pfc report 1

8/2/2019 PFC Report 1

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A Report on

Mobilization of Funds through External Commercial Borrowings

in the form of

Syndicated Loans and Bonds

By

Sneha Manan

Enrolment No. 1011005

Institute of Management Technology

Hyderabad


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A Report on

Mobilization of Funds through External Commercial Borrowings

in the form of

Syndicated Loans and Bonds

(Stage I)

By

Sneha Manan

Enrolment No. 1011005

A report submitted in partial fulfillment

of the requirement of PGDM Program

Institute of Management Technology

Hyderabad

04 April 2012


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Acknowledgement

This project report is an outcome of the guidance and support provided by my mentors at PowerFinance Corporation and Institute of Management Technology Hyderabad.

I extend my most sincere thanks to Mr. A.K. Gupta, GM Finance at PFC and Prof. Nikhil Rastogi, my

mentor at IMT Hyderabad for their guidance and for providing me with valuable inputs which were

very helpful.

My heartfelt thanks and appreciation go out to my Institution and my Professors, especially Prof.

Archana Pillai, without whom I would not have had this opportunity to intern at PFC.

Sneha Manan


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Declaration

This is to certify that the project entitled Mobilization of Funds through External CommercialBorrowings in the form of Syndicated Loans and Bonds submitted by Sneha Manan is a bonafide

piece of work conducted under my supervision and guidance. No part of this work has been

submitted in any other University for any other degree. It may be considered for evaluation in partial

fulfilment of Post-Graduation Diploma in Management.

Mr A.K. Gupta Ms Sneha Manan

General Manager, Finance Student

Date: 04 April 2012


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Objectives

The objectives of the report are:

1. To understand the condition and identify challenges facing the Power Sector in India2. To appreciate the role and activities of Power Finance Corporation in the development of

the power scenario through its role as a Financial Institution dedicated to meeting the

requirements of the Indian power sector.

3. To understand Syndicated Loans the procedure involved


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Introduction

Energy in its diverse forms is the life-blood of economic development. Economic Growth is driven by

energy, whether in the form of finite resources such as coal, oil and gas or in renewable forms such

as hydel and wind or in its converted form, electricity. The growth of power sector in India has been

tremendous. However, the demand for power has been outstripping its availability. The end users of

electricity like households, agriculture sector, commercial establishments, and industries are

confronted with frequent power cuts, both scheduled and unscheduled. Substantial energy shortage

prevails in the country due to inadequacies in the generation, transmission and distribution as well

as inefficient utilization of electricity.

Indian Power Sector

The power sector in India has undergone significant progress after Independence. When India

became independent in 1947, the country had a power generating capacity of 1,362 MW.

Generation and distribution of electrical power was carried out primarily by private utility

companies. Notable amongst them and still in existence is Calcutta Electric. Power was available only

in a few urban centers; rural areas and villages did not have electricity. After 1947, all new power

generation, transmission and distribution in the rural sector and the urban centers (which was not

served by private utilities) came under the purview of State and Central government agencies.

State Electricity Boards (SEBs) were formed in all the states.

Till December 1950 about 37% of the installed capacity in the Utilities was in the public sector and

about 63% was in the private sector. The Industrial Policy Resolution of 1956 envisaged the

generation, transmission and distribution of power almost exclusively in the public sector. As a result

of this Resolution and facilitated by the Electricity (Supply) Act, 1948, the electricity industry

developed rapidly in the State Sector.

From, the Fifth Plan onwards i.e. 1974-79, the Government of India got itself involved in a big way in

the generation and bulk transmission of power to supplement the efforts at the State level and took

upon itself the responsibility of setting up large power projects to develop the coal and hydroelectric

resources in the country as a supplementary effort in meeting the countrys power requirements.

The policy of liberalisation the Government of India announced in 1991 and consequent

amendments in Electricity (Supply) Act have opened new vistas to involve private efforts and

investments in electricity industry, like:

The Electricity (Supply) Act, 1948 was amended in 1991 to provide for creation of privategenerating companies for setting up power generating facilities and selling the power in bulk to

the grid or other persons.

