Project Financing

Managing and financing economic activities of large

infrastructural projects.

High cost with large volume of funds such as power stations,
fertilizer plants, satellites, oil, gas and hotel projects are some of
the infrastructural projects in which special techniques are
required to manage its finances.

Is a series of techniques for assessing risks and calculation of
cash flows generated by a project.





Loan Syndication
Is a service provided by merchant bankers for financing a
project or for working capital requirements of a company.

Financial institutions like IFCI, IDBI, ICICI, LIC, UTI, GIC and
SFCs are suppliers of finance for loan syndication.

Steps Involved:
Preparation of detailed project report by merchant bankers
Identification of lenders
Holding meetings and discussions and negotiate with lenders on
loan amount, rate of interest and other terms
Prepare a loan application and submit completed app to
financial institution
Merchant banker obtains letter of intent







Loan Syndication
Steps Involved contd:
Negotiations regarding security offered on loans are made with
financial institutions.
When loan document is complete, merchant banker assists
financial institution to disburse the loan to borrower.

Advantages:
Merchant bankers helps company to identify potential sources of
finance for taking loans for a fee.
Best Price
Disbursal of loan quickly.

Disadvantages:
Payment of fees







New Financial Institutions &
Instruments
In India, several reforms were made to strengthen financial
system after 1991.

Financial reforms were intended to move from controlled
economy to a free economy with following objectives:
Develop financial sector infrastructure
Bring about financial supervision for investor protection
Financial liberalization for moving from controlled economy to
efficient market driven economy.
Bring about improvement in quality of services and bring in
confidence amongst the savers for encouraging savings
Introduce new financial instruments for giving options to investor
Emphasize requirement of protection of investors from fraudulent
bills.


New Financial Institutions &
Instruments
Contributors to Financial System
Household sector which are suppliers of funds

Firms that are engaged in commercial activities and require
funds for carrying on business activities

Government which regulates the market through policies and
regulations and gives direction.

Financial institutions which play role of giving funds and
putting savers and investors together.

Financial instruments which facilitate transfer of money within
a country and internationally.


Book Building
New Issue market/Primary market performs functions of
providing an environment for sale and purchase of new issues.
Stock market has the function of trading in securities after new
securities are allotted and then listed with it.
Book Building is used in context of sale of a new security
offered for the first time in New Issue market before trading of
this share begins in stock market.
Process of offering shares to public in new issue market through
public demand by bidding for the shares. Based on bids, price is
discovered.
A price band is given and public is asked to bid for price within
that band.
Fairly new concept and one of the developments in financial
sector to bring about a fair and just system of issuing shares
through openness and public demand.



Depository or Paperless trading
Dematerialization of securities for electronic trading of shares is
one of the major steps for improving and modernizing stock
market and enhancing level of investor protection.

Advantages:
Eliminates risk as it does not have physical certificates.
Expedite transfer of shares through electronic transfer.
De-mat account which provides client identification number and
depository identification number.
Account statement which is similar as in case of a bank.
No Stamp duty on transfer of securities as there is no physical
transfer.
Allows a nomination facility
Automatic credit of bonus amount and other benefits of
consolidation or merger





Factoring
Is a financial service for financing credit sales in which
receivables are sold by a company to specialized financial
intermediary called factor.
Factor provides several services to a company that draws an
agreement for managing its receivables.

Parties to factoring:
Seller sells goods on credit to buyer. He gives delivery invoice
and instructs buyer to pay amount due on credit sales to his
agent or factor.
Buyer makes an agreement with seller after negotiating terms
and signing a memorandum of understanding.
Factor is a financial intermediary between buyer and seller.
He is an agent of seller. Factor pays 80% of price in advance
and receives payment from buyer on due date, then remits
balance to seller after deducting his commission.







Types of Factoring
With Recourse Factoring : factor does not take credit risks
which is associated with receivables. Factor has the right to
receive commission and his expenses for maintaining sales
ledger.

Without Recourse Factoring: Factor has to bear all losses that
arise out of irrecoverable receivables. For this he charges a
higher commission which is premium for higher risk.

Factor takes a great interest in business matters of client in this
type of factoring.






Venture Capital
Is a private equity investment fund through which funds are
borrowed by investors who have technical know how.

Venture capitalists make an agreement whereby they support
the project and fund it, in return for monetary gains,
shareholding and acquisition rights in business financed by
them.

Fist venture capital in India was established by IFCI in 1975.
Other venture capital funds in India are
IDBI Venture capital fund
ICICI venture funds management company limited






Credit Rating
Is a service provided by a credit rating agency for evaluating a
security and rating it by grading it according to its quality.

In India credit rating had its inception n 1987 with incorporation
of firsts service company named CRISIL Credit Rating
Information Services of India
Four rating agencies in India which are registered and regulated
by SEBI:
CRISIL
ICRA Investment Information and Credit Rating Agency of India
CARE Credit analysis and Research Ltd.
Duff and Phleps.





Objectives of Credit Rating
To analyze the risks of the company
Provide information to investor for selecting debt securities
Express an opinion of company by grading of debt securities
with technical expertise.






Debenture Rating Symbols Fixed Deposit Rating Symbols
AAA Highest Safety FAAA Highest Safety
AA High Safety FAA High Safety
A Adequate safety FA Adequate safety
BBB moderate safety FB Moderate safety
Commercial Paper (CP)
Is an unsecured short term negotiable instrument with fixed
maturity. Used for raising short term debt.

