final report-milind

8/7/2019 Final report-milind

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UNIVERSITY OF MUMBAI

A

PROJECT REPORT ON

FINANCING OF STEEL PROJECTS

IN PRIVATE SECTOR

IN PARTIAL FULFILLMENT OF

MASTER OF MANANGEMENT STUDIES (MMS)

FINANCE SPECIALISATION

SUBMITTED BY

MILIND ANAND APTE

NCRDS

STERLING INSTITUTE OF MANAGEMENT STUDIES

Sector - 19, Near Seawoods Darave Petrol Pump, Nerul (E), Navi Mumbai -

400 706

ACKNOWLEDGMENT

FINANCING OF STEEL PROJECTS IN PRIVATE SECTOR 1


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I am grateful to my guide Mr. K M Oza for the valuable guidance and encouragement given to

me throughout this project work.

I would also like to thank my friends who have helped me in my project work and the library

staff of my college for all their patience and helping me find the required materials and books.

All this would not have been possible without the active support of my family members whose

constant encouragement motivated me to complete the Master of Management Studies course.

Milind A. Apte

Roll No. 03

MMS 4th Semester

Batch: 2008-10



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EXECUTIVE SUMMARY

Steel is crucial to the development of any modern economy and is considered to be the

backbone of the human civilization. The level of per capita consumption of steel is

treated as one of the important indicators of socio-economic development and living

standard of the people in any country. It is a product of large and technologically

complex industry having strong forward and backward linkages in terms of material flow

and income generation. All major industrial economies are characterized by the existence

of a strong steel industry and the growth of many of these economies has been largely

shaped by the strength of their steel industries in their initial stages of development.

This report covers Indian steel scenario & it talks about the background of the steel industry, thedemand scenario, the supply scenario, the price scenario & the market potential of the Indian

steel industry. It presents a broad overview of the government reforms affecting the Indian steel

industry, the import duty structure, the policy on raw materials & the excise duty structure.

The report will also give an overview of processes for making steel, the various means of finance

available, the norms & policies of financial institutions, term loan procedure, kinds of financial

assistance & the risks prevalent in the steel industry. And a brief idea of the appraisal

methodology adopted by the financial institutions to appraise steel projects.

Table of Contents



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Sr. No Topic Page No.

1 INTRODUCTION 5

2 INDIAN STEEL SCENARIO 7

3 PRODUCTS AND PROCESSES 22

4 GOVERNMENT POLICY ON PRIVATE SECTORPRODUCERS

27

5 FINANCING IN STEEL SECTOR 29

6 APPRAISAL OF STEEL PROJECTS 50

7 BIBLIOGRAPHY 56



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1 INTRODUCTION

1.1 OBJECTIVES OF THE STUDY

To understand the financial norms & Appraisal methodology adopted by the Financial

institutions with respect to steel projects in private sector.

To analyze the Indian Steel scenario & the Government policies towards private sector steel

producers.

1.2 IMPORTANCE OF THE STUDY

This study focuses on the Financing & Appraisal of steel projects in private sector & the

issues emerging therefrom.

The study may help the policy makers in the central & state government in formulating new

policies towards new technologies that are more environments friendly & can provide an

impetus to the Indian iron & steel industry.

1.3 SCOPE OF THE STUDY

This study covers the following:

The steel sector overview with the current & future demand & supply scenarios,

An overview of the Government policies on the steel producers,

An overview about iron & steel making processes, the financial institutions involved, their

norms & policies and the term loan procedure,

An overview about the appraisal methodology adopted by the FIs,

The study also focuses on the risks prevalent in the steel sector.



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1.4 DATA

Secondary data has been collected from various publications & brochures.

1.5 METHODOLOGY USED

Research of secondary information available on Steel sector for current & future scenario,

growth, price & market potential.

Research of secondary information available on financial institutions for their norms, policies

& risks they perceive in steel plants.



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2 INDIAN STEEL SCENARIO

2.1 PROFILE OF THE INDIAN IRON AND STEEL INDUSTRY:

At the dawn of Indias Independence 60 years back, Indian Steel Industry was practically

insignificant compared to other industries of the country as well as the world steel industry. In

1947, TISCO and IISCO in the Eastern Region of the country were the only steel producers

through Blast Furnace route and their production together was not even one million ton.

Today, Indian Steel Industry is producing about 36 million tones of finished steel and there are

about 200 big, medium and small steel plants, based on blast furnace and electric arc furnace

routes (scattered almost in every State of India), for production of mild, alloy and special steels.

Not only the steel production in India has gone up significantly, the Indian Steel Industry has also

turned into a large and important industrial sector of the country. It has also become a major

player amongst the steel producing countries of the world. India has already started exporting a

large volume of steel products all over the world.

Indian Steel Industry is playing a very vital role in the growth and advancement of Indian

economy. A large number of other industrial units like mining, refractories, ferro-alloys etc.have come up in India as offshoots of the steel industry. It has also helped to mitigate our

unemployment problem significantly by generating large-scale employment opportunities,

particularly for skilled and technical manpower.

The growth of steel industry in a number of other countries, like Japan, China, Brazil, South

Korea and former Soviet Union has been considerably faster than what happened in India. Our

steel industry is yet to achieve much higher targets to be comparable with China and others.

However, inspite of the significant growth of production in the recent years, steel market in India

has not grown sufficiently to absorb its whole production.

The growth of steel industry in any country is primarily dependent on the infrastructural activities

of the country. The construction industry is the largest consuming sector of steel, even in the

case of industrially developed countries. For the countries like India, which are still on the path

of development, very fast growth of infrastructural facilities is extremely essential. But inspite of

official announcements, plans and programmes, the infrastructural development in India even



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now is very slow and highly inadequate. Perhaps one of the reasons for comparatively slow

growth of Indian economy lies in its poor infrastructure.

In the urgent interest of the growth of economy, it should be the immediate concern of our

Government as well as the entrepreneurs to invest and accelerate the growth of infrastructure in

the country. The economic future of the Indian Republic depends on the steps which we are going

to take to accelerate the infrastructural development of this vast country. The growth of Indian

steel industry in the coming years also depends largely on the growth tempo of infrastructural

activities and vice-versa.

2.2 BACKGROUND

Indias first steel company TISCO was set up in 1907 & began commercial production in 1912.

IISCO was established in 1919. The installed capacity was 2.5 million tons at the time of Indias

independence.

In 1951, the Government imposed licensing restrictions on the creation of new capacities. This

restricted the growth of private players & resulted in Government owning a major portion of the

steel capacity. The second five year plan (1956-61) outlined large capacities to be set up in public

sector. Accordingly, the Rourkela, Bhilai & Durgapur Steel plants were setup in the late 50s

with German, Russian & British aides respectively. SAIL, operating as Hindustan steel Ltd, was

setup in 1973 as a holding company for the earlier established plants. Steel production grew from

1.6 million tons in 1955 to 6 million tons in 1965 at a CAGR of 14%. Per capita consumption

increased from 5 kgs to 12 kgs during this period.

The Government encouraged investments in steel through EAF route on account of lower capital

costs. Further these plants could have smaller capacities and were located close to end user

markets. As a result 1970s saw mushrooming of small EAFs units throughout the country. During

the same period the plan to set up the Rashtriya Ispat Nigam Ltd (RINL), mainly as a shore based

plant, was formalized. Construction of this 3 million tones plant commenced in 1982 in

collaboration with the erstwhile Soviet Union. However due to resource crunch the plant was

fully commissioned only in 1992-93.

The Government setup a Joint Plant Committee (JPC) to control the distribution and price of steel

produced by Integrated Steel Plants (ISPs). The intention was to ensure the availability of steel topriority sectors at uniform prices across the country. Under the freight equalization scheme of the



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JPC, all the ISPs were required to contribute Rs 1000 per ton of steel to the fund which was then

used to equalize all the freight costs. Under this scheme, customers located close to ISPs

subsidized the far off customers. In this controlled era, the consumption of steel increased from

3.5 million tons in 60-61 to 14.8 million tons in 91-92 at a CAGR of 4.7%.

