PROJECT FINANCING & RAISING PROJECT FINANCE
Subcontracts India provides project owners / sponsors / promoters a much needed project financing gateway to investors and financiers. Our project financing services are particularly beneficial to shovel ready or green shoot projects. We have the means as well as the necessary expertise to approach numerous Banks, Investment Bankers, Non Banking Finance Companies (NBFCs), Financial Institutions (FIs), Venture Capitalists (VCs), Private Equity Investors (PE), Ultra High Net Worth Individuals (UHNWIs), Family Businesses, Hedge Funds, Pension Funds, Underwriters, Insurance Providers, etc. with great speed and efficiency. We understand how these fund providers and investors work and what are their main areas of interest. Targeting the right source is not just important but also crucial for achieving successful financial close.
Subcontracts India offers:
Identification of projects with a Cash Flows Generating component and bankability potential;
Support of project development to achieve bankability;
Preparation and structure of transaction by leveraging our consulting, financial and legal expertise;
Finding the right investor and achieving financial close;
Support to the client through the project execution and construction phases.
We can be present with our services across the entire project lifecycle:
Strategy and planning: Assisting long-term planning of individual projects or a portfolio by focusing on feasibility, alignment with corporate objectives and governance procedures in order to maximize return on investment.
Financing and procurement: Raising project finance; establishing and managing the procurement process to acquire services, material or equipment to deliver the project, and prioritizing capital allocation between projects.
Project organization, execution and construction: Setting up the project for success and strengthening client capabilities to deliver on time and to budget.
Operations and maintenance: Assessing ongoing lifecycle costs and providing insights around optimizing the performance and value of assets in operation.
Asset recycling, concession maturity & decommissioning: Determining when and how to discontinue investing in an asset, and transaction advisory services for investors in infrastructure assets.
The key reasons for the underdevelopment of project financing lie in insufficient project maturity and inability to develop projects to the level necessary to achieve bankability. Access to finance is one of the main reasons that infrastructure projects are not developing faster and the key stakeholders sometimes do not see a business case for financing. Moreover, lack of know-how and competence of key stakeholders require a complex multidisciplinary approach in order to guarantee project execution.
Projects, however, are funded solely on their merits. Although we do not make claims of 100% success rate in our pursuit of project finance, with our expertise and experience, our clients enjoy a definite advantage in terms of getting their projects successfully funded. The following are extremely important for achieving successful financial closure.
Business Plan & Pitch Deck
We have been consistently endeavoring to simplify the process of raising Project Finance for the project promoters and owners across the world. While discussing Project Finance, the significance of submitting a concise yet profoundly informative Project Proposal or Business Plan cannot be overestimated. Fund Providers as well as investors want to see a business plan that is short enough to engage investor interest and yet long enough to cover all vital project information.
We realize that it is not easy to put a winning Business Plan in place unless the Business Plan writer has been thoroughly acquainted with the project right from its inception. There are numerous consultants who would accept any Business Plan compiled by anyone. However, we generally do not. Project Finance is a challenging task and our experts would like to do it in a highly evolved manner so that chances of successful financial closure is extremely high. We accept a Business Plans compiled by either a competent project management team or a professional financial services provider with history of handling financial modelling for projects. Financial modeling combines accounting, finance, and business metrics to create an abstract representation of a company in Excel and has a wide range of uses, including making business decisions at a company, making investments in a private or public company, pricing securities, or undergoing a corporate transaction such as a merger, acquisition, divestiture, or capital raise.
We also need a Pitch Deck. A pitch deck is a brief presentation, often created using PowerPoint, Keynote or Prezi, used to provide your audience with a quick overview of your business plan with visual enhancements such as graphs, charts, and pictures. You will usually use your pitch deck during face-to-face or online meetings with potential investors, customers, partners, and co-founders.
Financial modeling, often considered synonymous to financial statement forecasting, is an effective tool for providing a clear picture of the forecasted financial performance of a company. The process results in the construction of a mathematical model that assists in firm’s decision making as well as financial statement analysis. The importance of financial modeling is mainly rooted in its capability to enable better financial decisions within a firm. It is widely used by organizations for the purpose of future planning. By simulating the impact of important variables, financial modeling allows for scenario preparation so that organization knows its course of action in various situations that may arise.
Financial modeling also plays an important role in capital budgeting. Not only does it make financial statement analysis and resource allotment for the next big investment easier, but it also helps in determining the cost of capital. It provides a thorough analysis of debt/equity structure for this purpose, along with the returns expected by investors.
We realize forecasting a company’s operations into the future can be very complex since each business is unique and requires a very specific set of assumptions and calculations. We will then focus on the following:
Historical data – input at least 3 years of historical financial information for the business.
Ratios & metrics – calculate the historical ratios/metrics for the business, such as margins, growth rates, asset turnover ratio, inventory changes, etc.
Assumptions – continue building the ratios and metrics into the future by making assumptions about what future margins, growth rates, asset turnover, and inventory changes will be going forward.
Forecast – forecast the income statement, balance sheet, and cash flow statement into the future by reversing all the calculations you used to calculate historical ratios & metrics. In other words, use the assumptions that you made to fill in the financial statements.
Valuation – after the forecast is built, the company can be valued using the Discounted Cash Flow (DCF) analysis method.
The structuring of project financing is a framework in which ownership structure, project structure, risk structure, and financial structure decisions are made and tied together in the project's legal structure which, in turn, forms a foundation for funding the project on a limited recourse basis. The ownership structure is how the special purpose company/vehicle (SPC/SPV) is organized; that is, as a corporation, unincorporated joint venture, limited liability partnership, etc. Project structure on the other hand refers to the agreements defining responsibilities and transfer of rights and/or ownership of the SPC/SPV such as build, operate, and transfer of ownership (BOT), build, own, operate, and transfer (BOOT), build, lease, and transfer (BLT), etc.
Risk structure is the prioritization and mitigation of risks after the identification, assessment, and allocation process is completed. The project's legal structure is the web of contracts and agreements negotiated to make financing possible. Financial structure refers to the mix of financing used to fund a project, which includes equity, short‐ and long‐term loans, bonds, trade credits, etc. and the cash flows to equity providers and the lenders.
