Management & Technical appraisal

Session- 3

Shyam Ji Mehrotra

July 21, 2012

Management appraisal (Seven Cs of Management appraisal)

Management is key to success of an enterprise
Character & Integrity Capability to organize resources Capacity to arrange finance Creditworthiness

& KYC compliance

Competence to manage
Credit Rating Collateral & Covenants

Majority of defaults occurs due to managerial inefficiency

Shyam Ji Mehrotra

July 21, 2012

Credit Ratings
CRA like CARE, CRISIL, FITCH, ICRA,

ONICRA,SAMERA conducting credit rating for SME and large industries 75% of credit rating fee subject to maximum of Rs. 25000 to Rs. 40,000 is reimbursed to Small and Micro units way of grants. Banks have developed system of internal credit rating of borrowers in compliance of BASEL II norms.
3 Shyam Ji Mehrotra July 21, 2012

Management structure
Suitability and adequacy of management

structure
Individual Proprietorship Partnership Hindu Undivided family Limited Liability Partnership (LLP) Joint stock companies

Others- society, trust etc.

Whether technically and professionally qualified Reputation in the market and experience
4 Shyam Ji Mehrotra July 21, 2012

Borrowing capacity
Capacity to borrow
Examine memorandum and article of association or

charter of the borrower to satisfy capacity to borrow and borrowing limit Resolution of the board or Shareholders meetings for borrowing Resolution for charging securities

Shyam Ji Mehrotra

July 21, 2012

Borrowing capacity
Due diligence- past payment history
Defaulters list of RBI Caution list of ECGC Credit report of reputed companies like Dun &

Bradstreet, CIBIL etc. Credit report from other banks/financial institutions Market intelligence

Shyam Ji Mehrotra

July 21, 2012

Borrowing capacity
KYC Compliance
To confirm identity of the borrower/borrowers

through identity proof such as pass port, PAN card, voters card, Aadhar card etc. To confirm address through telephone bill, electricity bill, pass port etc.

Shyam Ji Mehrotra

July 21, 2012

Borrowing capacity
Credit worthiness
Project finance has no operating history Credit worthiness is dependent upon debt servicing

capacity ( expected future cash flows) & inherent value of assets ( collateral) Credit history of sponsors of the project and pledge of third party assets, if any Amount of equity project sponsors have at risk

Shyam Ji Mehrotra

July 21, 2012

MANGEMENT APPRAISALSUMMARY
Quality of management

Honesty and integrity Competence Broad based Involvement in project Financial resources Initiative Intelligence Self confidence Patience Drive and energy Past track record Experience

Forms of organization Setup of the organization

Shyam Ji Mehrotra

July 21, 2012

TECHNICAL APPRAISAL
SESSION 3

10

shyam Ji Mehrotra

July 21, 2012

TECHNICAL APPRAISAL
Purpose
Technically feasible in terms of size, location, plant

capacity, Ease of absorption Availability of technical manpower Technical know how at reasonable cost All inputs are available ( indigenously or imported) timely and adequately- raw material, power, stores & spares Ecological balance and environmental concern are addressed ---------

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Examined by experts but financial analyst is expected to raise key questions based on 2012 shyam Ji Mehrotra July 21, experience, common sense and pure logic

TECHNICAL KNOW HOW

Foreign collaborators, Consultancy organizations

Nature of support by collaborators in design,

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selection, procurement, erection, maintenance of project Performance guarantee Price- royalty, licensing fee , one time or regular Upgradation of technology- automatic or against fee Turn key projects Restrictions if any by technology providers non compete clause shyam Ji Mehrotra July 21, 2012 Recruitment of suitable technical persons

Material input, skill and utilities Check list

Defining the material required and setting up

supply chain
Mineral products, agricultural products, marine products,

imported raw material direct ownership, lease or purchase agreements Vendors, suppliers including overseas Input constraints and alternatives Typical uncertainties like proven, probable or possible reserves of natural resources

Availability
Locally available Dependent on foreign suppliers Dependent on few suppliers Dependent on vagaries of nature
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Price agreements shyam Ji Mehrotra

Forward contracts

July 21, 2012

Material input ,skill and utilities Check list

Defining the status of utilities , total

requirements and gap if any

Power Stream Water Fuel

Skills Locally available Trained manpower

14 shyam Ji Mehrotra July 21, 2012

Product mix- check list

Product planning- based on target demand

Nature of target customers (garment

manufacturing wide range of sizes and quality) Flexibility to change mix and additional investment Packaging Profit margin and BEP analysis

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shyam Ji Mehrotra

July 21, 2012

Plant capacity- check list

Also referred as production capacity Defined in terms of installed capacity, technical

condition of the plant, down time and holidays, shift change etc. Minimum economic size Input constraints Demand constraints Investment cost economies of scale Government policies Limitation imposed by financial and managerial capacity of management
July 21, 2012

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shyam Ji Mehrotra

Location and site- check list

Land acquisition supported by state government,

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farmers agitations Proximity to raw material, utilities etc. Proximity to market Transportation and other infrastructure facilities Labour situation Government policies and incentives-Growth centers, Notitified back ward area etc. Environmental issues and effluent disposal say chemical , plastic, tanneries industries are located in sea area or rivers Proximity to ancillary units Climatic conditions shyam Ji Mehrotra

July 21, 2012

Machines and equipments- check list

Estimate likely level of production

Define machine and other operations

Calculate the machine hours required in each

operations Select machine and equipments required for each functions depending upon technological sophistication and opinion of consultant re.
Vendor, capacity , technology, delivery schedule, payment

terms, performance guarantee etc.

Make inventory of spare and tools to meet need

of original machine and also wear and tear.

18 shyam Ji Mehrotra July 21, 2012

Risk Mitigation
Assessment & mitigation of managerial and

technical risks
Completion risk- time and cost over run Technological risk Raw material supply risk

Managerial risk
Default risk Marketing risk ..

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shyam Ji Mehrotra

July 21, 2012