Part A

Industrial profile
In financial economics, a financial institution is an institution that provides financial
services for its clients or members. Probably the most important financial service provided by
financial institutions is acting as financial intermediaries. Most financial institutions are
regulated by the government.
Broadly speaking, there are three major types of financial institutions:

1. Depositary Institutions : Deposit-taking institutions that accept and manage deposits

and make loans, including banks, building societies, credit unions, trust companies,
and mortgage loan companies
2. Contractual Institutions : Insurance companies and pension funds; and
3. Investment Institutes : Investment Banks, underwriters, brokerage firms.

An enterprise such as a bank whose primary business and function is to collect money
from the public and invest it in financial assets such as stocks and bonds, loans and
mortgages, leases, and insurance policies.
An organization, which may be either for-profit or non-profit, that takes money from clients
and places it in any of a variety of investment vehicles for the benefit of both the client and
the organization. Common examples of financial institutions are retail banks, which take
deposits into safekeeping and use them to make loans to other customers, and insurance
companies, which do not take deposits, but provide guarantees of payment if a certain
situation occurs in exchange for a premium. See also: Depository institution, Non-depository
institution.

Definition:

Section 45-I of the RBI Act, defines financial institution as under:

"Financial Institution" means any non-banking institution which carries on as its business
or part of its business any of the following activities, namely:-

(a) the financing, whether by way of making loans or advances or otherwise, of any

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 activity other than its own;
(b) the acquisition of shares, stock, bonds, debentures or securities issued by a
government or local authority or other marketable securities of a like nature;
(c) letting or delivering of any goods to a hirer under a hire-purchase agreement as
defined in clause (c ) of section 2 of the Hire-Purchase Act, 1972;
(d) the carrying on of any class of insurance business;
(e) managing, conducting or supervising, as foreman, agent or in any other capacity, of
chits or kuries as defined in any law which is for the time being in force in any
State, or any business, which is similar thereto;
(f) collecting, for any purpose or under any scheme or arrangement by whatever name
called monies in lump sum or otherwise, by way of subscriptions or by sale of
units, or other instruments or in any other manner and awarding prizes or gifts,
whether in cash or kind, or disbursing monies in any other way, to persons from
whom monies are collected or to any other person.

History of financial institution:

After the end of World War-II there was great need for speedy industrial expansion in the
whole world. Both winners and losers had to resurrect and to rebuild their economies from
the ruins of war. Development Financial Institutions (DFI) were set up in almost all the
countries of the world and the models were suited to their economic, social and cultural
values.

Similarly in India there was scarcity of finance which was a big hurdle in way of industrial
development. The means of providing finance for large scale industries were not adequate.
Moreover new enterprises, projects in backward areas and the projects which by their very
nature involve huge capital and the projects with long gestation periods owing to the nature
of the technology or product sophistication found it difficult to mobilise funds. To cater to
these kinds of projects for which adequate long term financing were required , the
Government of India decided to set up a series of financial institutions to provide funds to the
large industrial sector. These DFIs were set up on the model of “Industrial Bank Of

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Japan”.Also with the introduction of Five Year Plans the need for these kind of financial
institutions was felt all the more.
DFIs in India
The Group notes that there is no specific use of the term ‘DFI’ in either the RBI Act, 1934 or
the Companies Act, 1956 or various statutes establishing DFIs. While the RBI Act defines the
term
‘Financial Institution (FI), the Companies Act has categorized certain institutions as Public
Financial Institutions (PFIs).

Emergence of Financial Institutions in India

As mentioned earlier, DFIs are created in developing countries to resolve market failures,
especially in regard to financing of long-term investments. The DFIs played a very significant
role in rapid industrialisation of the Continental Europe. Many of the DFIs were sponsored by
national governments and international agencies. The first government sponsored DFI was
created in Netherlands in 1822. In France, significant developments in long-term financing
took place after establishment of DFIs such as Credit Foncier and Credit Mobiliser, over the
period 1848-1852. In Asia, establishment of Japan Development Bank and other term-lending
institution fostered rapid industrialisation of Japan. The success of these institutions, provided
strong impetus for creation of DFIs in India after independence, in the context of the felt need
for
raising the investment rate. RBI was entrusted with the task of developing an appropriate
financial architecture through institution building so as to mobilise and direct resources to
preferred sectors as per the plan priorities. While the reach of the banking system was
expanded to mobilise resources and extend working capital finance on an ever-increasing
scale, to different sectors of the economy, the DFIs were established mainly to cater to the
demand for long-term finance by the industrial sector. The first DFI established in India in
1948 was Industrial Finance Corporation of India (IFCI) followed by setting up of State
Financial Corporations (SFCs) at the State level after passing of the SFCs Act, 1951.
Financial Institutions set up between 1948 and 1974
Besides IFCI and SFCs, in the early phase of planned economic development in India, a
number of other financial institutions were set up, which included the following. ICICI Ltd.4
was set up in 1955, LIC in 1956, Refinance Corporation for Industries Ltd. in 1958 (later
taken over by IDBI), Agriculture Refinance Corporation (precursor of ARDC and NABARD)