Financial Environment for private sector units modified to allow liberal capital structuring and anattractive return on investment. Up to hundred percent (100%) foreign equity participation can

be permitted for projects set up by foreign private investors in the Indian Electricity Sector.
http://indianpowersector.com/2010/10/electricity/http://indianpowersector.com/2010/10/electricity/http://indianpowersector.com/2010/10/electricity/http://indianpowersector.com/2010/10/electricity/http://indianpowersector.com/2010/10/electricity/http://indianpowersector.com/2010/10/electricity/http://indianpowersector.com/2010/10/electricity/http://indianpowersector.com/2010/10/electricity/http://indianpowersector.com/2010/10/electricity/http://indianpowersector.com/2010/10/electricity/http://indianpowersector.com/2010/10/electricity/http://indianpowersector.com/2010/10/electricity/http://indianpowersector.com/2010/10/electricity/http://indianpowersector.com/2010/10/electricity/http://indianpowersector.com/2010/10/electricity/http://indianpowersector.com/2010/10/electricity/


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India has the fifth largest generation capacity in the world with an installed capacity of 1,90,592.55

MW as on 31st March 2012. The top four countries, viz., US, Japan, China and Russia together

consume about 49 percent of the total power generated globally. The average per capita

consumption of electricity in India is estimated to be 704 kWh during 2008-09. However, this is fairly

low when compared to that of some of the developed and emerging nations such US (~15,000 kWh)

and China (~1,800 kWh). The world average stands at 2,300 kWh.

In India, the transmission and distribution system is a three tier structure comprised of regional

grids, state grids and distribution networks. The five regional grids, configured on a geographical

contiguity basis, enable transfer of power from a power surplus state to a power deficit state. The

regional grids also facilitate the optimal scheduling of maintenance outages and better co-ordination

between power plants. These regional grids are to be gradually integrated to form a national grid,

whereby surplus power from a region could be redirected to another region facing power deficits,

thereby allowing a more optimal utilization of the national generating capacity.

Power sector at this point of time is undergoing crucial changes in terms of huge capacity addition,

higher efficiency, and increased private power participation, competitive pricing and improved

regulatory framework. The power requirement in India is expected to grow manifold in the coming

years as a result of industrial and urban expansion. As on March 31, 2011, Indias total installed

capacity was 1,90,592.55 MW, with majority capacity in the state and central sectors. Hydro power

and coal based thermal power have been the main sources of generating electricity.

The Indian power sector has historically been beset by energy shortages which have been rising

over the years. In fiscal 2011, peak energy deficit was 10.3% and total energy deficit was 8.5%. The

shortages in energy and peak power have been primarily due to the sluggish progress in capacity

addition as illustrated in the table below:

Given below are some of the issues currently facing the Power Sector:

1. Poor Project Execution2. Distribution3. Fuel Availability

4. Equipment Shortage5. Land Acquisition and Environment Clearances6. Financial Constraints

The ongoing economic crisis in the Indian Power Sector can be judged from the fact that SEBs owe

almost Rs. 1.77 trillion to banks. The States faced with major distribution losses include Tamil Nadu,


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Uttar Pradesh, Rajasthan, Madhya Pradesh, Andhra Pradesh, Haryana and Punjab. Out of these, the

first three states alone account for nearly 75 percent of the total distribution losses in the country.

The reasons for these losses range from power theft, inefficient transmission and billing

inefficiencies.


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Power Finance Corporation

PFC is a leading power sector public financial institution u/s 4A of the Indian Companies Act, 1956

and registered as a non-banking financial company (NBFC-ND-IFC) with the Reserve Bank of India;

dedicated to Power Sector financing and committed to the integrated development of the power

and associated sectors. PFC provides fund and non-fund based support to central, state and private

sector projects. PFC occupies a key position in the governments plans for the growth of Indian

power sector.

PFC started its lending operations in the fiscal 1988 with a sanction of Rs 107 Crore and

disbursement of Rs 101 Crore. In comparison, the Company has sanctioned Rs 75,197 Crore and

disbursed close to Rs 34,122 Crore including R-APDRP during the FY 2011. The cumulative

sanctions are Rs 3,45,726 Crore and cumulative disbursements are Rs 1,73,049 Crore as on Mar 31,

2011.