Finished Steel Consumption

0

5

10

1520

25

30

35

4045

50

78-

79

84-

85

93-

94

95-

96

97-

98

99-

00

20

01-

02

20

03-

04

20

05-

06

20

08-

09

ear

M

T

P

A

In 1991, the Government introduced the process of liberalization & the industrial policy was

delicensed. In line with this policy, the steel industry was delicensed in July 1991 & in Jan 1992,

the price & distribution of steel were decontrolled & the freight equalization levy was

discontinued. Production immediately started picking up & increased to 18 million tons in 1994-

95.Then the industry went into a bit of depression till in the beginning of 2002 it again picked upon account of pick up in economy and demand from china. Today it stands at over 36 million

tones.

2.3 DEMAND SCENARIO

Following liberalization of the economy in 1991-92, the steel industry faced two years of

stagnant demand. Finished products demand was stuck at about 15 million tones from 1990-91

through 1993-94. Then, the economy entered a higher growth period. Apparent consumption offinished steel products grew nearly 19% during fiscal 1994-95 to about 18 million tones and

about 16% in 1995-96 to about 21.3 million tones. However, there was a slowdown in the 1996-

97 fiscal year with preliminary demand figures as reported by the Steel Ministry increasing just

4.6% to 22.3 million tones.

The potential for the growth of steel demand is substantial, especially if one considers the

possibilities on a per capita basis. If the per capita consumption level were to rise to about 60 kg

from about 30 kg currently, this implies a steel demand of about 60 million tones per year. In

comparison, per capital steel consumption is about 200 kg in China, an average of 80 kg for all of



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Asia, and 58 kg in Latin America. Steel consumption in the developed countries is over 450 kg

per capita.

There is strong correlation between the GDP & the apparent steel consumption. GDP is estimated

to grow at an average rate of 6- 8% till the end of the decade. World Steel Dynamics Projects

finished steel product demand in India to grow at a 6.75% per annum rate to 2010, from an

estimated 19.5 million tones in fiscal 1995-96 to about 28 million tones in 2000/01, to 38 million

tones in 2005/06 and to 52 million tones in 2010/11. The Government estimates the domestic

demand to be about 31 to 34 million tones in the fiscal year 2001-02 & at 67 million tones in

2011. These figures are somewhat more optimistic than the World Steel Dynamics estimates.

The determinants of demand in India are as follows:

1. Elasticity of steel consumption to GDP

The elasticity of steel consumption to GDP is a ratio which is inversely related to the stage of

development in the country. In the growth phase this ratio is high due to the fact that the

industrial & infrastructure sector is growing and a bulk of investment is going into these sectors.

But as the economy approaches a mature phase there is an infrastructural saturation & the

absorptive capacity of steel in the economy declines. India is still in the initial phases of growth

& as per the estimates of Economic Research Unit (ERU), Ministry of steel, this ratio is 1.33,

which is high enough to attract investments in this sector.

2. Per Capita consumption

In 1995 Indias per capita consumption of steel was one of the lowest in the world at 30kgs. It

was low compared to China, Thailand & Mexico which are in the similar stage of development as

India, thus, indicating a tremendous potential of steel in the country.

Per capita steel consumption



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0

100

200

300

400

500

600

700

3. Contribution of industry to GDP

The share of industry in Indias GDP has increased from 17.5% in the 1950s to 27.8% in the

1980s, whereas that of agriculture has decreased from 50.6% to 33.8% over the same period.

The delicensing of industries is expected to result in higher levels of fixed capital formation. This

in turn would imply intensification of general construction activities & additions to the stock of

general machinery. As the economy develops, the contribution of industry and the service sector

to the GDP is expected to increase. Hence the demand for steel is expected to grow in tandem.

4. Development of the transportation sector

Demand for transport by rail or road is dependent on the level of economic & agricultural activity

which is reflected by the tonnage of goods being transported. Increasing urbanization further

promotes the need for public & private transport systems. as the transport sector gains

importance, the demand for steel which is the main raw material is expected to increase.

5. Growth in automobile sector

The uptrend in automobile sector began in 1993 following easing of recession. In 94-95 the

industry grew by 26% followed by 28% in 95-96.further in recent past its more exciting for

example the sector grew by 24% and 37% in 2007 2008 respectively. In long term, the demand

for flat products is going to increase as this sector grows.

6. Infrastructure growth



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Investment in infrastructure has only been by the public sector & the Government which were

constrained in the past on account of paucity of funds. The Government has already introduced

several structural reforms in the infrastructural sectors such as Power, Petroleum, Roads, Ports

etc. Investments in these sectors are expected to boost the demand for the long products.

7. Ability to replace wood

Increasing environmental concern has led to a restriction on the felling of trees. As steel is a

stronger material for construction than wood, therefore in the long term the steel will replace

wood in housing even in the rural sector.

8. Growing middle class

As per the Government estimates there are around 50 million families in the middle class with

increasing disposable incomes. This class is estimated to be growing by 20% each year. The

opening up of economy, entry of multinationals and availability of consumer finance has further

increased the demand for the consumer goods. This increase in demand for consumer goods is

estimated to grow at a high rate till the end of this century, thus translating into a demand for flat

products.

Import / export



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The annual import of steel has increased rapidly over 1994/95 in response to general economic

recovery, and is expected to remain at this level or more in the coming years. Exports declined

during 1994-95 in response to rapid increase in domestic demand and a sluggish world market to

recover again in 1995-96. There was a brief recession in years followed but in recent years there

has been sudden increase primarily on account of demand from china.

Steel import / export / production (in thousand tpa)

Year Import Export Production

1995-96 1485 1320 21227

1996-97 1651 1922 22720

1997-98 1815 2383 23370

1998-99 1637 1984 23820

1999-00 2200 2998 26710

2000-01 1632 3000 29100

2001-02 1375 3000 30630

2002-03 1510 4966 33637

2003-04 1650 5922 36190

2004-05 1744 6062 38438

2005-06 1859 6157 40656

2006-07 1965 5972 43104

2007-08 2062 6189 45679

2008-09 2120 6276 48231

Demand summarized: Steel demand was 21.3 million tons in the year 1996/97 & the growth

rate 4.6%. The average growth is 6.75% per annum till the year 2010. But with increase in per

capita consumption of steel the demand in 2011 can touch up to 67 million tons.

2.4 SUPPLY SCENARIO

In the fiscal year ended March 1996, the Indian steel industry produced about 21.8 million tons of

crude steel and 21.0 million tons of finished steel products. Preliminary figures reported in Steel

scenario for fiscal 2008-09 indicate that finished steel production increased to about 36.19 million

tons, a rise of about 10.74% from the previous year. On the basis of steel production, India ranks

as the 8th highest in the world.Status of new projects as on Jan 1996:



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0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

Fiscal year

MTPA

DEMAND (WSD)

DEMAND (GOVT)

SUPPLY

The gap between demand & supply present a grim negative value of 7 million tons, if only

growth rates are considered. But if the Govt. estimates based on the factors affecting the steel

demand are considered then there exists a positive gap of 7 million tons. This gap can be even

more than the projected figure as the Indian economy grows and this represents the tremendous

potential of the Indian steel industry in terms of investment opportunities.

2.7 MAJOR INDIAN IRON AND STEEL INDUSTRIES

Steel Authority of India Ltd. (Sail):

Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It

is a fully integrated iron and steel maker, producing both basic and special steels for

domestic construction, engineering, power, railway, automotive and defence industries and

for sale in export markets.

Ranked amongst the top ten public sector companies in India in terms of turnover, SAIL

manufactures and sells a broad range of steel products, including hot and cold rolled

sheets and coils, galvanised sheets, electrical sheets, structurals, railway products, plates,

bars and rods, stainless steel and other alloy steels. SAIL produces iron and steel at four

integrated plants and three special steel plants, located principally in the eastern and



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central regions of India and situated close to domestic sources of raw materials, including

the Company's iron ore, limestone and dolomite mines.

SAIL's wide range of long and flat steel products are much in demand in the domestic

as well as the international market. This vital responsibility is carried out by SAIL's own

Central Marketing Organization (CMO) and the International Trade Division. CMO

encompasses a wide network of 38 branch offices and 47 stockyards located in major

cities and towns throughout India. With technical and managerial expertise and know-how

in steel making gained over four decades, SAIL's Consultancy Division (SAILCON) at

New Delhi offers services and consultancy to clients world-wide.