A special purpose vehicle (SPV) project company with no previous business or record is necessary for project financing. The company’s sole activity is carrying out the project by subcontracting most aspects through construction contract and operations contract. Because there is no revenue stream during the construction phase of new-build projects, debt service is possible during the operations phase only. For this reason, parties take significant risks during the construction phase. Sole revenue stream is most likely under an off-take or power purchase agreement. Because there is limited or no recourse to the project’s sponsors, company shareholders are typically liable up to the extent of their shareholdings. The project remains off-balance-sheet for the sponsors and for the government.)
Project Risk Identification, Analysis, Mitigation, and Allocation
We assist our clients with arriving at a comprehensive risk management strategy. The core of Project Finance is the analysis of project risks, namely construction risk, operating risk, market risk, regulatory risk, insurance risk, and currency risk. There are risks related to the pre-completion phase such as activity planning risk, technological risk, and construction risk or completion risk. Then there are risks related to the post-completion phase such as supply risk, operating risk, and demand risk. And then there are risks related to both phases such as interest rate risk, exchange risk, inflation risk, environmental risk, regulatory risk, political risk, country risk, legal risk, and credit risk or counterparty risk. These risks are allocated contractually to the parties best able to manage them. The process of risk management is usually based on the following interrelated steps:
risk transfer and allocation;
residual risk management;
Essential to structuring a project finance package are the crucial elements of successful identification, analysis, mitigation and allocation of project risks. These risks are related to events that could endanger the project during development, construction and operation.
During the development stage the main risk is rejection by the host government or by the financiers – for reasons including commercial weakness, failure to obtain licenses, permissions and clearance. Sponsors can hedge their risks by obtaining technical assistance grants for project preparation and planning.
During the construction stage the main risk is failure to complete the project with acceptable performance levels and within an acceptable time frame and budget. Sponsors can hedge construction risks by purchasing various forms of insurance and obtaining guarantees from contractors with regard to costs, completion schedule and operational performance.
After construction, the main risk is ongoing operations and performance and include technical failures, availability of funds, market demand, prices, foreign exchange rates or environmental issues. The sponsors can hedge these risks through contractual and guarantee agreements that transfer some of the risk to other parties.
Realizing Benefits Of Project Finance
Financing projects through the project finance route offers various benefits such as the opportunity for risk sharing, extending the debt capacity, the release of free cash flows, and maintaining a competitive advantage in a competitive market. Project finance is a useful tool for companies that wish to avoid the issuance of a corporate repayment guarantee, thus preferring to finance the project in an off-balance sheet manner. The project finance route permits the sponsor to extend their debt capacity by enabling the sponsor to finance the project on someone's credit, which could be the purchaser of the project’s outputs. Sponsors can raise funding for the project based simply on the contractual commitments.
Project finance also permits the sponsors to share the project risks with other stakeholders. The basic structure of project finance demands that the sponsors spread the risks through a network of security arrangements, contractual agreements, and other supplemental credit support to other financially capable parties willing to assume the risks. This helps in reducing the risk exposure of the project company.
The project finance route empowers the providers of funds to decide how to manage the free cash flow that is left over after paying the operational and maintenance expenses and other statutory payments. In traditional corporate forms of organization, corporate management decides on how to use the free cash flow — whether to invest in new projects or to pay dividends to the shareholders. Similarly, as the capital is returned to the funding agencies, particularly investors, they can decide for themselves how to reinvest it. As the project company has a finite life and its business is confined to the project only, there are no conflicts of interest between investors and the management of the company, as often happens in the case of traditional corporate forms of organization.
Financing projects through the project finance route may enable the sponsors to maintain the confidentiality of valuable information about the project and maintain a competitive advantage. This is a benefit of raising equity finance for the project (however, this advantage is quite limited when seeking capital market financing (project bonds). Where equity funds are to be raised (or sold at a later time so as to recycle capital) through market routes (for example, Initial Public Offerings [IPOs]), the project-related information needs to be shared with the capital market, which may include competitors of the project company/sponsors. In the project finance route, the sponsors can share the information with a small group of investors and negotiate the price without revealing proprietary information to the general public. And, since the investors will have a financial stake in the project, it is also in their interest to maintain confidentiality.
In spite of these advantages, project finance is quite complex and costly to assemble. The cost of capital arranged through this route is high in comparison with capital arranged through conventional routes. The complexity of project finance deals is due to the need to structure a set of contracts that must be negotiated by all of the parties to the project. This also leads to higher transaction costs on account of the legal expenses involved in designing the project structure, dealing with project-related tax and legal issues, and the preparation of necessary project ownership, loan documentation, and other contracts.
Understanding The Dynamics Of Project Financing
From a broad perspective and general analysis, the financial viability (or commercial feasibility) of the project is assessed by determining whether the net present value (NPV) is positive. NPV will be positive if the expected present value of the free cash flow is greater than the expected present value of the construction costs. However, in addition to or in lieu of the NPV, lenders will use debt ratios such as the Debt Service Cover Ratio (DSCR) and Life Loan Cover Ratio (LLCR) as the main ratios to measure bankability.
The DSCR measures the protection of each year’s debt service by comparing the free cash flow (more precisely, the cash flow available for debt service – CFADS) to the debt service requirement. The DSCR requires that the cash flow available for debt service is at least a specified ratio (for example, 1.2 times) of the scheduled debt service for the relevant year. The LLCR compares the overall amount of free cash flow projected for the life of the loan, duly discounted with the amount of debt under analysis. The LLCR also reflects the capacity of the SPV to meet the debt obligations over the life of the loan (considering potential re-structuring).
On the basis of the projected cash flows of the SPV, including the debt profile under analysis, lenders and their due diligence advisors will observe the value of such ratios, and accommodate the debt amount so as to meet them, considering the maximum term at which they are ready to lend. Subsequently, they will run sensitivities analysis (including break-even analysis) on the project cash flows to test the resistance of the project to adverse conditions or adverse movements of the free cash flow figures from the base case.
In determining financial viability, and related to the reliability of cash flows and the guarantees offered by the contract (especially termination provisions), the lenders will analyze the risk structure of the contract. This will include determining how achievable the performance standards in government-pays projects, or the contractual guarantees in user-pays projects, actually are.Lenders will exercise tight control of all cash flows, limiting the ability of the private partner to dispose of them — through “covenants” (for example, no distributions may be made if the actual DSCR of the previous year has not meet a certain threshold). The bank accounts through which cash flows pass will be pledged and held with a bank within the syndicate; this is in addition to other provisions to be adapted in the loan agreement.