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in 1963, UTI and IDBI in 1964, Rural Electrification Corporation Ltd. and HUDCO Ltd. in
1969-70, Industrial Reconstruction Corporation of India Ltd. (precursor of IIBI Ltd.) in 1971
and GIC in 1972. It may be noted here that although the powers to regulate financial
institutions had been made available to RBI in 1964 under the newly inserted Chapter IIIB of
RBI Act, the definition of term ‘financial institution’ was made precise and comprehensive
by amendment to the RBI Act Section 45-I (c) in 1974.
DFIs set up after 1974 and Notification of certain institutions as Public Financial Institutions
Another important change that took place in 1974 was the insertion of Section 4A to the
Companies Act, 1956 where under certain existing institutions were categorized as ‘Public
Financial Institutions’ (PFI) and the powers of Central Government to notify any other
institution as PFI were laid down. In exercise of these powers GOI has been notifying from
time to time
certain institutions as PFIs. As on date, under the Section 4A, six specified institutions are
regarded as PFI and it has been provided that the Securitization Company or Reconstruction
Company which has obtained a certificate of registration under sub-section (4) of Section 3
the Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 shall also be regarded as a PFI. Besides these institutions, GOI has been
notifying, from time to time, certain other FIs as PFIs and as on date additional 46 institutions
have been so notified. Thus, in all 52 institutions have been categorised as PFIs. The FIs set
up after 1974 have been as follows. NABARD was set up in 1981, EXIM Bank (functions
carved out of IDBI) in
1982, SCICI Ltd. in 1986 (set up by ICICI Ltd. in 1986 and later merged into ICICI Ltd. in
1997), PFC Ltd. and IRFC Ltd. In 1986, IREDA Ltd. in 1987, RCTC Ltd. and TDICI Ltd.
(later known as IFCI Venture Capital Funds Ltd. and ICICI Venture Funds Management
Ltd.) in 1988, NHB in 1988, TFCI Ltd. (set up by IFCI) in 1989, SIDBI (functions carved out
of IDBI) in
1989, NEDFi Ltd. in 1995 and IDFC Ltd. in 1997. As may be observed from the foregoing,
over the years, a wide variety of DFIs have come into existence and they perform the
developmental role in their respective sectors. Apart from the fact that they cater to the
financial needs of different sectors, there are some significant differences among them. While
most of them extend direct finance, some extend indirect finance and are mainly refinancing
institutions viz., SIDBI, NABARD and NHB which also have a regulatory / supervisory role.

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DFIs can be broadly categorized as all-India or state / regional level institutions depending on
their geographical coverage of operation. Functionally, all-India institutions can be classified
as (i) term-lending institutions (IFCI Ltd., IDBI, IDFC Ltd., IIBI Ltd.) extending long-term
finance to different industrial sectors,
(ii) refinancing institutions (NABARD, SIDBI, NHB) ‘Reserve Bank of India: Functions and
Working’ 4th Edition, 1983extending refinance to banking as well as non-banking
intermediaries for finance to agriculture, SSIs and housing sectors,
(iii) sector-specific / specialised institutions (EXIM Bank, TFCI Ltd., REC Ltd., HUDCO
Ltd., IREDA Ltd., PFC Ltd., IRFC Ltd.), and
(iv) investment institutions (LIC, UTI, GIC, IFCI Venture Capital Funds Ltd., ICICI Venture
Funds Management Co Ltd.). State / regional level institutions are a distinct group and
comprise various SFCs, SIDCs and NEDFi Ltd.
List of Public Financial Institutions as per Section 4A of Companies Act,
1956
1 Industrial Credit and Investment Corporation of India Ltd. ICICI Ltd.
2 Industrial Development Bank of India IDBI
3 Industrial Finance Corporation of India IFCI
4. Life Insurance corporation of India LIC
5. Unit Trust of India UTI
6. General Insurance Corporation of India GIC
7. National Insurance Company Ltd. NIC Ltd.
8. New India Assurance Company Ltd. NIA Ltd.
9. Oriental Fire and General Insurance Company Ltd. OIC Ltd.
10. United Fire and General Insurance Company Ltd. UII Ltd.
11 SCICI Ltd. SCICI Ltd.
12. Industrial Reconstruction Bank of India/ IIBI Ltd.
now Industrial Investment Bank of India Ltd.)
13. Tourism Finance Corporation of India Ltd. TFCI Ltd.
14 Risk capital and Technology Finance Corporation Ltd./ RCTC Ltd./
Now IFCI Venture Capital Funds Ltd. IVCF Ltd.
15 Technology Development and Information Company of India Ltd./TDICI Ltd./
ICICI Venture Funds Management Ltd ICICI Venture Ltd.

