S. NO. CHAPTER PAGE NO.

Executive summary 2-3

1 Introduction-Project Finance 4 - 14

2 SOURCES OF PROJECT FINANCE 15 - 25

3 INSTITUTIONS IN PROJECT FINANCING 26 – 33

4 Guidelines for funding the projects by various 34- 42

Institution

5 Guideline for infrastructure project 43

6 Guideline for industrial project 44

Executive Summary
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CHAPTER 1

PROJECT FINANCE

Project financing uses the project’s assets and/or future revenues as the basis for raising funds. Generally, the sponsors
create a special purpose, legally independent company in which they are the principal shareholders. The newly created
company usually has the minimum equity required to issue debt at a reasonable cost, with equity generally averaging
between 10 and per cent of the total capital required for the project. Individual sponsors often hold a sufficiently small
share of the new company’s equity, to ensure that it cannot be construed as a subsidiary for legal and accounting
purposes.
The final legal structure of each independent project is different. The following chart illustrates
a simple project finance example. It shows that the legal vehicle (company) frequently
has more than one sponsor, generally because:
• the project exceeds the financial or technical capabilities of one sponsor
• the risks associated with the project have to be shared
• a larger project achieves economies of scale that several smaller projects will not achieve
• the sponsors complement each other in terms of capability
• the process requires or encourages a joint venture with certain interests (e.g. local participation
or empowerment)
• the legal and accounting rules stipulate a maximum equity position by a sponsor, above
which the project company will be considered a subsidiary.
In large projects, different legal vehicles may be established to perform specific functions (i.e. construction,
maintenance and actual ownership). The structure is often dictated by tax and other legal conditions, as well as by the
credit implications for each participant. In designing the structure of the project, stakeholders should maintain
maximum flexibility. In other words, sponsors often have other interests in the project, including the
design, construction or management of the project, for which they will establish independent legal entities. These
relationships will be governed by additional contracts between the project company and the sponsors. Sponsors are not
precluded from being lenders; this overlap often occurs in practice.
The objective of using project financing to raise capital is to create a structure that is bankable (of interest to investors)
and to limit the stakeholders’ risk by diverting some risks to parties that can better manage them. In project financing,
an independent legal vehicle is created to raise the funds required for the project. Payment of principal, interest,

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dividends and operating expenses is derived from the project’s revenues and assets. The investors, in both debt and
equity, require certain basic legal, regulatory and economic conditions throughout the life of the project.
The project’s revenues are obtained from the government and/or fees (tariffs) charged to the users of the service. In
some projects, the private sector provider also pays concession fees to the government or to another designated
authority, in return for the use of the government’s assets and/or the rights to provide the service, which is often a
monopoly. In toll roads and ports projects, for example, the concession fee is based on the use of the service or the net
income, giving the government a vested interest in the success of the project. In this case, the government’s interests
are comparable to those of an equity investor

NEED OF PROJECT FINANCE

1. Project finance is a finance structure which ensures that the
projects are environmentally, socially, economically and
politically viable.
2. Traditional methods are not suitable for projects which have a
long life and require huge capital investment.
3. Risk sharing is another unique feature of project finance which
traditional methods do not provide.

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4. Project Finance improves the return on capital in a project by
leveraging the investment
5. Project finance facilitates careful project evaluation & risk
assessment

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CHAPTER 2

Sources of Finance
A company would choose from among various sources of finance depending on the amount of
capital required and the term for which it is needed. When looking at the source of finance, it
can usually be divided into three categories, namely traditional sources, ownership capital and
non-ownership capital.

Traditional Sources of Finance

Internal resources have traditionally been the chief source of finance for a company. Internal
resources could be a company¶s assets, personal savings and profits that have not been reinvested
or distributed among shareholders. Working capital is a short term source of finance and is the
money used for a company¶s day-to-day activities, including salaries, rent, payments for raw
materials and electricity bills.

Internal Sources

Traditionally, the major sources of finance for a limited company were internal sources:

y Personal savings: Quite simply, personal savings are amounts of money that a business
person, partner or shareholder has at their disposal to do with as they wish. If that person
uses their savings to invest in their own or another business, then the source of finance
comes under the heading of personal savings.

Although we would generally discuss personal savings as a source of finance for small
businesses, there are many examples where business people have used substantial sums
of their own money to help to finance their businesses. A good and very public example
here is Jamie Oliver, the television chef. Jamie financed his new restaurant, 'Fifteen',
using fifteen raw recruits to the catering trade and a large amount (£500,000) of his own
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 cash.

y Retained Profit: This is often a very difficult idea to understand but, in reality, it is very
simple. When a business makes a profit and it does not spend it, it keeps it - and
accountants call profits that are kept and not spent retained profits. That's all. The

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 retained profit is then available to use within the business to help with buying new
machinery, vehicles, and computers and so on or developing the business in any other
way. Retained profits are also kept if the owners think that they may have difficulties in
the future so they save them for a rainy day!
Working Capital: This is the short-term capital or finance that a business keeps.
Working capital is the money used to pay for the everyday trading activities carried out
by the business - stationery needs, staff salaries and wages, rent, energy bills, payments
for supplies and so on. Working capital is defined as:
Working capital = current assets - current liabilities

Where:

Current assets are short term sources of finance such as stocks, debtors and cash - the
amount of cash and cash equivalents - the business has at any one time. Cash is cash in
hand and deposits payable on demand (e.g. current accounts). Cash equivalents are short
term and highly liquid investments which are easily and immediately convertible into
cash.
Current liabilities are short term requirements for cash including trade creditors,
expense creditors, tax owing, dividends owing - the amount of money the business owes
to other people/groups/businesses at any one time that needs to be repaid within the next
month or so.
Sale of Assets: Business balance sheets usually have several fixed assets on them. A
fixed asset is anything that is not used up in the production of the good or service
concerned - land, buildings, fixtures and fittings, machinery, vehicles and so on. At times,
one or more of these fixed assets may be surplus to requirements and can be sold.
Alternatively, a business may desperately need to find some cash so it decides to stop
offering certain products or services and because of that can sell some of its fixed assets.
Hence, by selling fixed assets, business can use them as a source of finance. Selling its
fixed assets, therefore, has an effect on the potential capacity of the business - the amount
it can produce.