In the fiscal 2011, International credit rating agencies Moodys, Fitch and Standard & Poors gave a

long term foreign currency issuer ratings of Baa3, BBB- & BBB- respectively, which are at par

with sovereign rating. The long term domestic borrowing programme (including bank loans) have

the highest safety rating of AAA and LAAA respectively by CRISIL and ICRA. Further, short term

domestic borrowing programme of your Company (including bank loans) also have the highest rating

of P1+ and A1+ respectively by CRISIL & ICRA. PFC is an ISO 9001:2008 certified Company.

RBI classified PFC as an IFC in July 2010. Infrastructure Finance Company (IFC) is a category of

infrastructure funding entities introduced by Reserve Bank of India (RBI) in February 2010. Non-

deposit taking Non-Banking Financial Companies (NBFCs-ND) which satisfy minimum eligibility

criteria relating to proportion of infrastructure loans (75% of total assets deployed in infrastructure

loans), net owned funds (Rs 300 crore), credit rating (A or equivalent of CRISIL, FITCH, CARE, ICRA

or equivalent rating by any other accredited rating agencies), CRAR (15% with minimum Tier I capital

of 10%) are eligible to apply to RBI and seek IFC status.

PFCs clients include:

1. State Electricity Boards2. State Power Utilities3. State Electricity/Power Departments4. Other State Departments engaged in the development of power projects5. Central Power Utilities6. Joint Sector Power Utilities7. Equipment Manufacturers8. Private Sector Power Utilities


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Resource Mobilization Unit:

Resource Mobilization Unit(RMU) is responsible for raising fund resources both in domestic for

further disbursement as financial assistance to its customers. RMU also undertakes various activities

like appointment for various agencies like RTA, Trustees, IPA, Collecting and Paying Banker for

coordinating the resource mobilizing process. It is also responsible for listing of various debt

instruments on the NSE.

The main objective of the RM department is to mobilize resources/raise funds at the minimum cost

and the easiest terms and conditions keeping in mind the requirements, objectives and the financial

position of the company.

in order to keep pace with the increasing level of disbursement needs, the RMU has to keep itself

occupied and vigilant to tap the markets for smooth operations of the company.

It generally funds assets comprising loans to the power sector, with borrowings of various maturitiesin the international and domestic market. Market borrowings include bonds, short term loans,

medium term loans, long term loans and commercial papers. Since 1999, all funds raised, both

domestic and international, have been raised on an unsecured basis.

The company segments the market into two:

Domestic International

Rupee Resources (Domestic):

In terms of the domestic resource, a significant proportion of Rupee funds are raised through

privately placed bond issues in the domestic market and term loans. PFC has a diverse investor base

of banks, financial institutions, mutual funds, insurance companies, provident fund trusts and

superannuation trusts. The bonds issued are unsecured, redeemable, non-convertible, non-

cumulative and taxable and are listed on the wholesale debt market of the NSE.

Foreign Currency Resources(International)

PFC began accessing foreign currency loans from multilateral, bilateral and export credit agencies in

fiscal 1991 when it obtained funds from the French Government, which were guaranteed by the

Government of India. Traditionally, major foreign currency borrowing has been from multilateral

institutions such as the World Bank and the ADB. These finds were routed thru the Government of

India, where the foreign exchange risk was borne by the government.

PFC first accessed commercial foreign currency borrowings that were not guaranteed by the

Government of India in January 1997 with the establishment of a syndicated loan facility. Since then,

corporation has borrowed funds in the international commercial markets in the form of syndicated

loans as well as fixed and floating rate note/bond issues. This has enabled PFC to diversify the

investor base.


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At present the corporation is borrowing directly from these agencies, where foreign exchange risk is

borne by the corporation. PFC has a USD 50 million Line of Credit facility with the ADB that has a 20

year tenure. This line of credit facility is guaranteed by the government of India.

Some key decisions taken before funds are raised:

1. Tenor2. Timing3. Quantum4. Competitors Actions5. Investors Appetite6. Policy changes and other actions of RBI/Regulatory Authorities

Types of Instruments:

The Company generally funds its assets, comprising loans to the power sector, with borrowings of

various maturities in the international and domestic markets.