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16. Power Finance Corporation Ltd. PFC Ltd.
17. National Housing Bank NHB
18. Small Industries Development Bank of India SIDBI
19. Rural Electrification corporation Ltd. REC Ltd.
20. Indian Railways Finance Corporation Ltd. IRFC Ltd.
21. IFCI Ltd. IFCI Ltd.
22. Andhra Pradesh State Financial Corporation APSFC
23. Assam Financial Corporation AFC
24. Bihar State Financial Corporation BSFC
25. Delhi Financial Corporation DFC
26. Gujarat State Financial Corporation GSFC
27. Haryana Financial Corporation HFC
28. Himachal Pradesh Financial Corporation HPFC
29. Jammu & Kashmir State Financial Corporation JKSFC
30. Karnataka State Financial Corporation KSFC
31. Kerala Financial Corporation KFC
32. Madhya Pradesh Financial Corporation MPFC
33. Maharashtra State Financial Corporation MSFC
34. Orissa State Financial Corporation OSFC
35. Punjab Financial Corporation PFC
36. Rajasthan Financial Corporation RFC
37. Uttar Pradesh Financial Corporation UPFC
38. West Bengal Financial Corporation WBFC
39. Indian Renewable Energy Development Agency Ltd. IREDA Ltd.
40. Tamilnadu Industrial Investment corporation Ltd. TIIC Ltd.
41. North Eastern Development Finance Corporation Ltd. NEDFi Ltd.
42. Housing and Urban Development Corpn. Ltd. HUDCO Ltd.
43. Infrastructure Development Finance Company Ltd. IDFC Ltd.
44. Export-Import Bank of India EXIM Bank
45 National Bank for Agriculture and Rural Development NABARD
46 National Cooperative Development Corporation NCDC
47 National Dairy Development Board NDDB

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48 Pradeshiya Industrial and Investment Corporation of U.P. Ltd. PICUP Ltd.
49 Rajasthan State Industrial Development & Investment Corporation Ltd. RIICO Ltd.
50 State Industrial Development Corporation of Maharashtra Ltd. SICOM Ltd.
51 West Bengal Industrial Development Corporation Ltd. WBIDC Ltd.
52 Tamil Nadu Industrial Development Corporation Ltd. TIDCO Ltd.

Role of Financial Institutions

 The various financial institutions generally act as an intermediary between the capital
market and debt market. But the services provided by a particular institution depends
on its type.
 The financial institutions are also responsible to transfer funds from investors to the
companies.
 Typically, these are the key entities that control the flow of money in the economy.

Functions of Financial Institution

 Financial institutions provide service as intermediaries of financial markets.

 They are responsible for transferring funds from investors to companies in need of those
funds.
 Financial institutions facilitate the flow of money through the economy. To do so,
savings are brought to provide funds for loans.

Company profile

Name of the company IFCILtd

Industry Finance- Medium and Term lending institution

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Business group Joint sector holding

In 1947 at the time of independence Indian capital market was underdeveloped. Although
there was high demand for new capital and the providers. Underwriters and merchant bankers
were almost unavailable. And commercial banks were not equipped to provide long-term
industrial finance in any significant manner.

At this situation government established the industrial finance corporation of India on 1, July
1948 as the first development financial institution in the country in order to provide long term
finance for the industrial sectors.

Liberalization – Conversion in to company in 1993

By the early 1990s, it was recognized that there was need for greater flexibility to respond to
the changing financial system. It was also felt that IFCI should directly access the capital
markets for its fund’s needs. The company was subsequently corporatized in July 1993 after
passing of the Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act,
1993 by the parliament of India. The company was registered as a non-banking financial
company with RBI during the year 1998, but was exempted from most of the regulatory
guidelines for non-banking financial companies, being regulated as a financial institution.
The name of the company was changed from The Industrial Finance Corporation of India Ltd
to IFCI Ltd with effect from October 27, 1999. During the year 1999-2000, the IFCI
Investors Services Ltd and IFCI Custodial Services Ltd, wholly owned subsidiaries of the
company were amalgamated with IFCI Financial Services Ltd (another wholly owned
subsidiary company). In the year 2000, IFCI and the Dubai-based Mashreq Bank Group
signed an agreement for the first trance of a million syndicated loans. In the year 2003, the
company took over Arihant Industries Export Oriented Unit (EOU) under the securitization
Act. In the year 2004, the company merged with Punjab National Bank (PNB) would help
each other. During the period 2005-06, the company was conferred an award for 'Corporate
Excellence' instituted by the Amity Business School and presented every year to select
corporate for outstanding performance in various areas. From August 2007 onwards, the
company is being regulated as a non-banking financial company. During the year 2007-08,
the company promoted IFCI Infrastructure Development Ltd (IIDL) as a wholly owned
subsidiary. During the year 2008-09, the company forayed into factoring business by

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acquiring an additional stake in Foremost Factors Ltd. In April, 2008, the company
rechristened Foremost Factors Ltd as 'IFCI Factors Ltd'. The company subscribed Rs 25 lakh
to the rights issue of MPCON, one of the Technical Consultancy Organizations promoted by
IFCI in the year 1979, with a view to expanding our business outlook and reaping business
opportunities in the highly lucrative consulting sector. With this infusion of capital, MPCON
is now a subsidiary of the company. During the year 2010-11, the company accelerated their
operations and re-established their presence in the financial market by enlarging and retaining
high value customer base.