Is a promise by borrowing company to return loan on specified
date of payment.

Unsecured promissory note which is issued for a period of 7
days and three months.

In India CP are popularly used between 91 to 180 days.

Corporate organization can directly issue commercial papers to
investors (direct paper) or can be indirectly issued through a
bank or a dealer (dealer paper).





Certificate of Deposit (CDs)
Is a securitized short term deposit issued by banks at high rates
of interest during period of low liquidity.
Liquidity gap is met by banks by issuing CDs for short period.
In India, CDs are being issued by banks directly or through
dealers.
Are part of bank deposits and issued for 90 days but maturity
period vary acc to corporate organizations
Min issue of CDs to single investor is 10 lakh rupees.

Advantages:
Reliable
Liquidity
Flexible
Trading








International Depository Receipts
American Depository Receipts
Are a method of raising funds in America in US stock markets.
First ADR was issued in 1920 to invest in oversees markets and
to provide a base to non-USA companies to invest in stock
market in USA.
ADRs could be traded only in USA.

European Depository Receipts
EDRs are issued in Europe and denominated in European
currency.
EDRs have a small market and are not attractive instruments.
Are not well developed like ADRs and GDRs.

International Depository Receipts
Global Depository Receipts

Are a method of raising equity capital by organizations which
are in Asian countries.
Are placed in USA, Europe and Asia.
Have a low cost and help in bringing liquidity.
Govt of India allowed Indian cos to mobilize funds from foreign
markets through Euro issues of GDRs and foreign currency
convertible bonds.
Cos with good track record can issue GDRs for developing
infrastructure projects in power, telecommunications and
petroleum and in construction and development of roads,
airports and ports in India.

International Depository Receipts
Indian Depository Receipts

Are like ADRs and GDRs.
A new instrument as a source of raising finance.
Instrument provides global companies to have an entry in Indian
capital market.
Global companies can issue IDRs and raise money from India.
Although this instrument has been accepted as an international
financial instrument for raising funds, legal formalities are still
being worked out by Department of Company Affairs.

Chapter 3
Concepts in Valuation
Time Value of Money
Value of a unit of money is different in different time
periods i.e. Value of a sum of money received today
is more than its value received after sometime.

Due to reinvestment opportunities for funds which are
received early.

Since a rupee received today has more value,
rational investors would prefer current receipts to
future receipts.
Time Value of Money
Mr. X has option of receiving Rs 1000 now or one
year later. What would be his choice?

He can deposit this amount received now and earn
nominal rate of interest (3%). At the end of the year,
amount accumulates to Rs 1030.

As a rational person, he should be expected to prefer
the larger amount (Rs 1030 here).

Same principle applies to a business firm.
Relevance of Time Value of Money
Money received today is higher in value than after a
certain period because of uncertainties, inflation and
preference for current consumption and opportunities
for reinvestment to get a higher yield.

Importance of money can be analyzed for three
reasons:
Compensation for Uncertainty
Preference for Current Consumption
Reinvestment Opportunity

Techniques of Time Value of Money
Basic techniques are:
Compounding for Future Values
Discounting for present Value
Future Value
If you were to invest Rs 10,000 at 5-percent interest for one
year, your investment would grow to Rs 10,500

Rs 500 would be interest (Rs 10,000 .05)
Rs 10,000 is the principal repayment (Rs10,000 1)
Rs 10,500 is the total due. It can be calculated as:

Rs10,500 = Rs10,000(1.05).

The total amount due at the end of the investment is call the
Future Value (FV).
Compound / Future Value
In the one-period case, the formula for FV can be
written as:
FV = PV (1 + i)
n

Where PV is cash flow today (time zero), present
value
i is the appropriate interest rate for 1 period
n is the number of years
Compound / Future Value
In the multi- period case, the formula for FV can be
written as:
FV = PV (1 + i/m)
nm

Where PV is cash flow today (time zero), present
value
i is the appropriate interest rate for 1 period
n is the number of years
m is number of compounding per year
Compound Value of Annuity

Compound Value = Annuity Amount * Compound
Value Annuity Factor


FV = A * CVAF

Present Value
PV can be calculated through discounting approach.

If you were to be promised Rs10,000 due in one year when
interest rates are at 5-percent, your investment be worth
Rs9,523.81 in todays rupees.
RS 9523.81 = Rs 10000/1.05

The amount that a borrower would need to set aside today
to be able to meet the promised payment of Rs10,000 in
one year is call the Present Value (PV) of Rs10,000.

Note that Rs10,000 = Rs9,523.81(1.05).
Present Value
In the one-period case, the formula for PV can be
written as:
PV = FV/ (1 + i)
n

Where PV is cash flow today (time zero), present
value
i is the appropriate interest rate for 1 period
n is the number of years
Present Value
In the multi- period case, the formula for FV can be
written as:
PV = FV/ (1 + i/m)
nm

Where PV is cash flow today (time zero), present
value
i is the appropriate interest rate for 1 period
n is the number of years
m is number of compounding per year
Practical Applications
Valuation of Securities
Valuation of Debentures
Valuation of Preference shares
Valuation of Equity Shares