Domestic Market:

Bonds Term Loans Commercial Paper

Overseas Market:

Syndicated Loans Bonds


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External Commercial Borrowings

External Commercial Borrowings(ECBs) refer to commercial loans in the form of bank loans,buyers credit, suppliers credit, securitized instruments (e.g. floating rate notes and fixed

rate bonds, non-convertible, optionally convertible or partially convertible preference

shares) availed of from non-resident lenders with a minimum average maturity of 3 years

Guidelines related to ECBs are set out in the Reserve Bank of Indias Master Circular onExternal Commercial Borrowings and Trade Credits(Master Circular No.9 /2011-12 dated 1st

July, 2011)

Indian Companies are allowed to raise funds from abroad in the following methods(The ECBpolicy is applicable to all these):

1. ECBs2. Foreign Currency Convertible Bonds(FCCBs)3. Preference Shares, the funds for which have been received on or after 1st May 20074. Foreign Currency Exchangeable Bonds(FCEBs)

ECBs can be accessed under two routes:

Automatic Route i.e. do not require Reserve Bank / Government of India approval Approval Route, wherein RBIs approval is needed

The circular sets out various guidelines with respect to ECBs like:

Eligible Borrowers Recognized Lenders Amount and Maturity All-in-cost ceilings End-use End uses not permitted Guarantees Securities Parking of ECB Proceeds Prepayment Refinancing of an existing ECB Debt Servicing Procedure


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Syndicated Loans

The increasing size of loans has led to a practice ofsyndicated loans. Under this, a lead manager,

or a group, syndicates the loan by inviting participation of other banks. Syndicated loans are an

important source of financing for corporate acquisitions. In case of large loans, the syndicate can

comprise several hundred banks. Major commercial banks are usually the lead managers.

Investment banks like Goldman Sachs, Morgan Stanley are also active in this field.

Fees payable on Syndicated Loans include a Management Fee (payable by the borrower either on

loan signing or on first drawdown); commitment fee(payable on the undrawn portion of the loan

during the availability period); and agency fee(payable to the Agent bank to cover administration

costs incurred during raising the loan).

The parties to a typical syndicated loan agreement would generally include the following:

1. The borrower2. The managing banks3. The lending banks4. The guarantor(where applicable)5. The agent bank(the agent bank is generally one of the managing/lending banks, who act as

agent for all the lenders. One of the functions of the agent bank would be to distribute the fees

or repayments of the loan amongst the participants. The agent bank gets a fee for the

administration work it does).

Procedure:

Over the years, the drill for finalization of syndicated loans has become well-settled. Some of the

important steps in the process are summarized below:

1. The borrower decides upon the size and currency of the loan it desires to borrow and invitesbids from banks for arranging the financing on the basis of its business plan, purpose of the loan

etc.

2. For a name acceptable in the market, in general, several banks or group of banks will comeforward with offers indicating the broad terms on which they are willing to arrange the loan. The

bank or banks are referred to as the lead manager(s)/arranger(s). In their offers, the lead

managers would indicate the front end fees, commitment and other charges, and spreads over

LIBOR on which they are willing to arrange the loan. In certain cases, alternatives may be given

to the borrower, for example, of embedding a currency option in favour of the lenders as part of

the loan transaction with consequential changes in terms.

3. After comparing the bids received from banks or groups of banks, the borrower will choose theone that seems best to it in terms of the total cost of the package, the other terms and


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conditions, and the relationship factor. Once the borrower has chosen the bid, he would

mandate the lead manager(s) to arrange the loan.

4. The next step generally would be the finalization, jointly by the borrower and the lead manager,of an information memorandum giving financial and other details of the borrower. The

information memorandum is the basis on which the lead managers would solicit participation in

the loan from other banks and financial institutions. Typically each of the lead managers would

underwrite a portion of the total loan amount involved and send out invitations to 50, 60 or

more banks, who may be likely participants.

5. The invitation to participate would also specify the basis on which the front-end fees would besplit between the lead managers and the other participants. In general, the lead managers

would not pass on the entire fee to the participating banks, but, depending on their assessment

of the likely response, offer a share to the participants. The greater the amount a participant iswilling to take up, the higher will be his share.

The total return for a lending bank is thus a mixture of the front-end fee and the spread over

LIBOR. Since the lead managers do not generally pass on the entire fee to the participants, their

return goes up to the extent to which they are able to sell participations to other banks.