Diversification:

Aside from its role in promoting industries and creating capacities, IFCI has also played a
pivotal role in institution building. Through a host of subsidiaries and associate organizations,
IFCI has emerged as a major player providing comprehensive financial solutions ranging
from Merchant Banking, Insurance Broking, Venture Capital, Depository Services, Factoring
Services to Education, Real Estate, Asset Reconstruction and Securitization.

Today, IFCI is rated amongst the world’s top 500 global financial brands. A strong and
dynamic management team comprising of highly motivated and seasoned industry
professionals, with values rooted in excellence, integrity and innovation making it uniquely
poised to emerge as a major player in corporate finance which is future - ready.

Formation of IFCI:

The IFCI was the 1st specialised financial institution setup in India to provide term finance to
large industries in India. It was established on 1st July, 1948 under The Industrial Finance
Corporation Act of 1948. IN 1993 it was reconstituted as a company to impart higher degree
operational flexibility in operations.

Objectives of IFCI:

The main objective of IFCI is too provide medium and long term financial assistance to large
scale industrial undertakings, particularly when ordinary bank accommodation does not suit
the undertaking or finance cannot b e profitably raised by the concerned by the issue of
shares.

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Functions of IFCI:

1) For setting up a new industrial undertaking.

2) For expansion and diversification of existing industrial undertaking.

3) For renovation and modernisation of existing concerns.

4) For meeting the working capital requirements of industrial concerns in some exceptional
cases.

Management of IFCI

The corporation has 13 members Board of Directors, including Chairman. The Chairman is
appointed by Government of India after consulting Industrial Development Bank of India. He
works on a whole time basis and has tenure of 3 years. Out of the 12 directors, four are
nominated by the IDBI, two by scheduled banks, two by co-operative banks and two by other
financial institutions like insurance companies, investment trusts, etc. IDBI normally
nominates three outside persons as directors who are experts in the fields of industry, labour
and economics, the fourth nominee is the Central Manager of IDBI. The Board meets once in
a month. It frames policies by keeping in view the interests of industry, commerce and
general public. The Board acts as per the instructions received from the government and
IDBI. The Central Government reserves the power up to the Board and appoints a new one in
its place.

The Board is assisted by the Central Committee which consists of the chairman, two directors
elected by nominated directors and the Board of directors elected by the elected directors.
This committee assists the Board in discharge of its functions. It can act on all matters under
the competence of the Board, So this committee practically transacts the entire business of
the corporation. IFCI also has Standing Advisory Committees one each for textile, sugar,
jute, hotels, engineering and chemical processes and allied industries. The experts in different
fields appointed on Advisory Committees. The chairman is the ex-officio member of all
Advisory Committees. All applications for assistance are first discussed by Advisory
Committees before they go to Central Committees.

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IFCI Subsidiaries & Associates:

1. IFCI Factors Limited

Incorporated in 1996 as Foremost Factors Ltd. the company was promoted by Mohan Group
and Nations Bank Overseas Corporation of U.S.A, along with 20th Century Finance
Corporation Limited (TCFC Limited) and ICDS Group as institutional investors. The
Company started its operations with domestic factoring activities and export factoring
operations were initiated in 1997. In April, 1999, IFCI subscribed to the share capital of the
Company besides acquiring the shareholding of 20th Century Group, thus becoming the
largest shareholder. Subsequently, IFCI also acquired the shareholding of Mohan Group and
in 2009 Foremost Factors was renamed as IFCI Factors Limited. It is now a subsidiary of
IFCI

2. IFCI Financial Services Ltd (I-FIN)

I-FIN was promoted in 1995 by IFCI Ltd. to provide a wide range of financial products and
services to investors, institutional and retail. I-FIN is a member of NSE, BSE and MCX-SX
and involved in Stock Broking, Investment Banking, Mutual Fund Distribution & Advisory
Services, Depository Participant Services, Insurance Products Distribution and the like. IFIN

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operates through a network of branches spread across 25 cities including Delhi, Mumbai,
Kolkata, Chennai, Bengaluru, Ahmedabad, Lucknow and Pune.

3. IFCI Venture Capital Funds Ltd. (IFCI Venture)

IFCI Venture was originally set up as a Society by the name of Risk Capital Foundation
(RCF) in 1975. The society provided institutional support to first generation professionals
and technocrats setting up their own ventures in the medium scale sector. In 1988, RCF was
converted into a company, Risk Capital and Technology Finance Corporation Ltd. (RCTC).
To reflect the shift in the company’s activities, the name of RCTC was changed to IFCI
Venture Capital Funds Ltd. (IFCI Venture) in February 2000. Over the years, IFCI Venture
acquired expertise and experience of investing in technology-oriented and innovative
projects. Since its inception, it has provided finance to over 350 ventures and supported
commercialization of over 50 new technologies. It has pioneered effort for widening
entrepreneurial base in the country and catalysed the introduction of Venture Capital activity
in India.