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External Sources:

Sources of Finance: Ownership Capital

Ownership capital is the capital owned by the shareholders of a company. A company can raise
substantial funds through an IPO (initial public offering). These funds are usually used for large
expenses, such as new product development, expansion into a new market and setting up a new
plant. The various types of shares are:

Ordinary shares: These are also known as equity shares and give the owner the right to
share the company¶s profits and vote at the firm¶s general meetings.
Preference shares: The owners of these shares may be entitled to a fixed dividend, but
usually do not have the right to vote.

Companies that are already listed on a stock exchange can opt for a rights issue, which seeks
additional investment from existing shareholders. They could also opt for deferred ordinary
shares, wherein the issuing company is not required to pay dividends until a specified date or
before the profits reach a certain level.

Unquoted companies (those not listed on stock exchanges) can also issue and trade their shares
in over-the-counter (OTC) markets.

Sources of Finance: Non-Ownership Capital

Non-ownership capital includes funds raised from lenders, such as banks and creditors.
Companies typically borrow a fixed amount from a bank, at a predetermined interest rate and
with a fixed repayment schedule. Certain bank accounts offer overdraft facilities. This is used by
companies to meet their short-term fund requirements, as they usually come at a very high
interest rate.

Factoring enables a company to raise funds using its outstanding invoices. The company
typically receives about 85% of the value of the invoice from the factor. This method is more
appropriate for overcoming short-term cash-flow issues.

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Hire purchase allows a company to use an asset without immediately paying the complete
purchasing price. Trade credit enables a company to obtain products and services from another
firm and pay the bill later.

Sources of Finance: Venture Capital

Firms in the early stages of development can opt for venture capital. This option gives the
financing company some ownership as well as influence over the direction of the enterprise.

Sources of Finance: Duration

Depending on the date of maturity, sources of finance can be clubbed into the following:

Long-term sources of finance: Long-term financing can be raised from the following sources:

Share capital or equity share

Preference shares
Retained earnings
Debentures/Bonds of different types
Loans from financial institutions
Loan from state financial corporation
Loans from commercial banks
Venture capital funding
Asset securitization
International

Medium-term sources of finance: Medium-term financing can be raised from the following
sources:

Preference shares
Debentures/bonds
Public deposits/fixed deposits for duration of three years
Commercial banks
Financial institutions
State financial corporations
Euro issues

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 Short term sources of finance: Short-term financing can be raised from the following sources:

Trade credit
Commercial banks
Fixed deposits for a period of 1 year or less
Advances received from customers

Other way of categorization:

Project funding can be obtained from various sources.
Public Finance
For years, many governments, funded projects by using existing surplus funds or issued debt (government bonds) to
be repaid over a specific period.
However, governments have increasingly found this funding to be less attractive, as it
strained their own balance sheets and therefore limited their ability to undertake other projects. This oncern has
stimulated the search for alternative sources of funding.
Corporate Finance
In corporate finance participant uses its own credit for raising the funds due to its capacity and the limited size and
nature of the project. This option is often used for shorter, less capital-intensive project.
Project Finance
A government borrows funds to finance an infrastructure project and gives a sovereign guarantee to lenders to repay all
funds. Government may contribute its own equity in addition to the borrowed funds.
Lenders analyse Government’s total ability to raise funds through taxation and general public enterprise revenues,
including new tariff revenue from the project. The sovereign guarantee shows up as a liability on Government’s list of
financial A private company borrows funds to construct a new treatment facility and guarantees to repay lenders from
its available operating income and its base of assets. The company may choose to contribute its own equity as well. In
performing credit analysis, lenders look at the company’s total income from operations, its stock of assets, and its
existing liabilities.
The loan shows up as a liability on the company’s balance sheet

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CHAPTER 3
Financial Institutions in Project Financing
Financial sector plays an indispensable role in the overall development of a country. The most
important constituent of this sector is the financial institutions, which act as a conduit for the
transfer of resources from net savers to net borrowers, that is, from those who spend less than
their earnings to those who spend more than their earnings. The financial institutions have
traditionally been the major source of long-term funds for the economy. These institutions
provide a variety of financial products and services to fulfil the varied needs of the commercial
sector. Besides, they provide assistance to new enterprises, small and medium firms as well as to
the industries established in backward areas. Thus, they have helped in reducing regional
disparities by inducing widespread industrial development.

The Government of India, in order to provide adequate supply of credit to various sectors of the
economy, has evolved a well developed structure of financial institutions in the country. These
financial institutions can be broadly categorized into All India institutions and State level
institutions, depending upon the geographical coverage of their operations. At the national level,
they provide long and medium term loans at reasonable rates of interest. They subscribe to the
debenture issues of companies, underwrite public issue of shares, guarantee loans and deferred
payments, etc. Though, the State level institutions are mainly concerned with the development of
medium and small scale enterprises, but they provide the same type of financial assistance as the
national level institutions.