How Project Financing Solutions By Subcontracts India Helps
Project Finance is one of the key focus areas for Subcontracts India. We have access to several project financing groups and institutions that have institutionalized capabilities to successfully manage the unique and multidimensional process of project finance transactions led by customized project structuring approach.
These groups and institutions have been the lead arrangers and underwriters of a significant amount of project debt over the years. In the Indian project finance domain, they enjoy a leadership position and are acknowledged for their comprehensive domain expertise and knowledge in the infrastructure, manufacturing and mining sectors, having ensured timely financial closure of several big ticket projects.
Whether you're investing in renewable energy, telecommunications or water supply and waste water treatment – we develop the right solution for sustainably viable, flexibly structured financing to meet the needs of your transaction.
Backed by in-depth expertise you can benefit from our wide network in emerging and developing countries, our comprehensive knowledge of sectors and industries, and our 21 locations across North America, Europe, Asia, Africa, Oceania and Latin America.
How Does One Apply For Project Finance
Once you have contacted us and shared your requirement for raising project finance, we will send you our FINANCIAL ADVISORY SERVICES TERMS AND CONDITIONS (FASTC) to review carefully. If and when you agree to our FASTC, you will receive the Client Agreement draft which you will have to fill, sign and return to us. Subsequently, you will need to submit relevant information pertaining to your project through our online Project Finance Application Form.
Our services do not come for free and hence be prepared to pay our service charges when you decide to use them. Also, we are rather choosy about who we serve. We encourage only serious clients who understand what it takes to arrange finances for projects. Our seamless services start with our client sending us a formal Letter of Intent expressing his/her desire to hire our services and then following this up by entering into a formal service agreement with us and depositing the token Engagement Fee online prior submitting the Project Finance Application Form which is non refundable. That is not all. You would be further liable to pay a Success Fee (case specific) post successful closure of funding.
What Happens Next
Our analysts evaluate projects individually, so if you have more than one project, you should complete one copy of the form for each project for which you are seeking funding. Once your Project Finance Application Form is received by us, our analysts will review the submitted Business Plan in detail and quickly evaluate whether it is good enough to move to the next stage.
If our analysts determine that your project is unlikely to meet our criteria, we will quickly contact you, usually within a day or two, to inform you the areas of the Business Plan that needs further working.
However, if our analysts determine that your project Business Plan is bankable, we will immediately get in touch with you for further discussions to finalize the project financing strategy.
Once the above have been taken care of, we move forward and present your Business Plan to target investors/financiers.
Important To Note:
We quickly respond to all inquiries.
We do not delegate executive time to an inquiry until your project, as expressed in your fully completed Project Finance Application form, has been thoroughly evaluated by our analysts.
To ensure our executives do not waste time on unrealistic inquiries we do not enter discussions in any form until we have a full understanding of your project's potential and risks. We therefore do not offer meetings, hold telephone discussions or return telephone calls until we have thoroughly evaluated your project.
Please do not send us additional communications during the application phase as it delays the application process.
We do not finance projects valued at less than $5,000,000.00 (United States Dollars five million), we do not finance acquisitions and we do not finance projects in countries mentioned in this Restricted Nations list
All our official communications are in English. We do not offer a translation service.
Upon receipt of all the documents and information submitted by the applicant, a Funder would evaluate the project in greater detail. Generally an Appraisal meeting is convened where all the decision makers at the Funding Company officially review the project as presented to determine if the project is within their scope of funding. Subsequent to this meeting, a due diligence of the project is generally undertaken by the Funder and the the Project Sponsors/Applicant pay(s) for the expenses involved in carrying out the due diligence. Such expenses are project specific .
Financial Due Diligence
Financial due diligence requires that, during loan preparation and processing, sufficient analysis is undertaken to enable an informed assessment to be made with respect to project financial viability and long-term sustainability, and that the borrowers’ financial and project management systems are, or will be, sufficiently robust to ensure that funds are used for the purpose intended and that controls will be in place to support monitoring and supervision of the project.
There are Guidelines that provide the framework for financial due diligence, namely completion of a financial management assessment (FMA) of the executing agency (EA) and/or implementing agency (IA), financial evaluation of the project, and assessment of implementation arrangements (from a financial perspective, including disbursement and auditing arrangements).
The methodology note provides specific guidance in four primary aspects of financial due diligence:
financial management assessment,
project cost estimates and financing plan,
financial analysis, and
It also provides guidance on assessing disbursement auditing arrangements. This financial due diligence methodology note offers a suggested approach for operationalizing the standard project preparation and loan processing requirements of the Guidelines. the Guidelines, together with the methodology note, should be seen as a reference guide to assist staff in conducting an appropriate degree of financial due diligence during project preparation and processing, and should guide staff in determining the appropriate level of financial management safeguards required for a given project and/or EA and/or IA. The advice, directions, and recommendations provided should not be regarded as a substitute for the professional judgment of SUBCON staff.
Financial Management Assessment
Effective financial management within the EA and/or IA is a critical success factor for project sustainability, both in the effective use of funds and in the safeguard of assets once created. Irrespective of how well a particular project or program is designed and implemented, if the EA and/or IA does not have the capacity to effectively manage its financial resources, the benefits of the project are unlikely to be sustainable.
The objective of the financial management assessment (FMA) is to ensure that the EA and/or IA has, or will have, sufficiently strong and robust financial management systems and procedures in place to ensure sustainability of project investments and benefits over time.
The FMA is a review of the entity’s systems for financial and management accounting, reporting, auditing, and internal controls. It also involves an assessment of the entity’s disbursement and cash flow management arrangements, and governance and anticorruption measures. The FMA is not an audit; it is a review designed to determine whether or not the entity’s financial management arrangements are sufficient for the purposes of project implementation.
Approach and Methodology
The first step is to determine whether an FMA has recently been completed by any other credible financial institution (Bank, NBFC, VC or PE agencies) , the objective being to avoid duplicating diagnostic work that already exists. If an FMA exists, this should be reviewed and, in particular, any work done to overcome previously identified weaknesses should be checked. The original FMA can then be updated accordingly.