4. Tourism Finance Corporation of India Ltd (TFCI)

IFCI along with other All-India Financial/Investment Institutions and Nationalised Banks
promoted a Public Limited Company under the name of "Tourism Finance Corporation of

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India Ltd. (TFCI)" to cater to the financial needs of the burgeoning tourism industry. The
range of TFCI's activities encompasses a wide spectrum of tourism-related services: from
financial assistance for setting up and/or development of tourism-related activities, tourist-
flow surveys, facilities and services for tourists, preparation of tourism master plans, to
individual tourism products; from project evaluation exercises to support services for
privatization; from planning for amusement/nature parks, etc. to undertaking of
environmental/ carrying-capacity studies.

5. Assets Care Enterprise Ltd (ACE)

An Asset Reconstruction Company, promoted by IFCI along with other banks and financial
institutions, ACE is licensed by RBI under the SARFAESI Act to acquire non-performing
loans (NPLs) from Financial Institutions and banks in India. ACE started operations in July
2007. The key objectives of ACE are to unlock the value entrapped in the impaired and non-
performing assets and to provide proactive management of the assets through financial
restructuring, strategic partnerships, board oversight and provision of growth capital. It aims
to incorporate international best practices for resolution of assets and set benchmarks in the
Indian Financial Sector and to play a pioneering role in the Securitisation of distressed debt in
India.

6. IIDL India Limited

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IFCI Infrastructure Development Ltd. (IIDL) is an institutional endeavour of IFCI Ltd.
(Formerly known as Industrial Finance Corporation of India), the first Development Financial
Institution of the country formed in 1948.

IIDL was formed in the year 2007 to venture into the real estate and infrastructure sector as
an institutional player.

7. Institute of Leadership Development (ILD)

The institute represents one of the instruments through which IFCI has broadened its original
mandate of being a catalyst for industrial growth in India. The institute is a manifestation of
IFCI’s desire to build capacities for developing skilled manpower for industry in addition to
providing direct long term financial support to various industries. ILD was set up in the year
1992 with a broad objective to develop an enlightened and motivated workforce all over India
through education, training, research, consultancy and counseling. Apart from class room
training modules, ILD aims to be a centre for out-bound trainings and management
workshops. ILD has its own extensive campus, set amidst idyllic surroundings and spread
over 33 acres of land in Jaipur.

8. Management Development Institute (MDI)

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MDI was conceived and sponsored by IFCI in 1973 as a training institute for enhancing
managerial capabilities of business managers and to impart training in modern management
to entrepreneurs and technocrats entering industry. In its initial years, the Institute mainly
catered to the training requirements of working executives. A two year full-time Post-
Graduate Diploma in Business Management (PGDBM) was introduced in the year 1994.
Over the years, MDI has evolved into an Integrated Business School specializing in the areas
of management education, training, research and consultancy. It is rated as one of the top
Business Schools of the country. Besides conducting training programmes, the faculty of the
Institute is also involved in consultancy and research work.

9. RashtriyaGraminVikasNidhi (RGVN)

Promoted by IFCI in 1990 as a non-profit institution registered under the Societies

Registration Act, 1860, to promote organisations for the social and economic upliftment of
underprivileged sections of society, RGVN subsequently received co-sponsorship from IDBI,
NABARD and the Tata Social Welfare Trust. RGVN is also registered with the Foreign
Contribution Regulation Act and has also obtained tax concessions to donors. Founded in
support of social action, RGVN'S main objectives are to:

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  Promote, support and develop voluntary organizations engaged in the social and
economic uplift of rural and urban poor, physically and socio-economically
handicapped people
 Improve the pace and quality of economic development, especially relating to the
village and decentralized sector
 Focus attention on groups which are disadvantageously placed in society, but have the
potential for pursuing socially and economically productive activities
 Assist the urban and rural poor especially tribal’s, scheduled caste, women and
children for their economic self sustenance.

Financial Resources of IFCI

The financial resources of the corporation consist of share capital bonds and debentures and
borrowings.

a) Share Capital:

The IFCI was set up with an authorized capital of Rs. 10crores consisting of 20,000 shares of
Rs. 5,000 each. This capital was later on increased at different times and by March, 2003 it
was Rs. 1068 crores. The capital was subscribed by Central Government, Reserve Bank of
India, scheduled banks, Life Insurance Corporation, investment trusts, co-operative banks are
other financial institutions. In 1964, the share capital held by the central government and RBI
was transferred to the Industrial Development Bank. The corporation thus became a
subsidiary of IDBI. The central government had guaranteed the shares of the corporation both
for repayment of the principal and for the payment of a dividend at 2.5 per cent on the
original issue and 4 per cent on the additional issues. However, since July , 1993 IFCI has
been converted into a limited company.

b) Bonds and Debentures:

The corporation is authorized to issue bonds and debentures to supplement its resources but
these should not exceed ten times of paid-up capital and reserve fund. The bonds and
debentures stood at a figure of Rs. 57.69 crores 1971 and rose to Rs. 15366.5 crores as on
31st March 2003. The bonds and debentures are also guaranteed by the central government
for both payment of interest at such rates as may be fixed at the time the bonds and
debentures are issued.