National Level Institutions

A wide variety of financial institutions have been set up at the national level. They cater to the
diverse financial requirements of the entrepreneurs. They include all India development banks
like IDBI, SIDBI, IFCI Ltd, IIBI; specialized financial institutions like IVCF, ICICI Venture
Funds Ltd, TFCI; investment institutions like LIC, GIC, UTI; etc.

1. All-India Development Banks (AIDBs):- Includes those development banks which

provide institutional credit to not only large and medium enterprises but also help in
promotion and development of small scale industrial units.
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o Industrial Development Bank of India (IDBI):- was established in July 1964 as
an apex financial institution for industrial development in the country. It caters to
the diversified needs of medium and large scale industries in the form of financial
assistance, both direct and indirect. Direct assistance is provided by way of
project loans, underwriting of and direct subscription to industrial securities, soft
loans, technical refund loans, etc. While, indirect assistance is in the form of
refinance facilities to industrial concerns.

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Some more examples of national level institutions as follows:

o Industrial Finance Corporation of India Ltd (IFCI Ltd)

o Small Industries Development Bank of India (SIDBI)
o Industrial Investment Bank of India Ltd (IIBI)

2. Specialized Financial Institutions (SFIs):- are the institutions which have been set up to
serve the increasing financial needs of commerce and trade in the area of venture capital,
credit rating and leasing, etc.
o IFCI Venture Capital Funds Ltd (IVCF):- formerly known as Risk Capital &
Technology Finance Corporation Ltd (RCTC), is a subsidiary of IFCI Ltd. It was
promoted with the objective of broadening entrepreneurial base in the country by
facilitating funding to ventures involving innovative product/process/technology.
Initially, it started providing financial assistance by way of soft loans to promoters
under its 'Risk Capital Schemeµ. Since 1988, it also started providing finance
under 'Technology Finance and Development Scheme' to projects for
commercialization of indigenous technology for new processes, products, market
or services. Over the years, it has acquired great deal of experience in investing in
technology-oriented projects.

o ICICI Venture Funds Ltd: - formerly known as Technology Development &

Information Company of India Limited (TDICI), was founded in 1988 as a joint
venture with the Unit Trust of India. Subsequently, it became a fully owned
subsidiary of ICICI. It is a technology venture finance company, set up to
sanction project finance for new technology ventures. The industrial units assisted
by it are in the fields of computer, chemicals/polymers, drugs, diagnostics and
vaccines, biotechnology, environmental engineering, etc.

3. Investment Institutions: - are the most popular form of financial intermediaries, which
particularly catering to the needs of small savers and investors. They deploy their assets

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largely in marketable securities.

o Life Insurance Corporation of India (LIC):- was established in 1956 as a

wholly-owned corporation of the Government of India. It was formed by the Life
Insurance Corporation Act, 1956, with the objective of spreading life insurance
much more widely and in particular to the rural area. It also extends assistance for
development of infrastructure facilities like housing, rural electrification, water
supply, sewerage, etc. In addition, it extends resource support to other financial
institutions through subscription to their shares and bonds, etc. The Life Insurance

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Corporation of India also transacts business abroad and has offices in Fiji,
Mauritius and United Kingdom. Besides the branch operations, the Corporation
has established overseas subsidiaries jointly with reputed local partners in
Bahrain, Nepal and Sri Lanka.

Some more examples of Specialized Financial Institutions (SFIs) as follows:

o Unit Trust of India (UTI)

o General Insurance Corporation of India (GIC)

State Level Institutions

Several financial institutions have been set up at the State level which supplements the financial
assistance provided by the all India institutions. They act as a catalyst for promotion of
investment and industrial development in the respective States. They broadly consist of 'State
financial corporations' and 'State industrial development corporations'.

State Financial Corporation¶s (SFCs):- are the State-level financial institutions which
play a crucial role in the development of small and medium enterprises in the concerned
States. They provide financial assistance in the form of term loans, direct subscription to
equity/debentures, guarantees, discounting of bills of exchange and seed/ special capital,
etc. SFCs have been set up with the objective of catalyzing higher investment, generating
greater employment and widening the ownership base of industries. They have also
started providing assistance to newer types of business activities like floriculture, tissue
culture, poultry farming, commercial complexes and services related to engineering,
marketing, etc. There are 18 State Financial Corporation¶s (SFCs) in the country:-

o Andhra Pradesh State Financial Corporation (APSFC)

o Himachal Pradesh Financial Corporation (HPFC)

o Madhya Pradesh Financial Corporation (MPFC)

o North Eastern Development Finance Corporation (NEDFI)

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o Rajasthan Finance Corporation (RFC)

o Tamil Nadu Industrial Investment Corporation Limited

o Uttar Pradesh Financial Corporation (UPFC)

o Delhi Financial Corporation (DFC)

o Gujarat financial Corporation

o Haryana Financial Corporation ( HFC )

o Jammu & Kashmir State Financial Corporation ( JKSFC)

o Karnataka State Financial Corporation (KSFC)

o Kerala Financial Corporation ( KFC )

o Maharashtra State Financial Corporation (MSFC )

o Orissa State Financial Corporation (OSFC)

o Punjab Financial Corporation (PFC)

o West Bengal Financial Corporation (WBFC)

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 CHAPTER 4
Guidelines
IDBI BANK

Project Finance: -

Under the Project Finance scheme IDBI Bank provides finance to the corporate for projects. The
Bank provides project finance in both rupee and foreign currencies for Greenfield projects as
also for expansion, diversification and modernization. IDBI Bank follows the Global Best
Practices in project appraisal and monitoring and has a well-diversified industry portfolio. IDBI
Bank has signed a Memorandum of Understanding (MoU) with LIC in December 2006 for
undertaking joint and take-out financing of long-gestation projects, including infrastructure
projects.

