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Mona Iyer
CEPT University
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 Session Outline
• Means and Sources of financing
– Equity
– Debt
– Guarantees
– Grant/subsidy
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 Means of Financing
• Equity
– In a project financing, the cash or
assets contributed by the sponsors.
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– In accounting, the difference between
total assets and total liabilities.
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– Equity finance is difficult to attract,
specially in initial stages of project as
the risk is high and returns uncertain
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 Means of Financing
• Equity
– Equity investors are last in the priority
of repayment
– Lenders look at equity very critically
for following reasons :
• Lenders want the investors in a position that they cannot
walk away easily from the project! They must have
enough stake to motivate them to see the project through
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• The more burden the debt component puts on project, the
greater the lenders risk
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• (unless sometimes guarantees are provided by very
creditworthy guarantors)
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 Means of Financing

Debt
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– Money, owed by one person to another

– Commonly called loan !
– The obligation to repay an agreed
amount of money
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 Means of Financing
Subordinated debts/loans (Mezzanine finance)
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– Quasi-equity, senior to equity and junior to

senior debts
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– Often used by sponsor to provide capital to a

project which will support senior borrowings
from third party lenders
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– Can be advanced by the investor as part of

its original investment on project
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 Means of Financing
Subordinated debts/loans (Mezzanine finance)
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– The possible sponsors for such loans are
• one of the owners (equity holders in the
project),
• user anxious to get the project operational, or
• government interested in getting the project
done and is not allowed to take equity position
in a project for policy reasons
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– Subordinated loan is usually considered as equity
by lenders for purpose of computing the proportion
of equity and debt
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 Means of Financing
Senior Debts
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– Debt with the highest ranking for repayment, security, or action

– Borrowings from commercial bank lenders
– Unsecured Debts
• No security except the creditworthiness of the borrower
• Project tend to be new enterprises and have no operating histories,
lenders rely upon the reputation of project partners
• Industry specialist or project financing specialist hired by
commercial banks as they are traditional balance sheet lenders
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 Means of Financing
• Senior Debts
– Secured Debts
• Assets are required to secure the debt-
collateral, guarantees by govt. etc
• Senior lenders may hold security interest
(first right) in key project assets
• Security trustee appointed to act on behalf of
all secured lenders in case of multiple
secured lenders
– Distributes the debt service in order of priority.
• Recourse: In the event a project cannot service the financing or achieve
completion, the financiers have recourse to either cash from the sponsor
or other non–project security.
• Non-recourse: The lenders rely on the project's cash flows and security
over the project vehicle's assets as the only means to repay debt service.
• Risk Premium: The reward for holding a risky investment rather than a risk-
free one.
• Royalty: A share of revenue or cash flow to the government or grantor of
the concession or license. Compensation (i.e., royalty fees) for the use
of intellectual property belonging to another party, usually calculated as a
percentage of sales.
• Collateral: Assets pledged as security under a loan to assure repayment of
debt obligations.
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 Sources of Equity
• Equity -Primary source of investment
– Promoter’s equity/ Equity Capital
– Promoters who launch the project
• These may include Indian, Foreign, both, NRIs,
Overseas Corporate bodies, investment banks
– Finance raised from public/ capital market.
• Preference capital/shares with fixed dividend rates
• Bonds and debentures
• Maturity period, rate of interest, tax exemption
• Can also be called as tradable debt!!
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 Sources of Debt
Debt
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– Institutional Borrowings
• Multilateral/Bilateral Development Banks
• Development Banks likes ICICI, IDBI
• Investment Institutions like UTI, LIC, VC funds, Pension
funds
• Infrastructure finance institutions IL&FS, IDFC
– commercial borrowings
• Commercial Banks
• Upto 35% of project cost
• Limitation to individual clients, sector, country
• Usually 15-22% interest rate per annum
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 Sources of Financing
– Sovereign Guarantees
• Credit enhancement of Infrastructure project
• Increases comfort level of lenders
• State/Central Govt. IDFC
• Extensive use may lead to fiscal stress of Govt.
• RBI stipulation – sovereign guarantees to be
issued by govt. as per SDP
• Guarantees by commercial banks (initial charge
3% and annual commission 1.6 %
 Sources of Financing
• Grants/Subsidies
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– Are provided in those projects which are usually not financially

viable or sustainable with only commercial funding.
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– Grant/subsidies usually given for projects that have high
economic or environmental impacts. For example, health,
sanitation, environmental protection and other similar projects.
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– Often used for promoting new technology and institutional
development.
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– In most cases, these are public infrastructures.
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– General Sources: Government, multilateral of bilateral donor
agencies, international agencies , Foreign aids and donations etc.
– Venture Capital: Risk capital extended to start–up or small
going concerns.
– Credit: Granting of goods, services, or money in return for a
promise of future payment. Most credit is accompanied by
an interest charge, which usually makes the future payment
greater than an immediate payment would have been.
– Multilateral Agency: An institution organized by a group of
countries to promote development (e.g., the World Bank, the
IFC, and the Inter-American Development Bank).
– Bilateral Agency : An institution established by one country
to promote trade with other countries, such as an export-
import agency or an export credit agency (ECA). JBIC
(Japan), US EXIM (USA)
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 – Development Bank: A lending agency
that provides funds to encourage the
creation or expansion of productive
facilities in developing countries.
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