While planning to rely on the work of another lender , SUBCONTRACTS INDIA would thoroughly review the agency’s assessment report to determine whether or not the results of the FMA are reasonable and can be accepted by SUBCONTRACTS INDIA.
If an FMA has never been completed, or if there have been significant on-ground changes which render an existing FMA obsolete, then the following approach to the FMA is recommended:
Review the Economic Sector diagnostic studies specific to the country where the project is located, including the country financial accountability assessment, country procurement assessment report, country governance assessment, and diagnostic study on accounting and auditing.
Early in project preparation, have the borrower/project promoter complete a Financial Management Assessment Questionnaire (FMAQ).
Review responses to the FMAQ, determine what (if any) additional information is required in order to be able to conclude whether or not the financial management arrangements (a) are capable of recording all transactions and balances, (b) support the preparation of regular and reliable financial statements, (c) safeguard the entity’s assets, and (d) are subject to audit.
Review past audit reports and audit management letters to assess what concerns have previously been raised on systems and internal controls.
Form a conclusion with respect to whether or not the financial management arrangements and financial and project accounting systems can be relied upon for the purposes of the project.
If issues and/or weaknesses are identified, determine the most appropriate mitigation measures (e.g., restructuring finance sections, increasing finance staff, filling vacant posts, developing new systems, developing financial reporting, training, etc.).
Determine whether, given the findings, it is necessary to include a project component to strengthen financial management in the EA and/or IA and/or establish or strengthen a project implementation or project management office via either technical assistance or consultant support within the project.
Due Diligence service is rendered by an accredited Due Diligence service provider appointed by the Funding Partner Company. Due Diligence is by far the most important exercise in the funding consideration process.
The charges for the Due Diligence are to be borne by the applicant. These charges are specific for every case and the applicant is given prior notice of this.
It is extremely important that the applicant understands clearly the processes of Due Diligence is to secure a successful transaction and mutual business relationship between the applicant and the Funding Partner Company.
The Funding Partner Companies provide finance to viable projects on precise terms. There are no general terms. Everything is specific to the project under consideration.
Once the Due Diligence is successfully completed, a Funding Offer is officially made from Funding Partner Company to the applicant (Project Owner(s)/ Promoter(s)). The Project Owner(s)/Promoter(s) are issued an Invitation Letter for a table meeting in the Funding Partner Company’s office which can be in any country. Post a personal interview of the project owner(s)/promoter(s) ,the MOU is drafted and signed. Insurance requirements too would be discussed and finalized at this meeting.
Post successful completion of all of the above processes, funding disbursement would commence within the specified time frame .
We specialize in financing projects in the sectors listed below. However, this list is not an exhaustive one.
INFRASTRUCTURE & PPP
Infrastructure projects such as roads, railways, airports, seaports, bridges, tunnels, power transmission, telecom networks, storage tanks, pipelines, irrigation, warehouses, cold storage, etc. are generally developed in the PPP (Public Private Partnership) model and involves a number of very complex legislation as well as financing challenges. However, these draw a lot of investor interest given the large sizes of such projects.
Energy projects (both renewable as well as non-renewable) such as solar PV and solar thermal power plants, wind turbines, waste-to-energy power plants, biomass power plants, hydroelectric power plants, thermal (coal as well as gas fired) power plants, geothermal power plants, nuclear energy power plants as well as other alternative energy projects are among the most favored for project financing.
REAL ESTATE & HOUSING
Developing low cost public housing is a growing need around societies across the world and governments as well as Financial organizations have come support such projects in increasing numbers. Urbanization upswing can be seen across the emerging nations and an accompanying demand for commercial and office spaces, apartments, luxury villas.
TOURISM & HOSPITALITY
Tourism has come to be a priority industry across the world due to its sustainable nature and socio-cultural importance. The ability of this industry to generate economic growth and employment is immense. Hotels, Resorts, Restaurant Chains, Speciality Spas, Entertainment Parks, Boutique chains, Private Beaches, Beach Properties, Travel Operations, Tourist Centers, Recreation Facilities provide the infrastructure required for a flourishing Tourism Industry and hence provide a massive need as well as scope for Project Financing.
HEALTHCARE, PHARMA & BIO-MEDICAL
Healthcare is a universal and mushrooming industry across the globe. Pharmaceutical research and Manufacturing facilities, Speciality Hospitals, Care Homes, Medical Training Centers, Diagnostic Centers, Pathological Laboratories, Medical Equipment Manufacturing facilities etc.are intrinsic part of a better healthcare environment. Projects supporting development of these facilities require finance and investors find these an attractive destination for the near term as well as long term term investment horizon.
EDUCATION / INSTITUTIONS
A growing number of Schools, Colleges, Universities, Vocational and Skill Development Training Centers, Automotive Training Institutes, Research Facilities, etc., are required to educate and train the citizens. This has an ever increasing potential and requires massive financial inputs to build and operate the supporting infrastructure of this sector. Human Development Index is an extremely important part of development and hence good projects are required which in turn fuels the need for project financing in this sector.
OIL AND GAS UPSTREAM
Upstream oil and gas production and operations identify deposits, drill wells, and recover raw materials from underground. They are also often called exploration and production companies. This sector also includes related services such as rig operations, feasibility studies, machinery rental, and extraction of chemical supply. The sector draws large high risk high returns investments.
OIL & GAS MIDSTREAM
Midstream operations link the upstream and downstream entities, and mostly include resource transportation (by pipeline, rail, barge, oil tanker or truck) and storage services for resources, such as offshore tanks and reservoirs and gathering systems. Each segment of this sector invites huge investments. This is a less riskier than upstream investment with steadier returns.
OIL & GAS DOWNSTREAM
This sector of the oil and gas industry is represented by refiners of petroleum crude oil and natural gas processors, who bring usable products to end users and consumers. They also engage in the marketing and distribution of crude oil and natural gas products. Companies engaged in the downstream process include oil refineries, petroleum product distributors, petrochemical plants, natural gas distributors, and retail outlets.