SAIL has a well-equipped Research and Development Centre for Iron and Steel (RDCIS)

at Ranchi which helps to produce quality steel and develop new technologies for the

steel industry. Besides, SAIL has its own in-house Centre for Engineering and

Technology (CET), Management Training Institute (MTI) and Safety Organization at

Ranchi. Our captive mines are under the control of the Raw Materials Division in

Calcutta. The Environment Management Division and Growth Division of SAIL operate

from their headquarters in Calcutta. Almost all our plants and major units are ISO Certified.

The Government of India owns about 86% of SAIL's equity and retains voting controlof the Company. However, SAIL, by virtue of its "Navratna" status, enjoys significant

operational and financial autonomy.

As part of the plan, SAIL will increase hot metal production from its plants to a level

of about 20 million tonnes per annum (MTPA) by 2012.

In view of emerging market requirements, SAIL has also planned to raise its output of

finished steel to 16.6 MTPA by 2011-12 from the current level of 8.6 MT, and reduce

generation of semi-finished steel from 20% of saleable steel to 4%. This will enable

inclusion of more value-added products in the companys product basket.

Products:

Semis: Blooms, Billets & Slabs

Long product: Structurals Crane Rails Bars, Rods & Rebars Wire Rods

Flat product: Sheets & Skelp Plates, CR Coils & Sheets, GC Sheets\ GP Sheets and

Coils Tinplates Electrical Steel



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Tabular product: Pipes

Railway product: Rails Wheels, Axles, Wheel Sets

PRIVATE SECTOR COMPANIES

1.Tata Iron and Steel Company Limited (TISCO)

TISCO has an integrated Steel Plant, with an annual crude steel making capacity of 4.0

Million Tonnes, located at Jamshedpur, Jharkhand. The Steel Works is situated at

Jamshedpur in the State of Jharkhand, India. The factory covers 800 hectares of land. West

Bokaro Division in Hazaribagh District covers 2000 hectares land in which mining and

coal beneficiation activities are performed. Jharia Division occupies 2500 hectares of land

for its industrial, mining and domestic activities in the District of Dhanbad both in the

State of Jharkhand. The Iron Ore and Dolomite Mines are located at Noamundi in the

State of Jharkhand and at Joda, Katamati, Khodbond and Gomardih in the State of

Orissa. Over the years, Tata Steel has emerged as a thriving, nimble, steel enterprise,

due to its ability to transform itself rapidly to meet the challenges of a highly

competitive global economy and commitment to become a supplier of choice. Constant

modernization and introduction of state-of-the-art technology at Tata Steel has enabled it

to stay ahead in the industry.

Tata Steel's four-phase Modernization Programme in the steel works has enabled it to

acquire the most modern steel making facilities in the world. Recently, Tata Steel

commissioned its 1.2 million tonne capacity Cold Rolling Mill complex at 'Global Speed

and Cost'. Its fifth phase of the Modernization Programme leveraged the intellectual

capabilities of its employees to generate sustainable value for the stakeholders. Most

recently, it has embarked on a programme for expansion of its existing steelmaking

capacity by 1million tonne to reach a rated capacity of 5 million tonnes per annum.

Tata Steel has continuously been on the growth path and is constantly striving to improve

the EVA of the company by seizing the opportunities of tomorrow and by exploring

newer avenues of operations such as a ferro-chrome and titanium. Tata Steel, after

completion of their four phases of modernization has achieved a production of 3.54

million tonnes of finished steel and 4.22 million tones of crude steel in 2006 2007,

surpassing all previous records. The performance of TISCO was marked by higher

volumes, richer product mix and considerable achievement in the areas of cost

reduction and improvement.



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2.Jindal Organization:

$ 2 billion Jindal Organization has expanded and diversified into core business areas

ensuring synergy amongst its various business ventures, spreading over 13 plants at 10

pivotal locations in India and two plants in USA.

Group Companies:

Jindal stainless limited

Jindal iron and steel company limited

Jindal vijayanagar steel limited Jindal steel and power limited

Jindal united Steel Corporation

Jindal stainless limited: India's largest integrated manufacturer of Stainless Steel catering

to about 40% of Indian demand.

Plant Location - Hisar, Harayana

Capacity - 500,000 tpa

High Carbon Ferro Chrome plant at Vishakhapatnam, Andhra Pradesh

Jindal iron and steel company limited: India's largest integrated galvanising facilities in

private sector accounting for 25% of total galvanising production in the country. It isengaged in Hot Rolling, Cold Rolling and Galvanising business. Export of 75% of production to

over 45 countries.

Plant Locations - Vasind and Tarapur, Maharashtra

Capacity - HR 280,000 tpa, CR 900,000 tpa, GP/GC 850,000 tpa

Jindal vijayanagar steel limited: An environment friendly integrated steel plant

manufacturing HR coils using the revolutionary Corex technology for iron making.

Supplies HR coils to group company JISCO for value addition and to South India. Only

HR coil manufacturer in South India. Tie up with world steel leaders gives unique

advantage in manufacturing and technology.

Plant Location - Toranagallu, Karnataka

Capacity - 2.0 million TPA

Products: Mild steel hot rolled coils, Mild steel hot rolled plates & sheets,



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Jindal Steel & Power Limited: Asia's largest and world's second largest coal based

sponge iron plant. Also manufacturing Rails, Blooms and Power

Plant Location - Raigarh, Madhya Pradesh

JSPL is one of the lowest-cost producers of sponge iron in India. Backward integration

has given JSPL the distinction of being the only sponge iron manufacturer with its own

captive raw material resources and power generation. This has enabled JSPL to monitor

both price and quality of its products. At Raigarh, JSPL has the world's largest coal-

based sponge iron manufacturing facility, with an installed capacity of 6,50,000 TPA,

using six rotary kilns. Growth and expansion plans include an additional 1.3 million TPA

capacity of sponge iron with the commissioning of 4 rotary kilns and a 250,000 MT

capacity for metallics charge using the state-of-the-art rotary hearth furnace.

JSPL has entered into a technical collaboration with NKK Corporation, Japan for

technology transfer to produce superior quality, world's longest rails of 120m-finished

length, along with Parallel Flange Beams, Columns and Sheet Piles for the first time in

the country. The agreement covers 'know-how' transfer encompassing steel-making,

secondary refining and continuous casting up to rolling and finishing of long rails anduniversal beams; deputation of NKK multi-disciplinary specialists at the JSPL plant; and

training of JSPL personnel at NKK steelworks in Japan. This technical collaboration shall

enable production of long rails requiring far less joints in tracks, ushering a new era in

safer rail-travel and making introduction of fast trains in India a reality.

Product Range: Carbon & Alloy Steels confirming to National & International Standards

like SAE, AISI, DIN,IS and ASTM

Jindal united steel corporation: Manufactures steel plates for use in large diameter pipes,

construction and fabrication industries.

Plant Location - Bay Town, Texas, USA

Capacity - 1.2 million TPA

3.Essar Steel:

Essar is an integrated steel producer, with operations all along the value chain. Essar

Steel produces some of the world's best steel at its state-of-the-art steel complex in

Hazira, Gujarat. It is also India's largest exporter of flat products, sending half of its



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production abroad, mainly to the highly demanding markets of the West, and the growth

markets of South East Asia and the Middle East. Essar ensures excellent customer service

through a modern distribution network.

Essar Steel's core manufacturing facilities are located at its steel complex in Hazira,

Gujarat. The Hazira complex includes a 2 MTPA hot briquetted iron (HBI) plant, a 2.4

MTPA hot rolled coils (HRC) plant and a downstream complex. These facilities are

complemented by its joint ventures: a 3.3 MTPA pellet plant in Vishakapatnam and a

200,000 TPA cold-rolled coils plant in Indonesia.

Essar Steel operates the world's largest gas-based hot briquetted iron (HBI) plant with a

production capacity of 3.4 MTPA. The plant uses state-of-the-art technology, which

ensures high quality raw material for the steel plant. Essar Steel is one of the world's

lowest cost producers of HBI on a per tonne basis. The plant is supported by a captive

power plant of 32MW, which operates at 100% capacity.