Project Finance Scheme: -

Objective: - To provide long term finance for the establishment of new industrial, infrastructure,
Agri-horticulture, fishery and animal husbandry projects as well as expansion, diversification
and Modernization of existing ones

Types of Assistance: -Term loan, direct subscription/underwriting of equity and debt

instruments, provide financial guarantee and participate in deferred payment guarantee.

Eligibility: -Industrial concerns conforming to the definition in Section 2 (c) of the IDBI Act,
Infrastructure, Agro-horticulture, Fishery and Animal Husbandry projects

Project Cost: -Minimum assistance: NEDFi ordinarily finances projects with loan component of
Rs.25 lakh and above, However smaller projects in innovative fields and in the hill states are also
considered.

Maximum assistance: -Normally, NEDFi can consider up to maximum exposure of 10% of paid
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up capital & reserves. However, it can consider projects requiring higher investment in
consortium with other financial institutions and banks.

Nature of assistance: -Rupee Term Loan

Promoters¶ contribution: -30-40% of the total project cost. However, in the case of consortium
financing it will be at par with the norms of All India Financial Institutions.

Debt Equity Ratio: -Ordinarily 1.5: 1

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Interest Rate: -Based on Prime Lending Rate fixed from time to time. Actual rate within the
prevailing rate band depends upon creditworthiness of borrower and risk perception. As on date,
the prevailing interest rate is 15% per annum. There is provision for 1% rebate on interest rate
for timely repayment on due dates.

Up-front fee: -1% of the loan amount sanctioned

Security: -First charge on movable and immovable fixed assets.

Documentation: -

1. Loan Agreement.

2. Deed of hypothecation.

3. Personal guarantee from main promoters, wherever required.

4. Undertaking from the promoters for

O Meeting overrun/shortfall in the project cost/means of financing

O Non-disposal of shareholdings by the promoters

5. Undertaking from MD for non-receipt of commission, if company is in default to NEDFi.

6. Resolution under Section 293 (1) (a) and 293(1) (d) of the Company¶s Act.

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 Ex-Im Bank

Ex-Im Bank's Approach to Project Finance: -

Ex-Im Bank established the limited recourse project finance or "project finance" program as
developing nations turned away from sovereign-guaranteed borrowing for large infrastructure
projects. The program helps U.S. exporters compete in the development of private infrastructure
and in the extraction of natural resources.

Program Description

The term "project finance" refers to the financing of projects that are dependent on project cash
flows for repayment, as defined by the contractual relationships within each project. By their
very nature, these types of projects rely on a large number of integrated contractual arrangements
for successful completion and operation. The contractual relationships must be balanced with
risks distributed to those parties best able to undertake them, and should reflect a fair allocation
of risk and reward. All project contracts must fit together seamlessly to allocate risks in a manner
which ensures the financial viability and success of the project.

Appropriate project finance candidates include Green field projects and significant facility or
production expansions. These projects do not rely on the typical export finance security package,
which provide lenders recourse to a foreign government, financial institution or an established
corporation. While Ex-Im Bank's analytical approach for project finance is different from the
traditional export finance approach, many of Ex-Im Bank's requirements remain the same.

Ex-Im Bank's project finance program has several financing options which project sponsors can
utilize to develop an appropriate financing plan. During construction and operations, political
only and comprehensive guarantees are available.

Ex-Im Bank has no dollar limits based on project size, sector or country. While there is no
minimum transaction size, the applicant should carefully consider the costs associated with a
limited recourse project financing approach. Generally, Ex-Im Bank utilizes financial, legal, and
technical advisors for project finance transactions. However, for small project finance
transactions, Ex-Im Bank may consider, on a case-by-case basis, not utilizing financial advisors,
and relying instead upon internal due diligence as well as the due diligence of an arranging bank
(or other major project lender).

FLEXIBLE COVERAGE:-

Where appropriate, Ex-Im Bank offers the maximum support allowed under the rules of the
OECD Arrangement, including:

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 y Financing of interest accrued during construction related to the Ex-Im Bank financing.

y Allowance of up to 30 percent eligible foreign content in the U.S. components.

y Financing of host country local costs of up to 30 percent of the U.S. contract value.

The rules outlined by the OECD Arrangement allow Ex-Im Bank to provide flexible loan
repayment terms to match a project's revenue stream. Thus, project finance transactions can be
structured with tailored repayment profiles, more flexible grace periods, and more flexibility on
total repayment terms.

Ex-Im Bank implements these flexibilities on a case-by-case basis for qualifying project finance
transactions. Generally, extended grace periods or repayment terms must be justified by project
cash flows or project considerations specific to certain industry sectors. For example, extended
grace periods and back-ended repayment profiles may be justified for telecommunications
projects but are likely not appropriate for power plants.

The new rules allow for the following:

y Full flexibility for setting a project's grace period, repayment profile, and maximum
repayment term, subject to a maximum average life of 5.25 years; or

y The extension of a project's average life up to 7.25 years, subject to constraints for setting
a maximum grace period of 2 years and a maximum repayment term of 14 years.

The new flexible terms are subject to the following additional constraints and/or considerations:

y If the project's repayment term extends beyond 12 years, 20 basis points are added to the
CIRR Rate for direct loans.

y Interest cannot be capitalized post-completion.

y The flexible terms are offered in High-Income OECD markets only with additional
constraints.

y The average life allowed under the new flexible terms will be taken into consideration
when meeting the Minimum Premium Benchmark fees required as of April 1, 1999.