The petrochemicals industry is competitive, involves significant technological innovation, is capital intensive and operates in a global product market. In terms of production volumes the industry represents approximately 10% of the total petroleum industry. On the basis of product value, however, the petrochemicals industry represents a larger share of the total industry, reflecting the higher value of petrochemical products compared to fuels
Fertilizer is a key ingredient in feeding a growing global population, which is expected to surpass 9.5 billion people by 2050. Half of all food grown around the world today, for both people and animals, is made possible through the use of fertilizer. As demand continues to grow, farmers around the world will continue to rely on fertilizer to increase production efficiency to produce more food while optimizing inputs. Growing demand continues drawing investment capital into this industry.
Manufacturing Industry is by far the largest sector in terms of varieties. Anything that needs mass production fits the bill. Be it cement, steel, consumer electronics, apparel, processed food and beverages, medicines, cosmetics, toiletries, furniture, utensils, packaging, paper, etc. The list is just endless. To support the manufacturing process, large capital is required and this fuels the evergrowing demand for capital investment. Viable projects with good bankability would always find interested investors in this sector.
TECHNOLOGY & IT
Technical projects have their own unique set of needs and challenges. New technology must be researched, downtime must be kept to a minimum, and the organization must be helped to adapt to the change. The goal of technology projects is to agree on the one way a process will be performed at all times. Integration between technologies is essential. Integration needs to be planned and tested based on agreed processes and detailed requirements.
SPORTS & FITNESS
Increasing support provided by governments and promoters have seen the emergence of sports as a full time career option for many. This has facilitated the need for providing adequate infrastructure to sporting activities. There is big money involved in sports with increasing number of brands associating themselves with sports and fitness. Large scale sports infrastructure has started drawing unprecedented investor interest. We help projects to source required capital to finance them.
Amusement park features various attractions, such as rides and games, as well as other events for entertainment purposes. A theme park is a type of amusement park that bases its structures and attractions around a central theme, often featuring multiple areas with different themes. These parks are stationary and built for long-lasting operation. Well presented amusement part projects with a robust ROI draws lot of investor interest.
FOOD & AGRICULTURE
Growing urbanization has entailed the emergence of large consumption hubs and at the same time shrinking land availability for agriculture and farming activities. Newer technologies such as GM crops, Captive Farming, Hydroponics, Aquaponics, Polyhouse or Greenhouse farming, Vertical Farming have emerged to augment the supply requirements of a growing population. Lerge investments are flowing into this sector.
LOGISTICS & SUPPLY CHAIN
Logistics and Supply Chain Management are used interchangeably these days. Logistics is generally seen as a differentiator in terms of the final bottom line of a typical “hard and tangible goods” organization; enabling either a lower cost or providing higher value. Logistics cover the broad functional areas: network design, transportation and inventory management. Projects in this sector have seen explosive growth recently and this trend would continue into the foreseeable future.
Broadly speaking, humanitarian projects aim to help people who are suffering the effects of environmental disasters and hardship. These projects will form part of the relief effort, working to mitigate ongoing effects, support the people affected, and put in place long term plans to ensure a brighter future. This means humanitarian projects may vary significantly in their goals, depending on the problem at hand.
PROJECT FINANCING IN INDIA
General Regulatory Framework:
Depending upon the nature of the project finance undertaken, following legislations may apply:
1.The Reserve Bank of India Act 1934 and guidelines, notifications issued in connection with the same.
2.The Banking Regulation Act 1949.
However in following cases, financing availed is governed by their respective legislation:
In case of external commercial borrowings (ECB), Foreign Exchange Management Act 1999 prevails read with the:
· Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations 2000.
· Foreign Exchange Management (Borrowing or Lending in Rupees) Regulations 2000.
In case of Project funding where equity or quasi-equity instruments are used by non-residents:
· Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations 2000 of the RBI.
· The foreign direct investment (FDI) policy issued from time to time by the Department of Industrial Policy and Promotion (DIPP).
Apart from the general regulatory framework, following material laws should also be taken into consideration:
- Companies Act 2013-regulates matters related to procedural compliances, registration of charge on company’s assets, conversion of debt into equity and in relation to availing of loans and creation of security by companies.
- Indian Contract Act 1872-governs contracts which include security documents .and loan agreements.
- Transfer of Property Act 1882-regulates procedure and creation for enforceability of security over immovable property.
- Securitizations and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI)- regulate enforceability of security for recovering However these benefits do not prevail to foreign creditor except to that of Asian Development Bank and related International Finance Corporation.
- Insolvency and Bankruptcy Code 2016- It covers partnerships, companies, individuals in relation to bankruptcy and insolvency legislations
- Code of Civil Procedure 1908 (CPC)-governs procedure for resolving disputes and civil court proceedings to be used by the creditors for enforcement of security and recovery proceedings.
Apart from above, India has also entered into international treaties that influence cross-border project financing transactions like Free trade, Comprehensive Economic Partnership and Co-operation Agreements, Preferential Trade Agreements etc
Project Financing Participants and Agreements
Sponsor/Developer: The sponsor(s) or developer(s) of a project financing is the party that organizes all of the other parties and typically controls, and makes an equity investment in, the company or other entity that owns the project. If there is more than one sponsor, the sponsors typically will form a corporation or enter into a partnership or other arrangement pursuant to which the sponsors will form a "project company" to own the project and establish their respective rights and responsibilities regarding the project.
Additional Equity Investors: In addition to the sponsor(s), there frequently are additional equity investors in the project company. These additional investors may include one or more of the other project participants.
Construction Contractor: The construction contractor enters into a contract with the project company for the design, engineering, and construction of the project.
Operator: The project operator enters into a long-term agreement with the project company for the day-to-day operation and maintenance of the project.
Feedstock Supplier: The feedstock supplier(s) enters into a long-term agreement with the project company for the supply of feedstock (i.e., energy, raw materials or other resources) to the project (e.g., for a power plant, the feedstock supplier will supply fuel; for a paper mill, the feedstock supplier will supply wood pulp).
Product Off taker: The product off taker(s) enters into a long-term agreement with the project company for the purchase of all of the energy, goods or other product produced at the project. Lender: The lender in a project financing is a financial institution or group of financial institutions that provide a loan to the project company to develop and construct the project and that take a security interest in all of the project assets.