6. Once the response to the participation invitation is known, the lead managers would generallybe required to take up the balance themselves. If the response is poor and the offer to arrange

the financing was initially made on a best efforts basis, rather than commitment, the lead

managers could back out. In practice, however, and in the case of good names, this rarely

happens. To maintain their name and standing in the syndicated loans market, lead managers

have to ensure that the terms on which they have bid for a transaction are such that the

syndication would be successful. In any case, even firm commitments on the part of lead

managers often contain a right to withdraw in the event of material adverse change in the

market, or the borrowers/its countrys credit standing. Sometimes borrowers have to cede to

lead managers the right to change the pricing or structure of the loan, if this becomes necessary

for successful syndication.

7. Once all the participants have been finalized, the lead managers and borrowers and whereapplicable, the guarantor, finalize the loan agreement, which is generally a single document

which all parties sign.

8. In the case of most syndicated loans, the last step is to publicise the arrangement of the loan inthe financial press.


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Provisions of a typical Syndicated Loan:

1. Conditions Precedent and RepresentationsAfter defining the parties to the agreement andvarious other terms, the agreement generally

sets out the conditions precedent to its coming into force. These would include delivery by theborrower to the agent bank of various documents such as overrun finance agreement,

government approvals, for example, relating to tax deduction at source, tying up of other

financial requirements, if necessary, certificates from the lawyers about the consultation of, and

the various internal and external approvals by, the borrowers etc. Next come various

representations by the borrower about its incorporation, financial projections, its not being in

default to any other lender etc.

2. Drawdown:The loan agreement would then go on to prescribe the procedure for drawdown of the loan, the

commitment period, the notice to be given by the borrower for the drawdowns to the agent

bank, any documentary requirements in that connection etc. One of the standard clauses is that

each bank is liable for its own commitment. In other words, if one of the participating banks is

unable, for any reason, to come up with its share of the funding, the other participating banks

are not liable to make good of the shortfall.

3. Repayment:The agreement incorporates provisions regarding the repayment schedule of the loan and the

prepayment option to the borrower. In general, for floating rate loans, the lenders have no

objections to the loan being prepaid on any rollover date. As for partial prepayment, minimum

amounts are often prescribed and these are applied towards repayment of instalments in

reverse order of maturity.

4. Fees and Interest:The agreement also specifies the commitment fees, front-end(or management) fees and interest

payable by the borrower. As for the interest, it is common for the borrower to have an option of

choosing the interest period, say, 1,3,6, or 12 months. Borrowers use this flexibility depending

on the view of the likely movements in interest rates). The agreement also specifies the manner

in which the LIBOR will be determined. This provision is meant to take care of the possibility that

different banks in the lending group may have different banks in the lending group may havedifferent offered rates and no dispute should arise on this score. Once the agent bank confirms

the LIBOR, it is applicable for the entire lending consortium. Another common provision is

regarding interest on amount in default.

5. Extraordinary Circumstances:Offshore loan agreements also have a provision giving the lenders the right to substitute the

loan, to say, their domestic market, in the event of an extraordinary situation arising. This is

merely an enabling provision to take care of a situation where, for example, because of certain

actions by central banks or national authorities, the offshore market ceases to exist.


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6. Optional Currencies:If the borrower has a multi-currency option, the agreement will specify the optional currencies

and prescribe the notice to be given for change of currency etc.

(Multicurrency option enables the borrower to change the borrowed currency on any interest

re-fixation day).

7. Miscellaneous:The loan agreement also provides that all payments by the borrower must be in convertible

funds and free and clear of all taxes. Covenants to be observed by the borrower, for example, a

minimum working capital, are also prescribed together with the events of default.

8. Jurisdiction, Cross-default and Sovereign Immunity:Some of the other important clauses in the loan agreement relate to Jurisdiction, Cross-default

and Sovereign Immunity. Jurisdiction is a very important element of any international loan

transaction and the agreement prescribes the place, whose laws are applicable to theinterpretation of the rights and obligations under it. The cross-default clause is aimed at giving

the lenders the right to accelerate repayment of the loan in the event the borrower or the

guarantor is in default under any other loan agreement. Most countries laws, customs and

practices preclude the suing in its courts of a foreign government, under the principal of

sovereign immunity. If the borrower or guarantor happens to be a sovereign government, as is

often the case in respect of developing country borrowings, the loan document takes an express

waiver of sovereign immunity from the borrower or guarantor as the case may be.