All Essar Steel's products are world-class, meeting the highest international standards,

supported by excellent marketing and service:

Iron Ore pellets, Hot briquetted (sponge) iron (HBI), Hot rolled coils (HRC), Cold rolledcoils (CRC), Plates, Sheet

Essar Steel defines value as value to customers because when its customers prosper, the

company prospers. Delighting its customers drives its unique approach to marketing. First, to

help its customers choose the best steel every time, it became the first Indian company

to brand flat products, under the name "24-carat steel". When customers ask for 24 carat

steel, they are assured of the world's best steel, backed by the strength and promise of

Essar Steel's technology, quality and distribution.

4.Ispat Industries Limited (IIL):

Ispat Industries Ltd. (IIL) has set up a 3 million tones per annum of hot rolled steel coil

plant at Dolvi in Raigad District, Maharashtra. The Dolvi complex also has a modern

blast furnace (setup by a group company Ispat Metallics India Limited) capable of

producing 2.0 million tones per annum of Hot Metal / Pig Iron and a DRI plant with a

capacity of 1.2 million tones per annum. It is ISO 9002 and ISO 14001 certified. Further,



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the complex envisages adding 110 MW captive power plant (which will use the BF gas)

by the year 2005.

The steel plant is using the electric arc furnace route (CONARC process) for producing

steel. In this project, IIL have uniquely combined the usage of hot metal and DRI

(sponge iron) in the electric arc furnace for production of liquid steel. For casting and

rolling of liquid steel, IIL have the state-of-the art technology called compact strip

production (CSP) process, which is installed for the first time in India and produces high

quality and specifically very thin gauges of HRC. IILs products are well accepted in

international markets.



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3 PRODUCTS AND PROCESSES

3.1 TYPES OF STEEL PRODUCTS

Steel making is a complex process and different types of products are obtained at each stage. The

various products obtained in the process of production are given below:

Hot metal (Molten iron)

Crude (Liquid) steel

Billets Blooms Slabs

Wire rods Bars Structurals Sheets/Plates

(Long products) Light Medium Heavy Hot rolled Cold rolled

coils coils

(Long products) (Flat products)

Hot Metal: Iron ore is mixed with coke, dolomite and limestone to form a homogenous mixture

called charge. This charge is fed into the blast furnace at a high temperature where iron ore is

reduced and molten iron or hot metal is formed. Hot metal, when otherwise not used for making

steel is cast by pig casting machines into moulds. The product from these moulds is called pig

iron and is sold to foundries for making cast iron.

Crude steel: The output obtained from the LD furnace or Open hearth furnace or the EAF

furnace is called crude steel. Crude steel is further cast into ingots, billets or slabs.

Semis or Semi finished steel: Molten steel is required to be cast into solids before it is usable.Molten steel is either cast into ingots or directly into billets/ blooms or slabs by the continuous



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casting process. When heated ingots are rolled into slabs, blooms or billets the process is called

primary rolling. These can be either sold to rerollers for further conversion or can be processed

further in-house. Semi finished steel is the first stage at which steel is saleable. Hence it is also

called saleable steel.

Ingots: Crude steel is poured into a mould where it solidifies into a rectangular block of

dimension (4 mtr, 2 mtr, 1 mtr). Ingots are produced when the manufacturer does not have

continuous casting facilities. Ingots are further rolled into semi finished products.

Blooms: Ingots can be rolled into smaller rectangular blocks of 6 - 12 square cross section and

8 feet to 18 feet in length. Blooms are further rolled into billets or slabs.

Billets: Blooms can be further rolled into smaller rectangular blocks with square cross section of

6-12 cms square and length 6-10 mts called billets. Most rerollers buying semis prefer billets due

to their smaller size. Billets are further converted into long products like rounds, bars and wire

rods.

Slabs: A bloom can be rolled into slabs which have a rectangular cross section (15-50 cms * 10-

15 cms) and 6-10 meters in length. Slabs are used to further manufacture flat products likeplates, holt rolled (HR) and cold rolled (CR) products.

Finished steel: Finished steel is obtained through further processing of semis. They can be

either flat product (e.g. hot rolled coils, cold rolled coils, CR strips etc.) or long products (bars,

structural, wires etc.). Finished steel is further classified as follows

Longs: includes bars, structurals, wire rods, wires, wire ropes, steel pipes and tubes.

These find application mainly in the construction and engineering industries.

Flats: includes Hot Rolled (HR) plates/ coils/ sheets, Cold Rolled (CR) coils/ strips/

sheets, galvanized plain (GP) sheets, coils, galvanized corrugated (GC) sheets. These

products find application in the automobile, consumer durables and engineering

industries.

3.2 PROCESSES

There are five basic processes for steel making.

The Blast Furnace route (BF) route



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The Electric Arc Furnace (EAF) route

Induction furnace route

Mini blast furnace route

Corex route

Of these the Blast Furnace route and the Electric Arc Furnace route account for 95% of the steel

production in the world. These two processes mainly differ in the terms of the raw material and

the process used to manufacture crude steel.

1. BLAST FURNACE ROUTE

The Integrated Steel Plants (ISPs) employ the Blast Furnace (BF) route to produce crude steel.

Steel production comprises two stages: reduction of iron ore to iron in the blast furnace and

conversion of iron to steel in the Open Hearth Furnace or the Linz and Donawitz (LD) furnace.

Blast Furnace

The main raw materials in this process are iron ore, coke, limestone, dolomite and manganese

ore. Coke is used as a reducing agent, to remove oxygen from the iron ore. Coking coal is

converted into coke in the coking ovens, wherein impurities like sulphur and phosphorous, which

are detrimental to the quality of steel, are removed. The concentrated iron ore along with

limestone, coke, etc. Is fed into the blast furnace and hot metal is obtained. This hot metal is animpure form of steel and is called pig iron when cooled and solidified.

Open Hearth Furnace (OHF) / Basic Oxygen Furnace (BOF) or (LD) process

The hot metal obtained from the blast furnace route is further refined or purified in an open

hearth furnace (OHF) or LD furnace to obtain crude steel. The OHF is increasingly being

replaced by the LD process in the manufacture of steel worldwide. The LD process is

economical both in terms of capital and operational costs. The heat time or tap-to-tap time of

steelmaking in a LD process is very low at approximately 1 hour as against 8-10 hours in the

OHF process. Further heat consumption in the LD process is low at 0.1 gcal compared to 1.2

gcal of heat consumption by the OHF (Under Indian conditions).

2. ELECTRIC ARC FURNACE ROUTE

The mini steel plants employ the Electric Arc Furnaces (EAF) to manufacture steel. In this

process a mixture of scrap and sponge iron is melted in an electric furnace and then refined to

produce molten steel.



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The EAFs are designed as single phase or three phase units. In a single phase unit, a single

carbon electrode is suspended in the centre of the furnace and the carbon bottom of the furnace

serves as the second electrode. In a three phased furnace, the three electrodes are spaced into the

arc furnace and arc buried in the charge. This unit has an open top and the charge consisting of

steel scrap and sponge iron is either shoveled in or introduced by chutes. After charging, the

electrodes are lowered and the arc is struck. The heat from the arc around 50000C melts the

charge and a pool of liquid steel called bath is formed which contains impurities. Flux

(limestone) is then added which forms the slag over the surface of the liquid metal. This

oxidizing slag is removed from the surface and the molten liquid is tapped at the bottom. The

molten steel is then cast to produce semis which are then processed in different rolling mills to

produce steel products (longs and flats). The choice of the EAF depends on the type of steel to be

manufactured, economic considerations and required quality of the finished product.

3. INDUCTION FURNACE

The induction furnace is based on the principle of heating by induced currents. The primary coil

fo the furnace is constructed of water cooled copper tubing, positioned towards the inside of the

furnace shell, covered with a layer of refractory material. It normally operates on alternating

current at a frequency of approximately 1000 cycles produced by a motor generator set of special

design. The power is transmitted over the co-axial cables to the primary coil of the furnace. Thehigh frequency power applied to the primary coil creates a magnetic flux which passes through

the charge which in turn acts as the secondary winding of a transformer having a single turn.

This induced current melts the charge by the heat developed due to the electrical resistance.