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 c) Borrowings:

The corporation is authorized to borrow from government IDBI and financial institutions. Its
borrowings from IDBI and Govt. of India were Rs. 975.6 crore on March 31, 2003. Total
assets of IFCI as on March 31, 2003 aggregated Rs. 22866 crore including investments of Rs.
3820.3 crore and loans and advances of Rs. 13212.8crore.

Priority Criterion for Investment

IFCI plans its financing policies as per the priorities set by the government through Industrial
Policy Statements. The Industries which are in high priority are given more importance.
Following considerations are taken into account while selecting a financial proposal:

1. Importance of the project for national economy.

2. Employment-oriented and labour-intensive nature of the project.

3. Export potential of the unit,

4. Projects located in backward areas or ‘no industry districts.

5. Projects initiated by new or technician entrepreneurs.

6. Projects which will help rural areas.

7. Projects which help in conserving energy or which manufacture renewable energy systems or
devices.

8. Projects to be set up in co-operative sector.

Eligibility for Assistance under Direct Financing

Following types of industrial concerns are eligible for direct finance under IFCI Act,
amended from time to time:

1. Limited companies incorporated in India, in private, public or joint Sector

2. Co-operative societies registered in India, which are engaged or propose to engage in any of
the activities related to

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  Manufacture, preservation or processing of goods

 Shipping

 Mining

 Hotel industry

 Generation or distribution of electricity or any other form of power

 Transport of passengers or goods.

 Maintenance, repair or servicing of machinery or vehicles.

 Assembling, repairing or packing of articles.

 Development of contiguous area of land as an industrial estate.

 Fishing or providing shore facilities for fishing.

 Providing special or technical knowledge or other services for promotion of industrial

growth.

 Research and Development of any process or product in relation to any of the matters
aforesaid.

Logo of company

Key Executive

Chairman P G Muralidharan

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Managing Director & CEO Atul Kumar Rai
Director RakeshBharti Mittal
Director UshaSangwan

Board Of Directors
Chairman P G Muralidharan
Managing Director & CEO Atul Kumar Rai
Director RakeshBharti Mittal
UshaSangwan
Omprakash Mishra
Company Secretary RupaSarkar
Nominee (Govt) Anurag Jain

Nature of the business carried

IFCI is nonbanking institution. IFCI provides financial services to the industry. IFCI
providing medium and long term loans. IFCI Ltd is engaged in project financing,
infrastructure development, debt and equity underwriting and syndication, venture capital,
stock broking and merchant banking, factoring, asset reconstruction, tourism finance, micro
finance, corporate and infrastructure advisory, technical consultancy and management
education.

Mission, Vision and Quality policy

Vision:

To extend the frontiers of Leadership knowledge and to nurture and encourage future
leaders in all the enterprises of life: social, business, economic, cultural and political.

Mission
To offer our Institutional premises and resources as a committed and engaging platform
where many voices, ideas and actions can come together creating, in the process itself, a
synergy that improves the sum of the effort and bonds us towards goals and actions that

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 are for the good of all.

Goal
•To provide innovative and cost effective solutions to clients with a blend of traditional and
latest technologies maximizing value at the least cost..
•To provide maximum service at least cost and shorter turnaround times.
•To develop long term relationship with our clients

Product and Service

Though started as a term lending institution, IFCI has diversified to many other activities
over the period and provides a wide range of services to industry in the areas of both fund
based and fee based services.
Its products and services include:
 Project finance: which includes financial assistance to industrial and services concerns
for their new projects as also for expansion, diversified and modernization schemes,
underwriting, direct subscription to equity, senior debt financing in the form of loans,
debentures, securitized debts, mezzanine products, including subordinated debt and
preference capital and equity financing through unlisted equity?
 Corporate loans, including short term loans for working capital expenditure and general
corporate expenditure purposes.
 Project development, which includes project conceptualization and participation in the
development of a project as a co-promoter or financial investor, in consortium with other
financiers with an objective to exit the project in definite time frame after
implementation, with the desired return.
 Principal investment, which includes equity investments made by the company with a
view to earning non-interest income.
 Resolutions of Non-Performing Assets, including acquisition of non-performing assets
from other banks and institutions with a view to leveraging the expertise developed in
course of its business in resolution of such assets.
 Financial services, comprising debt and equity syndication, structured finance.
 Project and Corporate Advisory Services, Which include investment appraisal,
business asset valuation, privatization and PSU disinvestment, advice on mergers and

20
 joint ventures, buy/sell advisory, legal advisory, capital structuring , study of techno-
economic feasibility, IPO monitoring, financial analysis and modeling as well as advisory
services to state and central governments. IFCI has provided these services to reputed
corporates like SAIL, BHEL, BEML, ONGC, GAIL, NeelachalIspat, Inland Waterways
Authority, ITPO, Air India, Uttaranchal JalVidyut Nigam, Tata Steel, Indian Hotel Ltd.,
Omaxe Ltd and various governments like government of India, government of Uttar
Pradesh and Government of Rajasthan. And
 Other Fee Based Services, which include managing the disbursement of funds from the
Sugar Development Fund of Government of India to the edible sugar manufacturing
companies and recovery from such companies and financial appraisal of such companies
sugar projects on management fee basis.