Stages in Project Financing
Pre Financing Stage
Risk Identification & minimizing
Technical and financial feasibility
Negotiation and syndication
Commitments and documentation
Post Financing Stage
Monitoring and review
Financial Closure / Project Closure
Repayments & Subsequent monitoring
Preparation of Project Report
A Project Report is essential before a decision for setting-up of any project is taken. The most important thing in any project financing is preparation of Detailed Project Report (DPR) which should be made beautifully for getting the project approved from banks/financial institutions. After preparation of DPR the proposal is moved to the banks/financial institutions for processing of the file. Project Report must include the followings:
All the factors relating to infrastructure needs, technology, availability of machine, material etc. are required to be scrutinized under this head. Broadly speaking the factors that are covered under this aspect include:
1. Availability of basic infrastructure- It includes the land and its location as per present and future needs, lay out and building plan including finalization of structure, availability of water and power, availability of cheap labour in abundant supply.
2. Licensing/ registration requirements
3. Selection of technology/ technical process- The technical process/technology selected for the project must be readily available either indigenously or necessary arrangements for foreign collaboration must be finalized. Further the selected technology must find a successful application in Indian environment and the management shall be capable of fully absorbing the technology.
4. Availability of suitable machinery/ raw material/ skilled labour etc- After selection of technical process, the availability of suitable kind of machinery is most important factor which needs to be considered. It should be ensured that the suppliers are capable to supply the plant and machinery timely along with all spare parts
The ultimate success of even well-conceived and viable project may depend on how competently it is managed. The promoters of the project have to provide necessary leadership and their qualification, experience and track record will be closely examined by lending institution. The detail of other projects successfully implemented by the same promoters may provide the necessary confidence of these institutions and help final approval of the project.
The reputation of the promoters group in the market is also very important factor which the banks/ financial institutions consider while lending to the companies. Also the bank/ financial institutions check the payment history of past loan raised by the companies in which the promoters are directors which shows their willingness of repayment of the loans. CIBIL is a very strong tool in the hand of banks/ financial institutions to verify the payment history and the number of loans raised by the companies from the date of existence.
Any project can be commercially viable only if it is able to sell its product at profit. For this purpose it would be necessary to study demand and supply pattern of that particular product to determine its marketability. Various methods such as trend method, regression method for estimation of demand are employed which is than to be matched with the available supply of a particular product.
Factors to be considered for financial viability:
Cost of project: A realistic assessment of cost of project is necessary to determine the source for its availability and to properly evaluate the financial viability of the projects. For this purpose, the various items of cost may be sub-divided as many sub-heads as possible so that all factor are taken into consideration for arriving at the total cost.
Cost includes the following:
a. Land Cost- Acquisition of project land, registry charges, and charges for other clearance.
b. Site Development Cost- to make the project easily accessible it is necessary to build roads, water tank, boundary walls, arranging electricity, levelling the site, demarcation of site, making available the basic amenities etc.
c. Buildings Cost- it includes lay out and building plan along with the structure cost, building the site office, factory sheds, godowns, residential flats for staff etc.
d. Plant and Machinery- cost of plant and machinery, any foreign assistance for installation, salary of technical staff, transportation cost, foreign currency fluctuations (if any), bank commissions, L/C Charges etc.
e. Miscellaneous Fixed Assets
f. Preliminary Expenses- licence required to start commercial production from the local authorities along with other clearances etc.
g. Contingencies- normally 5% extra cost is taken as contingency to avoid any kind of cost over-run at the end of implementation of project.
h. Margin for Working Capital- for running a project it is necessary to fuel it with the working capital. It works like a lubricant for any kind of business. It is financed against receivables and stock. A proper assessment of the same should be done. Banks now generally require that 25% of the total current assets (working capital) shall be the margin to be provided from the long term resources and 75% shall be financed by them.
Means of Finance: After estimation of the cost of the project, the next step will be to find out the source of funds by means of which the project will be financed. The project will be financed by contribution of funds by the promoter himself and also by raising loans from others including term loans from banks and financial institutions.
The means of financing will include:
1. Issue of share capital including ordinary/preference shares.
2. Issue of secured debentures.
3. Secured long-term and medium-term loans (including the loans for which the application is being put up to term lending institutions).
4. Unsecured loans and deposits from promoters, directors etc.
5. Deferred payments.
6. Capital subsidy from Central/State Government.
Security Coverage and Promoters Contribution: In today scenario and being to play safe, the bankers wants that at least the promoters should contribute 40% of the total project cost. The long term sources of funds are utilized for acquisition of land, procuring the fixed assets and construction of building etc. But for day to day expenses, payment of staff salary, purchasing the stocks etc. the project require short term loan or working capital loans. Hence the financing for a project is the mix of both long term and short term loans. In project funding the bank has charge on the land, building, any super structure thereof and hypothecation of stocks & receivables and all the current assets relating to project. It is considered as primary security but the bankers may ask for collaterals also in addition to the primary security.
Profitability Analysis: After determine the cost of the project and means of financing, the viability of the project will depend on its capacity to earn profits to service the debts and capital. To undertake the profitability analysis, it will be necessary to draw estimates of the cost of production and working results. These estimates are made for a period which should at least cover the moratorium and repayment periods. Generally in case of project loans repayment begins after 2-3 years, the time gap between the disbursement of loan and repayment of first installment is called moratorium period. Further repayment should start in that quarter or month when it is assured that the project will have sufficient cash profit to service the same in that particular quarter or month. Also, the moratorium and repayment period is decided while submitting the proposal to the banks hence while selecting these periods’ accurate calculations should be done.
Projected Balance Sheet, Profit and Loss Account and Projected Cash Flow: The projected financials of the project is prepared for the entire tenure as estimated above.
Break-Even Point: Estimations of working results pre-suppose a definite level of production and sales and all calculations are based on that level. The minimum level of production and sales at which the unit will run on “no profit no loss” is known as break-even point and the first goal of any project would be to reach that level. The break-even point can be expressed in terms of volume of production or as a percentage of plant capacity utilization. Break-even in terms of volume of production = Total Fixed Cost/ Contribution per unit
Debt Service Coverage Ratio (DSCR): Debt Service Coverage Ratio is calculated to find out the capacity of the project servicing its debt i.e. in repayment of the term loan borrowings and interest. The DSCR is worked out in the following manner: D.S.C.R = (PAT + Depreciation + Interest on Long Term Borrowings) / (Repayments of Term Borrowings during the year + Interest on long-term borrowings) The higher D.S.C.R. would impart intrinsic strength to the project to repay its term borrowings and interest as per the schedule even if some of the projections are not fully realized. Normally a minimum D.S.C.R. of 2:1 is insisted upon by the term lending institutions and repayment is fixed on that basis.
