae and address of the reg!latory
a!thority in the co!ntry concerned ay also be gi(enC
(d) si@eAa(erage ten!re of e"pos!re andAor total t!rno(er in a year together with e"pected pea$
position thereof and the basis of calc!lationC
(ii) copy of the 6is$ 9anageent Policy appro(ed by the 9anageent co(ering1
(a) ris$ identification*
(b) ris$ eas!reents*
(c) g!idelines and proced!res to be followed with respect re(al!ation andA or onitoring of
positions*
(d) naes and designations of the officials a!thorised to !nderta$e transactions and liitsC
(e) any other rele(ant inforation%
2% A!thorised dealer after ens!ring that the application is s!pported doc!ents indicated in paragraph - ay
forward the application its recoendations to 6eser(e Ban$ for consideration%