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 APPLICATION PROCESS

Business Development: - An introductory meeting with a Project Finance Business

Development Officer is strongly recommended. The meeting should focus on Ex-Im Bank's
policies and procedures and include a thorough explanation of the application process and the
requirements for Ex-Im Bank support.

Project Finance Letter of Interest: - A Project Finance Letter of Interest (LI) is an indication of
Ex-Im Bank's willingness to consider financing a given export transaction. To apply, interested
parties must complete the Ex-Im Bank LI application and clearly indicate Limited Recourse
Project Finance. The non-refundable processing fee for an LI is $100. The applicant should
attach an executive summary of the project which identifies the type of project, location of the
project, parties to the transaction, status of the project, total project cost, U.S. cost and the
anticipated project time frame. The Project Finance LI differs from Ex-Im Bank's traditional LI.
The LI application is available on Ex-Im Bank's web page.

Competitive Letter of Interest: - On a case-by-case basis, Ex-Im Bank is willing to consider

providing evidence of support during the early stage of the project development by performing a
more in-depth project analysis and issuing a Competitive Letter of Interest (CLI). Each CLI
issued will provide an indicative exposure fee range and a list of preliminary issues identified by
Ex-Im Bank. Applicants responding to an international invitation to bid for a project, or
applicants pursuing projects in difficult markets are eligible to apply. The cost for a CLI analysis
is $1000. In addition to the information required for an LI, applicants should submit any other
available information such as project agreements, proposed financing plan, risk mitigation
proposals, etc. Please refer to the Competitive Letter of Interest Fact Sheet on the web page.

Final Commitment Application Submission: - The final commitment application submitted to

Ex-Im Bank must include:

1) The standard Ex-Im Bank Preliminary Commitment/Final Commitment Application Form,

and

2) Five copies of the materials listed below under "Project Criteria and Application Information
Requirements."

Preliminary Review: - The Project Finance Business Development staff will review the material
submitted within five to ten business days from the date that the application is received to
determine completeness.

Incomplete Applications: - If the application is incomplete, it will be returned to the applicant

with an explanation of its deficiencies. If the application is not determined to be suitable for

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limited recourse project financing but could still be considered for another form of Ex-Im Bank
financing, it will be forwarded to the appropriate division and the applicant will be notified.

Choice of Financial Advisor: - For applications proceeding to a Phase I evaluation, a financial

advisor will be selected by Ex-Im Bank. Determination of the specific financial advisor will
depend on several factors including geographic and sector expertise and availability to meet
project deadlines.

Evaluation Fee: - Before the financial advisor begins his review (Phase I of evaluation), the
applicant will be required to pay an evaluation fee and execute a contract with the financial
advisor. In addition, the applicant will need to execute an indemnity agreement with the financial
advisor. No evaluation by Ex-Im Bank and the financial advisor will commence without payment
of the financial advisor evaluation fee, execution of the contract and the indemnity agreement. If
Ex-Im Bank agrees to proceed with the project after completion of the Phase I evaluation, the
applicant will be required to pay additional related fees for the Phase II due diligence. The
application will be returned to the applicant if the arrangements for the financial advisor are not
completed within thirty days.

Other Fees: - For all projects Ex-Im Bank will require, either in conjunction with other lenders
or for its own use, the advice of independent outside legal counsel, independent engineers, and
insurance advisors. In addition, there may be other fees associated with conducting proper due
diligence. Payment for these and any other fees will be the responsibility of the project sponsors
or the applicant.

Preliminary Project Letter (Phase I): - Upon satisfactory completion of the phase I evaluation
process, the Structured Finance Division will issue a Preliminary Project Letter within 45 days
from the date evaluation begins by the financial advisor. The PPL will indicate if Ex-Im Bank is
prepared to move forward on a financing offer and the corresponding general terms and
conditions based upon the information available at the time of application.

Evaluation Post-PPL (Phase II): -After issuance of the PPL, Ex-Im Bank will work with the
applicant to proceed to a Final Commitment. Please note that Ex-Im Bank does not issue
Preliminary Commitments for project finance transactions. Ex-Im Bank will continue to utilize
the financial advisor for Phase II of the due diligence process.

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Chapter 5

PROJECT CRITERIA AND APPLICATION

Information Required:-

I. General Project:-

y In most cases the project should have long-term contracts from creditworthy entities for
the purchase of the project's output and the purchase of the project's major project inputs
such as fuel, raw materials, and operations and maintenance. Such contracts should
extend beyond the term of the requested Ex-Im Bank financing. In sectors such as
telecommunications and petrochemicals if long-term contracts are not available, Ex-Im
Bank will evaluate the transactions on a case-by-case basis, looking for economically
compelling business rationale.

y The project should contain an appropriate allocation of risk to the parties best suited to
manage those risks. Sensitivity analysis should result in a sufficient debt service coverage
ratio to ensure uninterrupted debt servicing for the term of the debt.

y Total project cost should be comparable to projects of similar type and size for a
particular market.

y Product unit pricing and costs should reflect market based pricing.

y Devaluation risk needs to be substantially mitigated through revenues denominated in

hard currencies, revenue adjustment formulas based on changing currency relationships,
or other structural mechanisms.

Information Required:-

1. Summary of all aspects of the project, as contained in an independently prepared feasibility

study and/or a detailed information memorandum, prepared by a qualified party. The study or
memorandum should include the project description, location, legal status, ownership, and
background and status of key elements of the project structure, such as agreements, licenses,
local partner participation and financing.