Sensitivity Analysis: While evaluating profitability projections, the sensitivity analysis may be carried in relation to changes in the sale price and raw material costs, i.e. sale price may reduce by 5% to 10% and raw material costs may be increased by 5% to 10% and the impact of these changes on DSCR shall be analyzed. If the new DSCR, so calculated after changes, still proves that the project is viable, the financial institution may go ahead in funding the project.
Internal Rate of Return: This is an indicator of earning capacity of the project and a higher IRR indicates better prospects for the project. The present investment in the cash flow which is assumed to be negative cash flow and the return (cash inflow) are assumed to be positive cash flows. Normally bankers want that internal rate of return should be at least 18% because it depicts the strength of the project and its earning and repayment capacity at the same time. Better the IRR better rating to the project.
Environmental, Political and Economic Viability
The performance of the project is also influenced by the external factors also such as existing government policies regarding particular sector, easiness in getting the licence to operate in a particular region or state, effects of the project on the environment, tax exemptions for particular region etc. Hence while compiling the project report it is important to study the industry scenario, government policies etc and these should be covered in the project report.
Project Appraisal is a process of detailed examination of several aspects of a given project before recommending the same. The lending institution has to ensure that the investment on the proposed project will generate sufficient returns on the investments made and that loan amount disbursed for the implementation of the project will be recovered along with interest within a reasonable period of time. The various aspects of Project appraisal are:
1. Technical Appraisal
2. Commercial Appraisal or Market Appraisal (Demand of the product, supply of the product, distribution channels, pricing of the product and government policies.
3. Economic Appraisal
4. Management Appraisal (assessing the willingness of the borrower to repay the loan)
5. Financial Appraisal
Methods of the Project Financing
There are three methods in Project Financing:
1. Cost Share Financing or Low interest loan financing.
2. Debts Financing.
3. Equity Financing.
Sources for Financing Fixed Assets
The type of funds required for acquiring fixed assets have to be of longer duration and these would normally comprise of borrowed funds and own funds. There are several types of long term loans and credit facilities available which a company may utilize to acquire the desired fixed assets. These are briefly explained as under.
1. Term Loan :-
(a) Rupee loan- Rupee loan is available from financial institutions and banks for setting up new projects as, well as for expansion, modernisation or rehabilitation of existing units. The rupee term loan can be utilised for incurring expenditure in rupees for purchase of land, building, plant and machinery, electric fittings, etc. The duration of such loan varies from 5 to 10 years including a moratorium of up to a period of 3 years. Projects costing up to Rs. 500 lakhs are eligible for refinance from all India financial institutions and are financed by the State level financial institutions in participation with commercial banks. Projects with a cost of over Rs. 500 lakhs are considered for financing by all India financial institutions. They entertain applications for foreign currency loan assistance for smaller amounts also irrespective of whether the machinery to be financed is being procured by way of balancing equipment, modernisation or as a composite part of a new project. For the convenience of entrepreneurs, the financial institutions have devised a standard application form. All projects whether in the nature of new, expansion, diversification, modernisation or rehabilitation with a capital cost upto 5 crores can be financed by the financial institution either on its own or in participation with State level financial institutions and banks.
(b) Foreign Currency term loan- Assistance in the nature of foreign currency loan is available for incurring foreign currency expenditure towards import of plant and machinery, for payment of remuneration and expenses in foreign currency to foreign technicians for obtaining technical knowhow. Foreign currency loans are sanctioned by term lending institutions and commercial banks under the various lines of credits already procured by them from the international markets. The liability of the borrower under the foreign currency loan remains in the foreign currency in which the borrowing has been made. The currency allocation is made by the lending financial institution on the basis of the available lines of credit and the time duration within which the entire line of credit has to be, fully utilised.
2. Deferred payment guarantee (DPG)
Assistance in the nature of Deferred Payment Guarantee is available for purchase of indigenous as well as imported plant and, machinery. Under this scheme guarantee is given by concerned bank/financial institutions about repayment of the principal along with interest and deferred instalments. This is a very important type of assistance particularly useful for existing profitâ€‘making companies who can acquire additional plant and machinery without much loss of time. Even the banks and financial institutions grant assistance under Deferred Payment Guarantee more easily than term loan as there is no immediate outflow of cash.
3. Soft loan
This is available under special scheme operated through all-India financial institutions. Under this scheme assistance is granted for modernization and rehabilitation of industrial units. The loans are extended at a lower rate of interest and assistance is also provided in respect of promoters’ contribution, debt-equity ratio, repayment period as well as initial moratorium.
4. Supplier's line of credit
Under this scheme non-revolving line of credit is extended to the seller to be utilized within a stipulated period. Assistance is provided to manufacturers for promoting sale of their industrial equipment on deferred payment basis. While on the other hand this credit facility can be availed of by actual users for purchase of plant/equipment for replacement or modernization schemes only.
5. Buyer’s credit
Under a buyer's credit arrangement, a specific long-term loan is granted by a designated lending agency in the exporter's country to the buyer in the import, country against a guarantee by an acceptable bank or financial institution. The supplier receives payment for the exports on his delivering to the lending agency the requisite documents specified in the loan agreement and the relative commercial contract. The lending agency realizes the payment from the buy (importer) in installments as and when they fall due. Ordinarily, the supplier of his obligation reckons the period credit as the duration from the date of completion.
Long - term funds can also be raised through debenture with the objective of financing new undertakings, expansion, diversification and also for augmenting the long-term resources of the company for working capital requirements. Debenture holders are long term creditors of the company. As a secured instrument, it is a promise to pay interest and repay principal at stipulated times. In the contrast to equity capital which is a variable income (dividend/ security, the debenture / notes are fixed income (interest) security).
Leasing is a general contract between the owner and user of the assets over a specified period of time. The asset is purchased initially by the lessor (leasing company) and thereafter leased to the user (lessee company) which pays a specified rent at periodical intervals. The ownership of the asset lies with the lessor while the lessee only acquires possession and right to use the assets subject to the agreement. Thus, leasing is an alternative to the purchase of an asset out of own or borrowed funds. Moreover, lease finance can be arranged much faster as compared to term loans from financial institutions.