Area of operation
The area of operation of IFCI is in India. The lending policies of IFCI have evolved over the
last five decades of operations. These policies have sought to achieve the primary objective
of providing medium and long-term financial assistance to mainly manufacturing concerns
and to fulfill the overall goals of industrial and economic development in India.
The area of operation is spread throughout the country. Industrial Finance Corporation of
India head office is in New Delhi, it has 10 regional office and 5 branch office across the
country.

The principal activities of IFCI include:

· Project finance· Financial services· Non-project specific assistance· Corporate Advisory Services.
Project finance involves providing credit and other facilities to green-field industrial projects
(including infrastructure projects) as well as to brown-field projects, viz., expansion, diversification and
modernization of existing industrial concerns through various types of assistance that are tailored to
the borrowers’ needs.. Financial services covers a wide range of activities where in assistance is
provided to existing concerns through various schemes for the acquisition of assets as part of their
expansion, diversification and modernization programs. These schemes are also extended to equipment
which could be directly got fabricated by the actual user, or procured from domestic suppliers,
or imported. Tailor-made schemes to suit theindividual borrower's requirements have been
designed to provide quick funds after a need-based appraisal. The interest rate and rentals (in
case of equipment leasing) are competitive and determined on the basis of the risk perception

21
about individual concerns. Non-project specific assistance is provided mainly in the form of
corporate / short-term loans, working capital ,bills discounting, etc to meet expenditure, which is not
specifically related to any particular project.

Ownership pattern of the company

Particulars % Shareholding

Government of India 55.57

Mutual Funds/ UTI 0.17
Financial Institutions/Banks 5.91
Insurance Companies 6.42
Foreign Institutional Investors, NRI & OCB 5.69
Bodies Corporate 6.50
Individuals and Trust & Foundation 19.74
Total 100.00

Competitors

22
NAME SALES TURN NET PROFIT TOTAL ASSETS
OVER
Power Finance 13,014.85 3,031.74 130,833.43
IDFC 6,094.32 1,602.96 49,322.11
Rural Elect Corp 10,337.59 2,817.03 93,798.60
PTC India Fin 306.64 154.04 1,888.02
Tourism finance 129.27 49.47 1,135.92

1. Power Finance Corporation Ltd.

It is an Indian financial institution. Established in 1986, it is the financial back bone of Indian
Power Sector. Net worth of the company in the year 2007-2008 was 8688 Crore Indian
Rupees. Initially wholly owned by the Govt. of India, the company issued an IPO in January,
2007. The issue was oversubscribed by over 76 times, which is the largest for an IPO of any
Indian Company in recent times. PFC is listed on the Bombay Stock Exchange (BSE) and the
National Stock Exchange (NSE). The company has been conferred with many prestigious
awards, the latest of which is "KPMG-Infrastructure Today Award 2008" for its contribution
in development of power sector. It is also an ISO 9001:2000 certified company and enjoys
the status of Navratna Company in India.

2. Rural Electrification Corporation Limited

It is a leading public Infrastructure Finance Company in India’s power sector. The company
finances and promotes rural electrification projects across India, operating through a network
of 13 Project Offices and 5 Zonal Offices, headquartered in New Delhi. The company
provides loans to Central/ State Sector Power Utilities, State Electricity Boards, Rural
Electric Cooperatives, NGOs and Private Power Developers.
REC is a Navratna Company functioning under the purview of the Ministry of Power –
Government of India. The company is listed on both National Stock Exchange of India and
Bombay Stock Exchange.
The company is currently among the top 500 Global Financial Services brands by UK-based
plcBrand Finance (Brand Finance at Global Banking 500 for 2010).The company is also
among the Forbes Global 2000 companies for 2010.

3. IDFC

23
IDFC Project Equity manages the India Infrastructure Fund (IIF), a SEBI-registered domestic
venture capital fund focused on infrastructure with a corpus of INR 35 billion (USD 875
million). IIF focuses on investing equity for the long-term in a diversified portfolio of
infrastructure assets in India.
IDFC Project Equity Company Limited is a 100% subsidiary of Infrastructure Development
Finance Company Limited (IDFC), India's leading financial institution focused on
infrastructure. It is another key initiative by IDFC to catalyse India's infrastructure
development and was set up as part of the 'India Infrastructure Financing Initiative', a
collaborative effort between the Government of India and leading Indian and global financial
institutions to deploy USD 5 billion in capital for infrastructure projects in India.