4. MINI BLAST FURNACE (MBF)

The MBF is basically a scaled down version of the blast furnace and is largely used for the

production of foundry grade pig iron. The process is similar to the blast furnace route where the

iron ore is reduced in the blast furnace with coke acting both as reductant and fuel. Hot air at a

temperature of around 10000C is blown from the turbo blowers. The molten iron is tapped into

ladles and cast into pig casting machines and the slag is remvoed. This process has the advantage

of lower capital costs and shorter gestation period and lesser complications in stabilising as

compared to the blast furnace. Further it overcomes the draw back of requirement of scrap and

power used in the EAF process.



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The widely used technologies fro manufacture of pig iron in India are those developed by Tata

Korf, India (Sesa Goa, Tata Metaliks), Mannesman Demag, Germany (Usha Ispat) and China

Metallurgical Import and Export Corporation (CMIEC) of China (Mideast Integrated Steels Ltd).

5. COREX R ROUTE

The COREX R process uses low grade non coking coal which is abundantly available all over the

world as a reductant and energy source. On an average the price of non coking coal is lower by

about $ 20 per ton than that of coking coal. The Corex process eliminates the need for coke oven

battery and sinter plant required by the blast furnace.

The COREX process was developed by Voest Alpine Industrieanlagenbau (VAI) GmbH, Austria,

around 1975. It was subsequently, extensively tested and modified from 1981-87 in Germany.

The Corex-BOF route has been commercially proven at ISCOR Limited, Pretoria (South Africa).

Jindal Vijaynagar Steel Limited having two C-2000 units is being set up in Karnataka, South

India. COREX-MIDREX combination comprising two C-2000 units of COREX & a module 800

of MIDREX is being set up in HANBO, South Korea & the same combination is also being set

up at Saldhana, South Africa. Voest Alpine has also received orders from Pohang Iron & Steel

Company Limited (POSCO), South Korea for a C-2000 unit.

The COREX process releases large amount of top gas with high calorific value which can be used

for power generation.

Compared to the blast furnace route the corex process has the following advantages:

- Use of non coking coal, the reserves of which are abundant in India

- Lower operating costs

- Lower emissions as compared to the blast furnace route

- Further, the top gas released is used for generation of power.

4 GOVERNMENT POLICY ON PRIVATE SECTOR PRODUCERS

4.1 BACKGROUND

The Steel Development Fund (SDF) was created in 1978 to provide low cost funds to the ISPs, to

be used mainly for modernization and expansion programmes. The funds corpus was built by



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charging a levy of Rs. 350-500 per tones of steel sold by the primary producers. However, the

SDF levy was discontinued in April 1994.

Engineering goods export assistance fund (EGEAF) was created to make steel based engineering

exports from India internationally competitive. The government was utilising this fund to

reimburse engineering exporters the difference between the domestic and international steel

prices under the International Price Reimbursement Scheme (IPRS) introduced in 1981. ISPs

were required to pay an EGEAF levy of Rs. 300 per tones of steel sold. Although IPRS was

discontinued from 1995, the EGEAF levy was still being charged in order to meet the IPRS

arrears. However, the same has been discontinued in February 1996.

4.2 ECONOMIC REFORMS AFFECTING THE STEEL INDUSTRY

The New Economic Policy initiated in 1991-92 marked revolution in the Indian economy. The

Indian iron and steel industry, previously under numerous state controls, has been deregulated in

tune with the emerging economic philosophy. For this sector, some of the important changes are,

Large-scale capacities have been removed from the list of industries reserved for the public

sector.

Licensing requirement for additional capacity creation has been abolished.

The system of price and distribution control dismantled.

Inclusion in the high priority list for foreign investment which implied automatic approval for

foreign equity participation up to 74% on condition that the permissible equity covers the cost

of imported capital goods and foreign technology agreements up to specified limits.

Replacement of freight equalization system by a system of freight ceiling.

The peak import tariff rates have been lowered from a level exceeding 100% to15% in 2003-

04.

Physical control on imports by way of licensing was relaxed.

Apart from the sector-specific reforms, the steel industry benefited from the general

economic reforms. These are:

Convertibility of the rupee on trade account has helped in removing the bias against exports.

Exporters are allowed to import capital goods at concessional rates linked to their export

earnings.

Opening up of foreign trade meant easier access to input materials at competitive rates from

overseas sources.



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Import of technology and foreign know-how made less restrictive.

Rationalization of indirect taxes.

4.3 RAW MATERIALS

Raw material in India is not of very good quality namely coke as it has high ash component plus

also large quantity of water; however government has reduced the duties on coal both on

domestic as well as imported coal progressively over the years

4.4 EXCISE (PRODUCTION DUTY)

Excise duty on all steel products is at 12% ad valorem. No change is expected in the excise duty

structure.

4.5 OUTLOOK

In view of the large infrastructure and industrial growth potential in India, the Government is

encouraging steel capacities by the private sector in the country. Further the government is also

opening up mining activities, ports and roads to foreign and private sector participation.

The role of the government as a major buyer of long products is expected to reduce in the long

term with the participation of the private sector in infrastructural projects.Although reducing tariff barriers may increase the threat from imported steel, the decrease in

import duties is expected to be offset by the likely depreciation of the rupee. However, products

like HR coils continue to face competition from imports. Hence manufacturers would have to

control costs, improve quality and establish a base in the export market.

5 FINANCING IN STEEL SECTOR

5.1 MEANS OF FINANCE

To meet the cost of the project following are the means of finance available:

Equity capital

Preference capital

Debenture capital

Rupee term loan

Foreign currency term loan



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Euro issues

Deferred credit

Bills rediscounting scheme

Suppliers line of credit

Seed capital assistance

Government subsidies

Sales tax deferment & exemption

Unsecured loans & deposits

Lease & hire purchase finance

Equity capital

This represents the owners contribution towards business. The equity shareholders enjoy the

rewards & the risks equally. However their liability is limited to the capital contributed in limited

companies. This type of capital has two distinct advantages i.e. firstly it represents a permanent

capital to the business without the liability to payback & secondly it does not involve any fixed

obligation for payment of dividends. The disadvantages of this type of capital is that its cost is

high, being a non tax deductible expense & the flotation cost is also very high.

Preference capital

This represents a mix of equity & debt capital. It is similar to equity because preference dividend

being a non tax deductible expense and it is similar to debt since it carries a fixed rate of

dividend. This kind of financing is attractive only when the promoters without reducing their EPS

try to increase their net worth in order to meet the requirements of financial institutions.

Debenture capital

There are 3 kinds of debentures that are commonly used : non convertible debentures (NCD),

partially convertible debentures (PCD), fully convertible debentures (FCD). The debentures carry

a fixed rate of interest & the interest paid is a tax deductible expense. It is this property which

makes its cost less when compared to costs of equity and preference capitals.



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This scheme, administered by ICICI, is similar to the previous one by IDBI. ICICI pays directly

to the seller against the bank guarantee of the buyer.

Seed capital assistance

Financial institutions provide this type of assistance to promoters of small & medium scale

industrial units. Three schemes have been formulated ie Special seed capital assistance (Rs 0.2mn

or 20%), Seed capital assistance (Rs 1.5mn) & Risk capital foundation (Rs 1.5mn to Rs 4.0mn).

Government subsidies

The state Govt. provides subsidies to the certain projects set up in that state. This subsidy varies

from 5 % to 25% of the fixed capital investment, subject to a ceiling depending on the location.

Sales tax deferments & exemptions

This is an incentive given to certain industry by the state Govt. in order to attract the investors to

set up projects in that state. In sales tax deferment, the sales tax to be paid in the initial years is

deferred for a period ranging 5 to 12 years. In the sales tax exemptions the tax payable is

exempted for a certain period.

Unsecured loans & deposit

These loans are normally taken by promoters to bridge the gap between the promoters

contribution required and the equity capital subscribed by the promoters. These loans are

subsidiary of the institutional loans. Public deposits also represent unsecured borrowings, from

the public, of two to three years duration. However for a new company it is difficult to raise

public deposits as it may not be in a position to pay it back in two to three years.