8. Public deposits
Deposits from public is a valuable source of finance particularly for well-established large companies with a huge capital base. As the amount of deposits that can he accepted by a company is restricted to 25 per cent of the paid up share capital and free reserves, smaller companies find this source less attractive. Moreover, the period of deposits is restricted to a maximum of 3 years at a time. Consequently, this source can provide finance only for short to medium term, which could be more useful for meeting working capital requirements. In other words, public deposits as a source of finance cannot be utilized for project financing or for buying capital goods unless the payback period is very short or the company uses it as a means of bridge finance to be replaced by a regular term loan. Before accepting deposits a company has to comply with the requirements of section 58A of the Companies Act, 1956 and Companies (Acceptance of Deposits) Rules, 1975 that lay down the various conditions applicable in this regard.
9. Own Fund:
a. Equity: Promoters of a project have to involve themselves in the financing of the project by providing adequate equity base. From the bankers/financial institutions' point of view the level of equity proposed by the promoters is an important indicator about the seriousness and capacity of the promoters.
Moreover, the amount of equity that ought to be subscribed by the promoters will also depend upon the debt: equity norms, stock exchange regulations and the level of investment, which will be adequate to ensure control of the company.
The total equity amount may be either contributed by the promoters themselves or they may partly raise the equity from the public. So far as the promoters stake in the equity is concerned, it may be raised from the directors, their relatives and friends. Equity may also be raised from associate companies in the group who have surplus funds available with them. Besides, equity participation may be obtained from State financial corporation/industrial development corporations.
Another important source for equity could be the foreign collaborations. Of course, the participation of foreign collaborators will depend upon the terms of collaboration agreement and the investment would be subject to approval from Government and Reserve Bank of India. Normally, the Government has been granting approvals for equity investment by foreign collaborators as per the prevailing policy. The equity participation by foreign collaborators may be by way of direct payment in foreign currency or supply of technical knowhow/ plant and machinery.
Amongst the various participants in the equity, the most important group would be the general investing public. The existence of giant corporations would impossible but for the investment by small shareholders. In fact, it would be no exaggeration to say that the real foundation of the corporate sector are the small shareholders who contribute the bulk of equity funds. The equity capital raised from the public will depend upon several factors viz. prevailing market conditions, investors' psychology, promoters track record, nature of industry, government policy, listing requirements, etc. The promoters will have to undertake an exercise to ascertain the maximum amount that may have to be raised by way of equity from the public after asking into account the investment in equity by the promoters, their associates and from various sources mentioned earlier. Besides, some equity may also be possible through private placement. Hence, only the remaining gap will have to filled by making an issue to the public.
b. Preference share: Though preference shares constitute an independent source of finance, unfortunately, over the years preference shares have lost the ground to equity and as a result today preference shares enjoy limited patronage. Due to fixed dividend, no voting rights except under certain circumstances and lack of participation in the profitability of the company, fewer shareholders are interested to invest moneys in preference shares. However, section of the investors who prefer low risk, fixed-income securities do invest in preference shares. Nevertheless, as a source of finance it is of limited import and much reliance cannot be placed on it.
Compliance with Different Laws & Regulations
In this context it would be pertinent to note that while initiating the process for making a public issue of equity /preference shares, the promoters will have to comply with the requirements of different laws and regulations including Securities Contracts (Regulation) Act, 1956, Companies Act, 1956 and SEBI guide-lines etc., and various rules, administrative guidelines, circulars, notifications and clarifications issued there under by the concerned authorities from time to time.
c. Retained earnings: Plough back of profits or generated surplus constitutes one of the major sources of finance. However, this source is available only to existing successful companies with good internal generation. The quantum and availability of retained earnings depends upon several factors including the market conditions, dividend distribution policy of the company, profitability, Government policy, etc. Hence, retained earnings as a source plays an important role in expansion, diversification or modernization of an existing successful company. There are several companies who believe in financing growth through internal generation as this enables them to further consolidate their financial position. In fact, retained earnings play a much greater role in the financing of working capital requirements.
d. Unsecured Loans: If there is some shortfall in the mean-of-finance, the promoters/ directors can mobilize funds from their friends, relatives and well-wishers. Such loans are always unsecured i.e., the lenders cannot have any charge over the assets of the company. Banks and financial institutions stipulate the following conditions if unsecured loan is to form part of the means-of-finance.
- The promoters shall not repay the unsecured loan till the term loan persists.
- Interest if any payable on unsecured loan shall be paid only after meeting the term loan repayment committees.
-The rate of interest payable on unsecured loan shall not be higher than the rate of interest applicable for term loans. Normally unsecured loan component is expected not to exceed 50% of the equity capital.
10. Bridge Loans: This is a temporary loan meant for tying up the capital cost of the project. The necessity for bridge finance arises in situations where finance from particular source is being delayed. However, the availability of finance from that source is certain.
11. Seed Capital: In consonance with the Government policy which encourages a new class of entrepreneurs and also intends wider dispersal of ownership and control of manufacturing units, a special scheme to supplement the resource & of an entrepreneur has been introduced by the Government. Assistance under this scheme is available in the nature of seed capital which is normally given by way of long term interest free loan. Seed capital assistance is provided to small as well as medium scale units promoted by eligible entrepreneurs.
12. Government subsidies: Subsidies extended by the Central as well as State Government form a very important type of funds available to a company for implementing its project. Subsidies may be available in the nature of outright cash grant or long - term interest free loan. In fact, while finalising the mean of finance, Government subsidy forms an important source having a vital bearing on the implementation of many a project.
The key to any project finance is to use a right mix of debt and equity. Further, there should be a right mix of foreign currency and rupee loans. It is also essential that there should be flexibility in respect of switching from foreign currency to rupee loan and vice versa. There are a number of issues highlighted herein above which need to be considered for the purpose of financing of the project. Besides, it is important that due care is taken in drafting the documents concerning the financing of the project. The companies should adopt the project financing structures so that the objective of shareholder’s wealth maximization can be achieved. As the world is heading towards a global integrated market and the failure of governments as well as the demand for private capital in infrastructure assets is increasing, project finance will continue to play an important role in both developed and developing markets.