2. Agreements for key elements of the project. Ex-Im Bank considers key agreements to include
all contracts necessary for the project to be built and operate. This includes contracts relating to
infrastructure as well as supply and off take agreements. These agreements should be in
substantially final form. Ex-Im Bank will not accept summaries or outlines of these agreements.

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3. A breakdown of anticipated project costs through commissioning, including interest during
construction and working capital requirements, by major cost category and country of origin.
This information should also include a breakdown of any "soft costs" such as development costs,
development fees, owner's contingencies and other similar items. A breakdown of the proposed
coverage for interest during construction and the method of calculation should also be included.

4. A summary of the anticipated project financing plan and security package, including the
proposed source, amount, currency and terms of the debt and equity investments; the sources of
finance in the event of project cost overruns; and description of escrow accounts. Information on
the terms, security requirements, and status of financing commitments of other lenders to the
project, if applicable, should be provided. All other sources approached for financing
(multinational development banks, other export credit agencies, commercial banks, capital
markets and private investors) must be disclosed.

5. Projected annual financial statements covering the period from project development through
final maturity of the proposed Ex-Im Bank financing, to include balance sheet, profit and loss,
source and application of funds statements, and debt service ratios. Projections should include a
sensitivity analysis for not only the expected scenario, but pessimistic and optimistic cases as
well.

This information should also be provided electronically in Lotus 123 or Excel. The structure of
the financial model should be in a format that is user friendly. Ex-Im Bank must be able to
review and adjust the assumptions in the model.

6. Assumptions for the financial projections, including but not limited to the basis for sales
volume and prices; operating and administrative costs; depreciation, amortization and tax rates;
and local government policy on price regulation.

7. Market information to include ten years of historical price and volume data; present and
projected capacity of industry; product demand forecast with assumptions; description of
competition and projected market share of the project as compared to the shares of the
competition; identity and location of customers; and marketing and distribution strategy.

8. A description of the principal risks and benefits of the project to the sponsors, lenders, and
host government.

9. A description of the types of insurance coverage to be purchased for both the pre and post-
completion phases of the project.

10. Information on infrastructure required for the project to operate, specifically information
pertaining to the timing, status and developmental plans.

11. A clear articulation of the need for Ex-Im Bank coverage.

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II. Participants

y Project sponsors, off take purchasers, contractors, operators, and suppliers must be
able to demonstrate the technical, managerial and financial capabilities to perform
their respective obligations within the project.

Information Required:-

1. Sponsors must provide in English a brief history and description of their operations, a
description of their relevant experience in similar projects, and three years of audited financial
statements.

2. If the sponsors are part of a joint venture or consortium, information should be provided for all
the participants. A shareholders agreement should also be provided. All documents pertaining to
this area (joint venture agreement, management and service agreements) should be in
substantially final form.

3. Off take purchasers and suppliers should provide in English a history and description of
operations, at least three years of audited financial statements, and a description of how the
project fits in their long-term strategic plan. If the project utilizes raw materials (oil, gas, coal,
ethane, etc.) copies of contracts that have been reviewed by legal counsel for appropriateness and
in adherence with local law should be provided.

4. Contractors and operators must provide resumes of experience with similar projects and recent
historical financial information.

III. Technical

y Project technology must be proven and reliable, and licensing arrangements must
be contractually secured for a period extending beyond the term of the Ex-Im Bank
financing.

y A technical feasibility study or sufficient detailed engineering information needs to

be provided to demonstrate technical feasibility of the project.

Information Required:-

1. Technical description and a process flow diagram for each project facility.

2. Detailed estimate of operating costs.

3. Arrangement for supply of raw materials and utilities.

4. Draft turnkey construction contract and description of sources of possible cost increases and
delays during construction, including detailed description of liquidated damage provisions and
performance bond requirements.

29
5. Project implementation schedule, showing target dates for achieving
essential project
milestones.

6. A site-specific environmental assessment, highlighting concerns, requirements

and solutions.
These documents should demonstrate compliance with Ex-Im Bank's
environmental guidelines.
All applicants must submit a Preliminary Environmental Assessment report
conducted by a third
party expert prior to an application for final commitment.

IV. Host Country Legal/Regulatory Framework & Government Role

y Host government commitment to proceeding with the project needs to be

demonstrated.

y Legal and regulatory analysis needs to demonstrate that the country

conditions and the
project structure are sufficient to support long-term debt exposure for the
project through
enforceable contractual relationships.

y Ex-Im Bank's relationships with the host government will be addressed on

a case-by-case
basis. An Ex-Im Bank Project Incentive Agreement (PIA) with the host
government may
be required. The PIA addresses certain political risks and Ex-Im
Bank's method of
resolution of conflict with the host government pertaining to these
issues. Only certain
markets will require a PIA.

Information Required:-

1. A description of the host government's role in the project, and progress made
toward obtaining
essential government commitments, including authorizations from appropriate
government
entities to proceed with the project. Copies of all permits, licenses,
concession agreements and

30
 approvals are required in addition to a description of all permits necessary
to complete the
project and their status. This information is critical for Ex-Im Bank application
consideration.

2. A definition of the control, if any, that the government will have in the
management and
operation of the project, and status of any assurances that the government will not
interfere in the
project's operation. If the government is also a project sponsor, these issues will
be of particular
importance.

3. Evidence of the government's current and historical commitment and policies

for availability
and convertibility of foreign currency.

4. Status and strategy for obtaining government undertakings to support any

government parties
involved in the project, to the extent that such undertakings are needed to provide
adequate credit
support for such entities.