Leasing & hire purchase finance

Under this scheme some of the fixed assets could be financed by lease or hire purchase

agreement. A number of finance companies are engaged in the business of leasing & hire

purchase agreements.

5.2 INSTITUTIONS FOR FINANCE

The structure of financial institutions in India is as follows:



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I. All India institutions

Industrial Finance Corporation of India

Industrial Credit and Investment Corporation of India

Industrial Development Bank of India

Other all-India Institutions

II. State-level institutions

State Financial Corporations

State Industrial Development Corporations

I) ALL INDIA INSTITUTIONS

Industrial Finance Corporation of India

The Industrial Finance Corporation of India (IFCI), the first all-India term-lending institution,

was set up in 1948 with the primary objective of providing medium and long-term credit to

industry. It is headquartered in New Delhi. The source of funds for IFCI are paid-up capital,

reserves, repayment of loans, market borrowing, loans from the Government of India, advances

from the Industrial Development Bank of India, and foreign lines of credit from KfW (West

Germany), FFCE (France), ODA (UK), and others.

Industrial Credit and Investment Corporation of India

The Industrial Credit and Investment of India (ICICI) was founded in 1955. It is owned and

financed mainly by the private sector. It is headquartered in Mumbai. It provides assistance to

units in the private sector, particularly to meet their foreign exchange requirements. The

resources of ICICI consist of paid-up capital, reserves, repayment of loans, borrowing from the

Government of India, advances from the Industrial Bank of India, market borrowings and foreign

lines of credit from the World Bank, USAID, KfW, UK Government and others.

Industrial Development Bank of India

The Industrial Development Bank of India (IDBI) was established in 1964 as a subsidiary of the

Reserve Bank of India. It is headquartered in Bombay. It is the apex term-lending financial

institution in India. It has been designated as the principal financial institution of the country for

coordinating, in conformity with national priorities, the working of institutions engaged in

financing, promoting, and developing industry. IDBI finances the industry directly and also

provides principal support to State Financial Corporations and State Industrial Development



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Corporations and commercial banks in their financing of industries, through refinancing and bill

discounting facilities. The resources of IDBI consist of paid-up capital, reserves, repayment of

loans, market borrowings both within and outside the country, temporary credit from the Reserve

Bank of India, and foreign lines of credit from the World Bank, Asian Development Bank and

others.

Life Insurance Corporation of India

The Life Insurance Corporation of India (LIC) came into being in 1956 after the nationalization

and merger of about 250 independent life insurance societies. It is headquartered in Bombay.

The primary activity of LIC is to conduct the life insurance business, but it has gradually

developed into an important all-India financial institution which provides substantial support to

industry. It works in close liaison with the other all-India financial institutions in providing

finance directly and in helping industrial concerns by its underwriting support. Due to its massive

resources, LIC is one of the two largest institutional investors in the country. By law it is

required to invest 25 per cent of its funds in government securities and a further 25 per cent in

approved securities.

General Insurance CorporationThe General Insurance Corporation (GIC) was founded when the management of general

insurance business in India was taken over by the government in 1971 a subsequently

nationalized in 1973. It is headquartered in Bombay. In addition to investing in socially-

oriented sectors, where the bulk of its investable resources are required to be invested, GIC

provides substantial assistance to industrial projects by way of term loans, subscription to equity

capital and debentures, and underwriting of securities.

Unit Trust of India

The Unit Trust of India (UTI) was set up in 1964 with the principal objective of mobilizing

public savings and channeling them into productive corporate investments. UTI raises its

resources primarily through the sale of small denomination units. UTI subscribes to industrial

securities and also purchases outstanding securities in the secondary market. In its investment

activity, UTI is naturally governed by considerations of yield and security as it has an obligation

to earn a reasonable rate of return for its unit holders in its various schemes, without exposing

them to undue risks. UTI has emerged as one of the two largest institutional investors in India.



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Industrial Reconstruction Bank of India

The Industrial Reconstruction Bank of India (IRBI), headquartered in Calcutta, was set up when

its precursor, the Industrial Reconstruction Corporation of India, was reconstituted in 1984. IRBI

is primarily an agency to help the reconstruction and rehabilitation of industrial units which have

closed down or which face the risk of closure. IRBI offers assistance in various forms:

(I) financial assistance which is not available from normal channels of finance and banking,

(ii) technical assistance and guidance to sick units to revive them,

(iii) managerial assistance in the fields of administration, finance, marketing, industrial relations,

etc. and

(iv) suggestions for reconstruction and rationalization.

IRBIs resources consist of its paid up capital, interest-free loan from the Government of India,

and debt capital raised by issuing bonds. In addition, IRBI has recourse to accommodation from

the Reserve Bank of India and IDBI.

II) STATE LEVEL INSTITUTIONS

State Financial Corporations

The State Financial Corporations (SFCs), set up under the State Financial Corporations Act,

1951, render assistance to medium and small scale industries in their respective states. Their

shareholders are the respective state governments, IDBI, and borrowings from the Reserve Bank

of India and the Government of India.

State Industrial and Development Corporations

The State Industrial Development Corporations, (SIDCs) were set up by the state governments

during the 1960s to serve as catalytic agents in the industrialization process of their respective

states. Presently almost every state has an SIDC which is fully owned by the respective state

government. In addition to providing term finance to industry, SIDCs perform a variety of other

functions. In particular, the role in sponsoring joint sector projects with the participation of

private entrepreneur needs to be emphasized. The major resources of the SIDCs are paid-up

capital, reserves, market borrowings and loans from the government. In addition, SIDCs get

funds from IDBI under its refinancing scheme.



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5.3 NORMS AND POLICIES OF FINANCIAL INSTITUTIONS

Eligibility

Till recently, long term loans were provided by financial institutions to concerns in certain

industries and denied to concerns in industries placed in the negative list. Now, however, a shift

is taking place in their policy. They are inclined to finance almost every kind of industry.

Further, till recently financial institutions followed a consortium approach as per the advice of the

Ministry of Finance. Now they are permitted to lend individually as well as participate in

consortium financing.

Debt-equity Ratio

Presently, the general debt-equity norm for medium and large scale projects is 1.5:1. This is a

broad guideline against which variations are permitted on a case to case basis, especially under

the following circumstances:

(a) High degree of capital intensity,

(b) Location in a backward area, and

(c) Background of the promoter.

Other things being equal : (i) a capital intensive project is eligible for a higher debt equity ratio,

(ii) a project in a backward area qualifies for a higher debt-equity ratio, and (iii) a project

promoted by a technocrat - promoter is entitled to a higher debt-equity ratio.Debt consists of the following:

(I) Loans and deposits that are repayable after one year (this includes interest bearing unsecured

loans from government agencies, promoters, etc.),

(ii) Non-convertible debentures and convertible debentures until they are converted, irrespective

of the maturity period,

(iii) Deferred payments, and

(iv) Preference shares due for redemption within three years.

Equity consists of the following:



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(i) Paid-up ordinary share capital,

(ii) Irredeemable preference shares, cumulative convertible preference shares where the

redemption period is due after three years,

(iii) Premium on share issues,

(iv) Central/State cash subsidy,

(v) long term interest-free unsecured loans from state governments or government agencies or

promoters subordinate to loan from financial institutions, and

(vi) free reserves

Promoters Contribution

Financial institutions require promoters to contribute 25 to 30 per cent of the project cost. This is

in certain cases like capital-intensive projects, high priority projects, and technocrat-promoted

projects. Contributions made by the following or of the following kinds represent promoters

contribution :

(I) Equity investment by promoters, their friends, relatives and associates (including NRIs),

(ii) Equity investment by other companies controlled by promoters,

(iii) Equity participation by shareholders of other promoter companies,

(iv) Foreign collaborators,

(v) Investment from oil exporting developing countries,(vi) State government, in the case of joint sector or assisted sector projects,

(vii) Seed capital assistance,

(viii) Unsecured loan from promoters,

(ix) Venture capital participation,

(x) Mutual fund participation,

(xi) Internal accruals in the case of an existing company,

(xii) Rights issue to existing shareholders, and

(xiii) Any other contribution approved as promoters contribution.

