FUNDS FLOW STATEMENT FOR THE YEAR 31.03

SOURCES Rs. APPLICATION Rs.

IN MILLIONS IN MILLIONS

Funds from operation 121 Purchase of fixed assets 34

Before dividend

Issue of Share Capital 50 Repayment of bank overdraft 122

Issue of debentures 20 Dividend payment 32

Decrease in working capital 7 Purchase of investment 10

198 198

COMMENTS:

Repayment of bank overdraft may be considered as an achievement of the management. However, the pattern of funding is subject to criticism. Creation of fixed assets has been done out of share issue. This is acceptable since one is long term asset and other is a permanent source. But such funding could be done by debenture issue entirely since debt/equity ratio was non-existent in 2000. Even in 2001, it is only 1:10. Besides, repayment of overdraft has been done from equity issue, partly from debenture issue and retained earnings. These funds are generally from long term sources. The repayment should have been done from short-term sources.

SECTION - IV

6. With reference to infrastructure financing, elaborate upon. (a) Risks involved.

(b) Concept of financing those have emerged (c) Funding structure

(d) Mechanism of Escrow account

(e) Steps required to be taken by the banks in processing infrastructure financing

a. Risks involved

The specific risks involved with infrastructure are:

k Commercial Risk - Costs of production and uncertainties in demand for services.

k Construction Risk- Technical designs, cost over-run etc.

k Operating Risk - Cost and availability of operating inputs, bottlenecks etc.

k Regulatory Risk- As most of the infrastructure projects come under the category of public utilities; they are highly susceptible to sector specific regulatory policy decisions.

k Funding Risk- Mismatch with regard to liability sources and investment deployment of the promoter, adverse interest movements (floating or fixed) and even high exchange risk.

k Political Risk- Foreign investment does not come forth to developing countries mainly because of political risk etc. may result in funding risk.

b. Concepts of financing

The following concepts have emerged in management of infrastructure projects.

L BOT (Build, Operate and Transfer) - It refers to construction by a private party/consortium, which finances, operates and maintains an infrastructure for a specified period. Thereafter, it transfers the project to an identified public agency or back to the Government itself. BOT may have a period of transfer between 10 and 25 years.

L BOOT (Build, Own, Operate and Transfer) - It is like BOT but the period of transfer could be upto 50 years.

L BOO (Build, Own and Operate) - Under this the right to construct, operate and own remains with the private party. The infrastructure does not get transferred to the public sector.

L BOLT (Build, Own, Lease and Transfer) - Public agency / Government invites private sector to build / manufacture and lease the constructed asset to the Public agency / Government. The later will pay lease charges (rentals) during lease period. On expiry of lease period, the asset is transferred to the Public agency / Government.

c. Funding structure

The funding structure may take an equity route and / or mezzanine form i.e., a maximum of financing instruments including equity, bonds, subordinate debt, senior debt and bridge loan etc. Equity may be offered through special purpose funds by multilateral agencies like International Finance Corporation, Asian Development Bank, construction contractors, and suppliers of capital equipment or through local equity markets. Another suggested method of financing is that initial borrowing may be for ten years, which may be refinanced by another round of borrowing.

d. Mechanism of Escrow account

Operational phase. In the pre-construction stage, financing banks manage the risk by having full recourse to the promoters, contractors and the suppliers. In the post-construction stage, banks depend only on cash flows committed by lenders. To protect against adverse events, banks have devised Escrow Account mechanism through which the cash inflows are pooled and on which banks have first charge towards recovery of their loans.

e. Steps involved in processing infrastructure finance proposal Banks financing infrastructure projects have to undertake the following:

L Banks should ensure that they have the requisite expertise for appraisal of technical feasibility, financial viability and bankability of the project with particular reference to risk and sensitivity analysis. They can appraise the project with in house experts and / or external consultants.

L Financing offer which involves the development and application of a financing concept to the borrower with a view to capturing lead mandate.

L After the mandate is awarded the financial structure is fine-tuned in consultation with other lead banks. Any participation with the borrower should result in what is called a term sheet which set out the basic details of the financing and serves as a basis on which underwriting of the loan amount by lead banks is possible.

L Documentation

L Syndication

L Funding according to draw down schedule and financial supervision and monitoring. OR

Differentiate between Forfeiting and Factoring and enumerate advantages of Forfeiting to exporters and banks. Factoring is a financial package of Credit Protection Sales administration and receivables financing on with or without recourse to the seller. However, discounting of book debts or receivables is central to factoring.

FORFAITING FACTORING

1. This is without recourse to the exporter. 1. This may be with recourse or without recourse to

The risks are borne by the forfeiter. the supplier.

2. Trade receivables of medium to long term maturity 2. Factoring usually involves trade receivables of

are the subject matter of forfeiting. short maturities.

3. Forfeiting involves avalising negotiable instruments 3. Factoring does not involve avalising negotiable

like bill of exchange or promissory notes. instruments.

4. Eventually, the overseas buyer bears the cost of forfeiting. 4. The seller (client) bears the cost of factoring.

5. Forfeiting is generally transaction or project-based. 5. Factoring usually involves the purchase of all

So the structuring and costing is on case to case basis. debts or all class of debts owing to the customer.

6. There exist a secondary market in forfeiting. 6. Factoring tends to be a “One-Off” sale of debt obligations to

This adds depth and liquidity to forfeiting. the factor with no secondary market.

7. In forfeiting apart from improving cash flow, divesting the 7. In factoring the seller is looking to improve its cash flow and

performance risk is the motive of the exporter. not necessarily to divest itself of the risk of non-payment,