Guidelines on infrastructure financing

DBOD. No. BP. BC. 67 / 21.04.048/ 2002- 2003
February 4, 2003
All Scheduled Commercial Banks
(excluding RRBs & LABs) &
All India Financial Institutions
Dear Sir,
Guidelines on infrastructure financing
Please refer to our Industrial & Export Credit Department's Circular No. 16/ 08.12.01/
2001-02 dated 20 February 2002 on financing of infrastructure projects. RBI has been
receiving requests in the recent past suggesting a need for review of guidelines on
infrastructure financing by banks. In view of the above as also the critical importance of
the infrastructure sector and high priority being accorded for development of various

31
infrastructure services, the matter has been reviewed in consultation with Government of
India and the revised guidelines on financing of infrastructure projects are set out in the

32
Chapter 5
Guideline for financing infrastructure project

1. Definition of ‘infrastructure lending’

Any credit facility in whatever form extended by lenders (i.e. banks, FIs or NBFCs) to an
infrastructure facility as specified below falls within the definition of “infrastructure
lending”.
In other words, a credit facility provided to a borrower company engaged in:
· developing or
· operating and maintaining, or
· developing, operating and maintaining
any infrastructure facility that is a project in any of the following sectors:
i) a road, including toll road, a bridge or a rail system;
ii) a highway project including other activities being an integral part of the highway
project;
iii) a port, airport, inland waterway or inland port;
iv) a water supply project, irrigation project, water treatment system, sanitation and
sewerage system or solid waste management system;
v) telecommunication services whether basic or cellular, including radio paging,
domestic satellite service (i.e., a satellite owned and operated by an Indian company
for providing telecommunication service), network of trunking, broadband network
and internet services;
vi) an industrial park or special economic zone ;
vii) generation or generation and distribution of power
viii) transmission or distribution of power by laying a network of new transmission or
distribution lines.
ix) Any other infrastructure facility of similar nature
2. Criteria for Financing
Banks/FIs are free to finance technically feasible, financially viable and bankable projects
undertaken by both public sector and private sector undertakings subject to the following

33
conditions:
(i) The amount sanctioned should be within the overall ceiling of the prudential exposure
norms prescribed by RBI for infrastructure financing (please see paragraph 5.1 also).
(ii) Banks/ FIs should have the requisite expertise for appraising technical feasibility,
financial viability and bankability of projects, with particular reference to the risk
analysis and sensitivity analysis ( please see paragraph 4 also).
(iii) In respect of projects undertaken by public sector units, term loans may be sanctioned
only for corporate entities (i.e. public sector undertakings registered under Companies
Act or a Corporation established under the relevant statute). Further, such term loans
should not be in lieu of or to substitute budgetary resources envisaged for the project.
The term loan could supplement the budgetary resources if such supplementing was
contemplated in the project design. While such public sector units may include
Special Purpose Vehicles (SPVs) registered under the Companies Act set up for
financing infrastructure projects, it should be ensured by banks and financial
institutions that these loans/investments are not used for financing the budget of the
State Governments. Whether such financing is done by way of extending loans or
investing in bonds, banks and financial institutions should undertake due diligence on
the viability and bankability of such projects to ensure that revenue stream from the
project is sufficient to take care of the debt servicing obligations and that the
repayment/servicing of debt is not out of budgetary resources. Further, in the case of
financing SPVs, banks and financial institutions should ensure that the funding
proposals are for specific monitorable projects .
(iv) Banks may also lend to SPVs in the private sector, registered under Companies Act
for directly undertaking infrastructure projects which are financially viable and not for
acting as mere financial intermediaries. Banks may ensure that the bankruptcy or
financial difficulties of the parent/ sponsor should not affect the financial health of the
SPV.
3. Types of Financing by Banks
In order to meet financial requirements of infrastructure projects, banks may extend
credit facility by way of working capital finance, term loan, project loan, subscription to
bonds and debentures/ preference shares/ equity shares acquired as a part of the project

34
finance package which is treated as "deemed advance” and any other form of funded or
nonfunded facility.
Take-out Financing
Banks may enter into take-out financing arrangement with IDFC/ other financial
institutions or avail of liquidity support from IDFC/ other FIs. A brief write-up on some
of the important features of the arrangement is given in the Appendix. Banks may also be
guided by the instructions regarding take-out finance contained in Circular No. DBOD.
Inter-institutional Guarantees
In terms of the extant RBI instructions, banks are precluded from issuing guarantees
favouring other banks/lending institutions for the loans extended by the latter, as the
primary lender is expected to assume the credit risk and not pass on the same by securing
itself with a guarantee i.e. separation of credit risk and funding is not allowed. These
instructions are presently not applicable to FIs. While Reserve Bank is not in favour of a
general relaxation in this regard, keeping in view the special features of lending to
infrastructure projects viz., high degree of appraisal skills on the part of lenders and
availability of resources of a maturity matching with the project period, banks are
permitted to issue guarantees favouring other lending institutions in respect of
infrastructure projects, provided the bank issuing the guarantee takes a funded share in the
project at least to the extent of 5 per cent of the project cost and undertakes normal credit
appraisal, monitoring and follow up of the project.
Financing promoter's equity
In terms of our Circular DBOD. Dir. BC. 90/ 13.07.05/ 98 dated 28 August 1998, banks
were advised that the promoter's contribution towards the equity capital of a company
should come from their own resources and the bank should not normally grant advances
to take up shares of other companies. In view of the importance attached to infrastructure
sector, it has been decided that, under certain circumstances, an exception may be made to
this policy for financing the acquisition of promoter's shares in an existing company
which is engaged in implementing or operating an infrastructure project in India. The
conditions, subject to which an exception may be made are as follows:
(i) The bank finance would be only for acquisition of shares of existing companies
providing infrastructure facilities as defined in paragraph 1 above. Further,