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References

1. Reserve Bank of India (2011), Master Circular on External Commercial Borrowings andTrade Credits ", available at:http://rbidocs.rbi.org.in/rdocs/notification/PDFs/09MCEC300611.pdf(Accessed on 12th

March 2012)

2. Rajwade, A.V. (2004), International Finance in Foreign Exchange International Finance RiskManagement, Academy of Business Studies, New Delhi, pp. 185-196

3. http://www.powermin.nic.in/indian_electricity_scenario/power_for_all_target.htm(Accessed on 14

thMarch 2012)

4. http://www.pfcindia.com/Content/FinancialPoliciesProducts.aspx(Accessed on 18th March2012)

5. http://indianpowersector.com/about/overview/(Accessed on 20th March 2012)

6. http://www.pfcindia.com/writereaddata/userfiles/file/Annual%20reports/ann_rpt1011.pdf(Accessed on 22

ndMarch 2012)

7. http://www.pfcindia.com/writereaddata/userfiles/file/ResearchReport/VIII%20Report%20-%20Final.pdf(Accessed on 22

ndMarch 2012)
http://rbidocs.rbi.org.in/rdocs/notification/PDFs/09MCEC300611.pdfhttp://www.powermin.nic.in/indian_electricity_scenario/power_for_all_target.htm%20(Accessedhttp://www.powermin.nic.in/indian_electricity_scenario/power_for_all_target.htm%20(Accessedhttp://www.powermin.nic.in/indian_electricity_scenario/power_for_all_target.htm%20(Accessedhttp://www.powermin.nic.in/indian_electricity_scenario/power_for_all_target.htm%20(Accessedhttp://www.pfcindia.com/Content/FinancialPoliciesProducts.aspx(Accessedhttp://indianpowersector.com/about/overview/(Accessedhttp://www.pfcindia.com/writereaddata/userfiles/file/Annual%20reports/ann_rpt1011.pdf(Accessedhttp://www.pfcindia.com/writereaddata/userfiles/file/Annual%20reports/ann_rpt1011.pdf(Accessedhttp://www.pfcindia.com/writereaddata/userfiles/file/Annual%20reports/ann_rpt1011.pdf(Accessedhttp://www.pfcindia.com/writereaddata/userfiles/file/Annual%20reports/ann_rpt1011.pdf(Accessedhttp://www.pfcindia.com/writereaddata/userfiles/file/ResearchReport/VIII%20Report%20-%20Final.pdf(Accessedhttp://www.pfcindia.com/writereaddata/userfiles/file/ResearchReport/VIII%20Report%20-%20Final.pdf(Accessedhttp://www.pfcindia.com/writereaddata/userfiles/file/ResearchReport/VIII%20Report%20-%20Final.pdf(Accessedhttp://www.pfcindia.com/writereaddata/userfiles/file/ResearchReport/VIII%20Report%20-%20Final.pdf(Accessedhttp://www.pfcindia.com/writereaddata/userfiles/file/ResearchReport/VIII%20Report%20-%20Final.pdf(Accessedhttp://www.pfcindia.com/writereaddata/userfiles/file/ResearchReport/VIII%20Report%20-%20Final.pdf(Accessedhttp://www.pfcindia.com/writereaddata/userfiles/file/Annual%20reports/ann_rpt1011.pdf(Accessedhttp://www.pfcindia.com/writereaddata/userfiles/file/Annual%20reports/ann_rpt1011.pdf(Accessedhttp://indianpowersector.com/about/overview/(Accessedhttp://www.pfcindia.com/Content/FinancialPoliciesProducts.aspx(Accessedhttp://www.powermin.nic.in/indian_electricity_scenario/power_for_all_target.htm%20(Accessedhttp://www.powermin.nic.in/indian_electricity_scenario/power_for_all_target.htm%20(Accessedhttp://rbidocs.rbi.org.in/rdocs/notification/PDFs/09MCEC300611.pdf

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