Foreign Currency loans

Apart from rupee term loans, financial institutions provide foreign currency loans. This

assistance is provided only for the import of capital equipment (as per the liberalized exchange

risk management system, foreign currency required for other purposes has to be purchased from

authorized dealers at market rates). There are two kinds of schemes of FIs for foreign currency

loans i.e. the general scheme & the Exchange Risk Administration Scheme.



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On foreign currency loans sanctioned under the general scheme, the interest rate charged is a

floating rate as determined by the lenders (the foreign agency that has given a line of credit to the

financial institution for onward lending) and the risk of exchange rate fluctuation is borne by the

borrower. On foreign currency loans sanctioned under the Exchange Risk Administration

Scheme, the principal repayment obligations of the borrower are rupee tied at the rate of

exchange prevailing on the dates of disbursement. On such rupee-tied loan liability, the borrower

pays by way of servicing his loan a composite cost every quarter.

The composite cost consists of three elements:

(i) The interest portion which is arrived at on the basis of the weighted average interest cost of the

various components of the currency pool,

(ii) The spread of the financial institutions, and

(iii) The exchange risk premium.

The composite cost is a variable rate determined at six-monthly the intervals. It has a floor and

a cap. The floor and the cap as well as the rate of interest applicable for the period is reviewed

and announced from time to time.

5.4 SEBI GUIDELINES

The Capital Issues Act, 1947 was the primary legislation regulating the issue of securities by the

corporate sector till recently. This Act was repealed in May 1992 and capital issues were brought

under the guidelines of the Securities Exchange Board of India (SEBI) which was empowered

with statutory powers by passing of the SEBI Act, 1992.

A comparison of SEBI guidelines with the guidelines that were followed under the Capital IssuesControl Act, 1947 suggests that the thrust of regulation is no longer on product and price control.

In the earlier regime, there were restrictions on the kinds of securities that could be issued, the

pricing of these securities, and the interest rates or dividend rates payable on them. Under the

new regime there is virtually no restriction on the types of securities that can be issued, there is

substantial freedom in pricing these securities, and there is no ceiling on interest / dividend rate

payable on these securities. While new regime more or less does away with product and price

controls, it lays stress on adequate disclosures & seeks to safeguard the interest of investors.

The key SEBI guidelines are:



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New Instruments

There is no restriction on the kinds of financial instruments used, but the issuer of capital shall

make adequate disclosures regarding the terms and conditions, redemption, security conversion,

and any other features of the instrument so that an investor can make a reasonable determination

of risks, returns, safety, and liquidity of the instruments.

Pricing of Public Issues of Equity Capital

A new company set up by entrepreneurs without a track record will be permitted to issue

capital to public only at par.

A new company set up by existing companies with a five year track record of consistent

profitability will be free to price its issue provided the participation of the promoting

companies is not less than 50 per cent of the equity of the new company and the issue

price is made applicable to all new investors uniformly.

An existing private / closely held company with a three year track record of consistent

profitability shall be permitted to freely price the issue.

An existing listed company can raise fresh capital by freely pricing further issue.

FCDs / PCDs / NCDsThe guidelines relevant to these instruments are as follows:

Credit rating is compulsory in the case of FCDs if the conversion is effected after 18 months

and in the case of NCDs/ PCDs if the maturity exceeds 18 months.

In the case of FCDs/ PCDs the terms of conversion (time of conversion and conversion price)

shall be predetermined and stated in the prospectus.

Any conversion in part or whole of the debenture will be optional at the hands of the

debenture holder, if the conversion takes place at or after 18 months from the date of

allotment, but before 36 months. FCDs having a conversion period exceeding 36 months

must have put and call option.

A Debenture Redemption Reserve (DRR) shall be created by all companies raising

debentures.

Promoters Contribution and Lock-in Period

The key provisions in the regard are as follows:



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(a) Equity capital to be subscribed in any issue to the public by promoters, i.e., those

described in the prospectus as promoters, directors, friends, relatives and associates should

not be less than 25 per cent of the total issue of equity capital up to Rs 1000 million and

20 per cent of the issue above Rs 1000 million. In the case of FCDs, one third of issue

amount should be contributed by promoters, directors, friends, relatives and associates by

way of equity before the issue is made. In the case of PCDs, one third of the convertible

portion should be brought in as contribution of promoters, directors, friends, relatives and

associates before the issue is made. The minimum subscription by each of the friends/

relatives and associates under the promoters quota should not be less than Rs 0.1 million.

(b) The promoters contribution shall not be diluted for a lock-in period of five years from

the date of commencement of the production or date of allotment whichever is later.

Promoters must bring in their full subscription to issues in advance before public issues.

(c) All firm allotments, preferential allotments to collaborators, shareholders of promoter

companies, whether corporate or individual, shall not be transferable for three years from

the date of the commencement of production or date of allotment whichever is later.

5.5 FINANCIAL ASSISTANCE

I. DIRECT FINANCIAL ASSISTANCE

Financial institutions provide direct financial assistance in the following ways :

Rupee term loans

Foreign currency terms loans

Subscription to equity shares

Seed capital

Rupee Term loans

The most significant form of assistance provided by financial institutions, rupee term loans are

given directly to industrial concerns for setting up new projects as well as for expansion,

modernization, and renovation projects. These funds are provided for incurring expenditure

toward land, building, plant and machinery, technical know-how, miscellaneous fixed assets,

preliminary expenses, preoperative expenses, and margin money for working capital.

Foreign Currency Term Loans



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Financial institutions provide foreign currency term loans for meeting the foreign currency

expenditures towards import of plant, machinery and equipment, and also towards payment of

foreign technical know-how fees. The periodical liability for interest and principal remains in the

currency / currencies of the loans and is translated into rupees at the then prevailing rate of

exchange for making payments to the financial institutions. The borrower has the option of the

Exchange Risk Administration Scheme also.

Direct Subscription to Equity

In addition to providing term loans (in rupees as well as foreign currencies), financial institutions

also subscribe to equity capital.

Seed Capital

Financial institutions supplement the resources of the promoters of the small and medium scale

industrial units which are eligible for assistance from all-India financial institutions and / or state-

level financial institutions. Broadly, three schemes have been formulated:

Special Seed Capital Assistance Scheme: The quantum of assistance under this scheme is

Rs 0.2 million or 20 per cent of the project cost, whichever is lower. This scheme is

administered by the State Financial Corporations Seed Capital Assistance Scheme: The assistance under this scheme is restricted to Rs 1.5

million. This scheme is applicable to project costing not more than Rs. 20 million. The

assistance per project is restricted to Rs. 1.5 million. The assistance is provided by IDBI

through state level financial institutions. In special cases, IDBI may provide the

assistance directly.

Risk Capital Foundation Scheme: Under this scheme, the Risk Capital Foundation, an

autonomous foundation set up and funded by IFCI, offers assistance to promoters of

projects costing between Rs 20 million and Rs 150 million. The ceiling on the assistance

provided varies between Rs 1.5 million and Rs 4 million depending on the number of

applicant promoters.

II. INDIRECT FINANCIAL ASSISTANCE

Besides providing direct financial assistance, financial institutions extend help to industrial units

in obtaining finance/ credit through the following ways:



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Deferred payment guarantee

Guarantee for foreign currency loans

Underwriting

Deferred Payment Guarantee

Financial institutions issue guarantee on behalf of the buyer of industrial machinery to the

supplier offering the facility of deferred payments. Should there be a default by the buyer in the

payment of deferred installments, financial institutions make the payment and subsequently

recover the amount from the assisted unit. A nominal commission is charged for providing such

guarantee.

Guarantee for Foreign Currency Loans

Financial institutions provide guarantee for foreign currency loans obtained by industrial

concerns from institutions and banks abroad. A nominal commission is charged to the assisted

unit for such guarantee.

Underwriting

As part of the overall financial package, financial institutions generally participate in

underwriting equity issues of assisted units. This helps the assisted units in raising funds from thecapital market.