35
acquisition of such shares should be in respect of companies where the existing
foreign promoters (and/ or domestic joint promoters) voluntarily propose to
disinvest their majority shares in compliance with SEBI guidelines, where
applicable.
(ii) The companies to which loans are extended should, inter alia, have a satisfactory
net worth.
(iii) The company financed and the promoters/ directors of such companies should not
be defaulter to banks/ FIs.
(iv) In order to ensure that the borrower has a substantial stake in the infrastructure
company, bank finance should be restricted to 50% of the finance required for
acquiring the promoter's stake in the company being acquired.
(v) Finance extended should be against the security of the assets of the borrowing
company or the assets of the company acquired and not against the shares of that
company or the company being acquired. The shares of borrower company /
company being acquired may be accepted as additional security and not as
primary security. The security charged to the banks should be marketable.
(vi) Banks should ensure maintenance of stipulated margin at all times.
(vii) The tenor of the bank loans may not be longer than seven years. However, the
Boards of banks can make an exception in specific cases, where necessary, for
financial viability of the project.
(viii) This financing would be subject to compliance with the statutory requirements
under Section 19(2) of the Banking Regulation Act, 1949.
(ix) The banks financing acquisition of equity shares by promoters should be within
the regulatory ceiling of 5 per cent on capital market exposure in relation to its
total outstanding advances (including commercial paper) as on March 31 of the
previous year.
(x) The proposal for bank finance should have the approval of the Board.
4. Appraisal
(i) In respect of financing of infrastructure projects undertaken by Government
owned entities, banks/Financial Institutions should undertake due diligence on the
viability of the projects. Banks should ensure that the individual components of financing

36
and returns on the project are well defined and assessed. State Government guarantees
may not be taken as a substitute for satisfactory credit appraisal and such appraisal
requirements should not be diluted on the basis of any reported arrangement with the
Reserve Bank of India or any bank for regular standing instructions/periodic payment
instructions for servicing the loans/bonds.
(ii) Infrastructure projects are often financed through Special Purpose Vehicles. Financing
of these projects would, therefore, call for special appraisal skills on the part of lending
agencies. Identification of various project risks, evaluation of risk mitigation through
appraisal of project contracts and evaluation of creditworthiness of the contracting entities
and their abilities to fulfil contractual obligations will be an integral part of the appraisal
exercise. In this connection, banks/FIs may consider constituting appropriate screening
committees/special cells for appraisal of credit proposals and monitoring the
progress/performance of the projects. Often, the size of the funding requirement would
necessitate joint financing by banks/FIs or financing by more than one bank under
consortium or syndication arrangements. In such cases, participating banks/ FIs may, for
the purpose of their own assessment, refer to the appraisal report prepared by the lead
bank/FI or have the project appraised jointly.
5. Prudential requirements
Prudential credit exposure limits
Credit exposure to borrowers belonging to a group may exceed the exposure norm of 40
percent of the bank's capital funds by an additional 10 per cent (i.e up to 50 per cent),
provided the additional credit exposure is on account of extension of credit to
infrastructure projects.
Credit exposure to single borrower may exceed the exposure norm of 15 per cent of the
bank's capital funds by an additional 5 per cent (i.e. up to 20 per cent) provided the
additional credit exposure is on account of infrastructure as defined in paragraph 1 above.
Assignment of risk weight for capital adequacy purposes
Banks may assign a concessional risk weight of 50 per cent for capital adequacy purposes,
on investment in securitised paper pertaining to an infrastructure facility subject to
compliance with the following :
a) The infrastructure facility should satisfy the conditions stipulated in paragraph 1

37
above.
b) The infrastructure facility should be generating income/ cash flows which would
ensure servicing/ repayment of the securitised paper.
c) The securitised paper should be rated at least 'AAA' by the rating agencies and the
rating should be current and valid. The rating relied upon will be deemed to be current
and valid if :
(i) The rating is not more than one month old on the date of opening of the
issue, and the rating rationale from the rating agency is not more than one year
old on the date of opening of the issue, and the rating letter and the rating
rationale is a part of the offer document.
(ii) In the case of secondary market acquisition, the 'AAA' rating of the issue
should be in force and confirmed from the monthly bulletin published by the
respective rating agency.
(iii)The securitised paper should be a performing asset on the books of the
investing/ lending institution.
5.3 Asset - Liability Management
The long - term financing of infrastructure projects may lead to asset – liability
mismatches,particularly when such financing is not in conformity with the maturity
profile of a bank’s liabilities. Banks would, therefore, need to exercise due vigil on their
asset-liability position to ensure that they do not run into liquidity mismatches on account
of lending to such projects.

6. Administrative arrangements
Timely and adequate availability of credit is the pre-requisite for successful
implementation of infrastructure projects. Banks/ FIs should, therefore, clearly delineate
the procedure for approval of loan proposals and institute a suitable monitoring
mechanism for reviewing applications pending beyond the specified period. Multiplicity
of appraisals by every institution involved in financing, leading to delays, has to be
avoided and banks should be prepared to broadly accept technical parameters laid down
by leading public financial institutions. Also, setting up a mechanism for an ongoing

38
monitoring of the project implementation will ensure that the credit disbursed is utilised
for the purpose for which it was sanctioned.

39