PROJECT FINANCE IN INDIA
Project finance is that the future funding of infrastructure and industrial comes primarily basedupon the projected money flows of the project instead of the balance sheets of the project sponsors. It involves non-recourse funding of the event and construction of a particular project during which lenders appearance to the revenue expected to be generated by the project for compensation of its loans and to the assets of the project as collateral for its loan rather than to the final credit of the project sponsor .
- Financing of long term infrastructure and/or industrial projects using debt and equity.
- Debt is typically repaid using cash flow generated from the operations of the Project.
- Limited recourse to project sponsors.Ø
- Debt is typically secured by project’s assets, including revenue producing contracts
- First priority on project cash flows is given to the Lender
- Consent of the Lender is required to disburse any surplus cash flows to project
- sponsors Higher risk projects may require the surety / guarantees of the project sponsors.
INFRASTRUCTURE IN INDIA
As per the rbi, a credit facility is treated as “infrastructure lending’’ to aborrower company that is engaged in developing, operative andmaintaining any infrastructure facility that’s a project in any of the subsequent sectors ,or any infrastructure facility of the same nature. Infrastructure may be a basic physical and structure structure required for the
operation or the service ANd facilities necessary for an economy to operate set of interconnected structural components that give framework supportingan entire structure of development .
- Roads including toll road, a bridge or a rail system
- Ports, airport, inland waterway
- Water supply project, irrigation project, water treatment system, sanitation and sewerage system or solid waste management system
- Telecommunication services whether basic or cellular including radio paging, domestic satellite service, broadband network and internet services
- An industrial park or special economic zone ;
- Generation and distribution of power
- Transmission or distribution of power by laying a network of newØ transmission or transmission lines
- Construction relating to projects involving agro-processing and supply of inputs to agriculture
- Construction of educational institutions and hospital
- Any other infrastructure facility of similar nature .
POWER IN INDIA :
1.The power sector ranked sixth among the leading sector of the Indian economy.
2.It has attracted US$ 4.6 billion in FDI since the year 2000.
ROADS IN INDIA :
1.India has about the third largest road network in the world.
2.Government will undertake the upgradation of around 3700 km of National Highways at a cost of about 4.26 billion.
3.It involves double laning of single lane highways in eight states.
PORTS IN INDIA:
- India has one of the largest merchant shipping fleet and is ranked 16th among the maritime countries.
- India has announced a combined US$ 110 billion package to develop its ports and shipbuilding industry by 2020.
- The annual capacity of India’s major and non-major ports is expected to increase upto 1.5 billion tonnes by 2012.
AIRPORTS IN INDIA:
AAI has planned a heavy investment of USD 3.07 billion over the next five years including focus on airports for metro cities and upgradation of other non-metro airports and in the modernization of the existing aeronautical facilities.
CHARACTERISTICS OF PROJECT FINANCE
- Limited or non-recourse based
- Cash flow based
- Performance is the nucleus
- needs strong security structure
- little more costly / complex
- Project finance involves risk identification
- & allocation Project finance is different from corporate finance
- Usually accompanied by Special Purpose Vehicle
ADVANTAGES OF DEBT FINANCING:
- The primary advantage of debt financing is that it allows the founders to retain ownership and control of the company.
- The entrepreneurs are able to make key strategic decisions and also to keep and reinvest more company profits.
- Debt obligations are limited to the loan repayment period, after which the lender has no further claim on the business, whereas equity investors’ claim does not end until their stock is sold.
- Furthermore, a debt that is paid on time can enhance a small business’s credit rating and make it easier to obtain various types of financing in the future.
DISADVANTAGES OF DEBT FINANCING
- The main disadvantage of debt financing is that it requires a small business to make regular monthly payments of principal and interest.
- Very young companies often experience shortages in cash flow that may make such regular payments difficult. Most lenders provide severe penalties for late or missed payments, which may include charging late fees, taking possession of collateral, or calling the loan due early. Failure to make payments on a loan, even temporarily, can adversely affect a small business’s credit rating and its ability to obtain future financing.
- Another disadvantage associated with debt financing is that its availability is often limited to established businesses. Since lenders primarily seek security for their funds, it can be difficult for unproven businesses to obtain loans.
LOAN AMOUNT / TYPE
75% of the market value of the Project / Property is the maximum debt which may be granted
Short / medium / Long Terms Loans
Loans granted are typically used to finance:
- Land acquisition
- Preliminary expenses
- Flexible Repayments Terms
- Grace Period Offered During Construction
- epayment Schedule Matched to the Project Cash Flow Streams
- Early Repayment Option
SECURITY / COLLATERAL
Typical Security / Collateral Includes:
- Mortgage Charge on Land and Construction Works
- Pledge of Shares of the Borrowing Company
- Corporate Guarantees of Parent / Holding Company
- Personal Guarantees of Ultimate Beneficial Owners
- Assignment of all Project Proceeds
Internal / External Legal Advisors acceptable to both parties
Typical Upfront Fees:
Arrangement Fee – Once off calculated on Loan Amount
Other Possible Fees:
Commitment Fees – X % p.a. calculated on the daily/monthly/quarterly
aggregate un-drawn amount of the Loan Administration Fees
Typically include but are not limited to :
Property valuation report prepared by professional valuer acceptable to the Bank
Satisfactory due diligence on the Borrower, Corporate
Guarantors, Properties offered as Security, etc.
Independent Official Confirmation, verifying Existence of construction permits from local authorities
- Existence of permits for the commencement of construction works
- Approval of Loan Facility and Security by the Borrower’s Board of Directors