III. SPECIAL SCHEMES

Several special schemes have been designed to serve the varied needs of industry. The important

ones are:

Bill rediscounting scheme

Suppliers line of credit

Soft loan scheme

Equipment finance scheme

5.6 TERM LOAN PROCEDURE

The procedure associated with a term loan involves the following steps:

Submission of Loan Application



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The borrower may submit the application to any of the three term lending institutions, viz., IDBI,

ICICI, and IFCI. The borrower is required to fill out a common application form which seeks

comprehensive information about the project. Specifically, the common application form covers

the following aspects:

Promoters background

Particulars of the industrial concern

Particulars of the project (capacity, process, technical arrangements, management,

location, land and buildings, plant and machinery, raw materials, effluents, labour,

housing, and schedule of implementation)

Cost of the project

Means of financing

Marketing and selling arrangements

Profitability and cash flow

Economic considerations

Government consents

Initial Processing of Loan Application

When the application is received, an officer of the recipient institution reviews it to ascertain

whether it is complete for processing. If it is incomplete the borrower is asked to provide therequired additional information. When the application is considered complete, the recipient

institution prepares a flash report which is essentially a summarization of the loan application,

to be evaluated at the Senior Executive Meeting (SEM). Once the SEM, on the basis of its

evaluation of the flash report, decides that the project justifies a detailed appraisal, it nominates

the lead financial institution. The factors taken into account for designating the lead institution.

The factors taken into account for designating the lead institution are : location of the project,

prior experience of institutions in handling similar projects, representation of institutions in the

state and promoter group, and existing workload of the institutions.

For the convenience of borrowers, financial institutions operate a scheme of participation for

rupee term loans and underwriting assistance. Under this scheme, the borrower interacts with

only the lead financial institution which administers the entire loan and underwriting facility.

The lead institution exercises the rights of other participating institutions as their constituent

authority.

Appraisal of the Proposed Project



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The detailed appraisal of the project is done by the lead institution. The appraisal covers the

marketing, technical, financial, managerial, and economic aspects. The appraisal memorandum is

normally perpared within two months after site inspection and placed before the Senior

Executives Meeting / Inter-Institutional Meeting (SEM / IIM) for a decision about approval of the

project and determining the sharing arrangement among the institutions. Once a favorable

decision is taken at the SEM / IIM forum and the sharing arrangement worked out, the case is

referred to the Board of Directors of the lead financial institution.

Issue of the Letter of Sanction

After the Board of Directors of the lead financial institution approves the proposal, a financial

letter of sanction is issued to the borrower. This communicates to the borrower the assistance

sanctioned by the lead institution and the assistance sanctioned / to be sanctioned by other

participants in the consortium arrangement. Each of the participating institutions would, after

approval by its Board of Directors or other appropriate authority, convey sanction of its share of

assistance to the lead institution under advice to the borrower. If a participating institution is not

able to make available its share of assistance, the same will be shared on a pro rata basis amongst

the lead and other participating institutions.

Acceptance of the Terms and Conditions by the Borrowing UnitOn receiving the letter of sanction from the lead financial institution, the borrowing unit convenes

its board meeting at which the terms and conditions associated with the letter of sanctioned are

accepted and an appropriate resolution is passed to that effect. The acceptance of the terms and

conditions has to be conveyed to the lead financial institution within thirty days.

Execution of loan agreement

The lead financial institution, after receiving the letter of acceptance from the borrower, sends the

drafts of the agreement to the borrower to be executed by authorized persons and properly

stamped as per the Indian Stamp Act, 1899. The agreements, properly executed and stamped,

along with other documents as required by the lead financial institution must be returned to it.

Once the lead financial institution also signs the agreement, it becomes effective.

Disbursement of Loans

Periodically, the borrower is required to submit information on the physical progress of the

project, financial status of the project, arrangements made for financing the project, contribution



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made by the promoters, projected funds flow statement, compliance with various statutory

requirements, and fulfillment of pre-disbursement conditions. Based on the information provided

by the borrower, the lead financial institution will determine the amount of term loan to be

disbursed from time to time. Before the entire term loan is disbursed the borrower must fully

comply with all the terms and conditions of the loan agreement.

Creation of Security

The term loans (both rupee and foreign currency) and the deferred payment guarantee assistance

provided by the All-India financial institutions are secured through the first mortgage, by way of

deposit of title deeds of immovable properties and hypothecation of movable properties. As the

creation of mortgage, particularly in the case of land, tends to be a time consuming process, the

institutions permit interim disbursements against alternate security (in the form of guarantees by

the promoters). The mortgage, however, has to be created within a year from the date of the first

disbursement. Otherwise the borrower has to pay an additional charge of 1 per cent interest.

Monitoring

Monitoring of the project is done at the implementation stage as well as at the operational stage.

During the implementation stage, the project is monitored through:

(i) Regular reports, furnished by the promoters, which provide information about placement oforders, construction of buildings, procurement of plant, installation of plant and machinery, trial

production, etc.,

(ii) Periodic site visits,

(iii) Discussion with promoters, bankers, suppliers, creditors, and others connected with the

project,

(iv) Progress reports submitted by the nominee directors, and

(v) Audited accounts fo the company.

During the operational stage, the project is monitored with the help of

(I) quarterly progress report on the project,

(ii) Site inspection,

(iii) Reports of nominee directors, and

(iv) Comparison of performance with promise.

The most important aspect of monitoring, of course, is the recovery of dues represented by

interest and principal repayment.



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5.7 RISKS ASSOCIATED WITH STEEL PLANTS

1. Decline in Government SpendingLong products find usage mainly in construction and infrastructure projects. In the past, the

Government has been a major buyer accounting for about 30% of the output. The reduction in

government spending to control the deficit has resulted in a slow growth in this sector.

Thought the Government has opened the infrastructure sector to private and foreign investments,

the lack of clear policies has limited investments in this sector. It is expected that only in the

medium term, these policies would be clarified and the clearances required for the projects would

be obtained. This slow down in implementation of policies could limit growth of long products

in the medium term.

2. Threat from Imports

Landed costs of HR coils are almost equivalent to the domestic prices, with the decline in import

duties on HR coils from 30% to 25% as recommended in the 1996-97 budget. Further as per

recommendations of the Chelliah committee, import duty is expected to decline to 20% by 1997-

98. However, the impact of the reduction in the import duty is likely to be partially offset by the

depreciation of the rupee. The domestic manufacturers continue to face a threat from imports.

Domestic prices of HR coils are expected to remain close to the landed costs, thus maintaining a

pressure to keep domestic prices low.

Further, the quality of the domestic HR manufacturers (with the exception of a few plants) is

lower than the international standards on account of the outdated technologies and process in

efficiencies in use. Hence, the Indian steel manufacturers also face a threat from imports on thequality issue.

3. Capital Intensive Nature of The Industry

The project cost of an economic sized 1 million tonnes, integrated steel plant is estimated at Rs.

380 - 400 bn. Further, the gestation period for a steel plant is around 4-5 years. India is a capital

scarce country and the cost of capital is high. This limits the ability of new entrants to setup steel

plants using the ISP route. As a result, many companies would need to tap foreign markets or

seek joint ventures with foreign equity stake. However, the ability to borrow would be limited by



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the brand equity enjoyed by the group abroad. Consequently, although many steel projects have

been announced, there is likely to be a delay in setting up steel capacities. Thus the capital

intensive nature of the industry poses a constraint to small and medium sized players.

Further, over the past few years the budgetary support from the government for the

modernization and expansion programmes of the ISPs has been curtailed in a gradual manner on

account of the funds constraints.

4. Usage of Outdated Technology

Most ISPs in India were set up nearly four decades ago and are using outdated technology. In

India, only about 45% of steel output is manufactured through the energy efficient BOF route,

26% by the inefficient open hearth process (one of the highest in the world) and 29% by the

power intensive EAF route (figures are for the year 1992). Over dependence on the open hearth

process and the EAF route affects the cost structure and competitiveness of Indian companies.

In 1992, the continuous casting route accounted fro only about 16% of Indias steel production

(compared to almost 95% in Japan), adversely affecting the cost competitiveness of Indian

manufacturers. Today RINL is the only ISP in India which has a 100% continuous casting

facilities. As a result the Indian process efficiencies are much lower than the global average.Large capital outlays are required by the ISPs to modernize and upgrade their production

facilities. However, the Indian steel manufacturers are modernizing their plants and therefore, in

the medium term, process efficiencies are expected to improve.

5. Location

As steel is freight sensitive item, the location of the plant a

final report-milind

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