PTC India Financial Service

PTC India Financial Services Ltd (PFS) is promoted by PTC India Ltd (PTC) as a special
purpose investment vehicle to provide total financial services to the entities in energy value
chain, which inter-alia includes investing in equity and/or extending debt to power projects in
generation, transmission, distribution; fuel sources, fuel related infrastructure like gas
pipelines, LNG terminals, ports, equipment manufacturers and EPC contractors etc.
PFS also provides non-fund based financial services adding value to green field and brown
field projects at various stages of growth and development.

Tourism Finance Corporation Of India

The Government of India had, pursuant to the recommendations of the National Committee
on Tourism vizYunus Committee set up under the aegis of Planning Commission, decided in
1988, to promote a separate All-India Financial Institution for providing financial assistance
to tourism-related activities/projects. In accordance with the above decision, the IFCI Ltd.
along with other All-India Financial/Investment Institutions and Nationalised Banks
promoted a Public Limited Company under the name of "Tourism Finance Corporation of
India Ltd. (TFCI)" to function as a specialised All-India Development Financial Institution to
cater to the financial needs of tourism industry. TFCI was incorporated as a Public Limited
Company under the Companies Act, 1956 on 27th January 1989 and became operational with
effect from 1st February 1989 on receipt of Certificate of the Commencement of Business
from the Registrar of Companies. TFCI has been notified as a Public Financial Institution
under section 4A of the Companies Act, 1956, vide Notification No S.O 7(E) dated the 3rd
January 1990 issued by the Ministry of Industry, Department of Company Affairs. TFCI's
24
Registered office is situated at 13th Floor, IFCI Tower, 61, Nehru Place, New Delhi - 110
019.

Achievements/ awards:
 Amongst Power 100 list, Business and Economy, July 2007
 Amongst India`s Fastest Growing Companies, Business Today, June 2007
 Amongst the World’s Top 500 Global Financial Brands, Brand Finance Global
500 Financial Brands Index 2007
 Amongst Economic Times Top 500, 2009
 Dun & Bradstreet India’s Top 500 Companies, 2008
 India’s 3rd Great Place to Work in Banking & Credit Services, 2010

Infrastructural Facilities
IFCI has got all the best facilities to meet the requirements of their customers. IFCI
decided to position itself as a provider of mid corporate service and has created separate
groups to monitor health of large assets, identify and manage risk in credit proposals,
refinance loans pertaining to good assets and generate new business. For specialized
disciplines such as infrastructure, risk management, economics, foreign exchange,
information technology, and legal affairs, recruitment is done laterally. Government
directives reportedly govern staff salaries, which are not market related. IFCI has a good
relationship with its employees and their union.
The IFCI has been playing very important role as a financial institution in providing financial
assistance to eligible industrial concerns. However, no less important is its promotional role
whereby it has been creating industrial opportunities also. It has been taking up directly as
well as indirectly; such steps and activities are regarded necessary for the acceleration of the
process of industrialization in the country.

Future growth and prospects

Focus Sector in near future (Future growth and prospects)

 Road Development & Ports
 Power Generation and Distribution
(With focus on environment friendly forms of energy)

25
  Logistics & Transport Services
 Manufacturing
 Drugs & Pharmaceuticals
 Auto Ancillaries
 Cement & Ceramics
 Food Processing
 Mining
 Education and Healthcare
 Hospitality
 Telecom

The promotional role of IFCI has been to fill the gaps, either in the institutional infrastructure
for the promotion and growth of industries, or in the provision of the much needed guidance
in project intensification, formulation, implementation and operation, etc. to the new tiny,
small-scale or medium scale entrepreneurs or in the efforts at improving the productivity of
human and material resources.

(a) Development of Backward Areas: – The main thrust of all financial institutions has been
to remover regional imbalances by promoting industrialization of backward areas. IFCI
introduce a scheme of confessional finance for projects set up in backward areas. The
backward-districts were divided into three categories depending upon the state of
development there. All these categories were eligible for concessional finance. Nearly 50 per
cent of total lending of IFCI has been to develop backward areas.

(b) Promotional Schemes:- IFCI has been operating six promotional schemes with the
object of helping entrepreneurs to set up new units, broadening the entrepreneurial base,
encouraging the adoption of new technology, tackling ‘the problem of sickness and
promoting opportunities for self development and self employment of unemployed persons
etc. These schemes are as such:

1. Subsidy for Adopting Indigenous Technology:-The projects which use indigenously

developed technology are entitled to a concession in the form of subsidy covering interest
payments due to IFCI during the first three years of operations, extendable to five years.

26
2. Meeting Cost of Market Studies: - The entrepreneurs setting up medium sized industrial
projects for the first time can avail 75 per cent of the cost of market survey/study subject to a
ceiling of Rs. 15,000 provided it is handled by Technical Consultancy Organization. .

3. Meeting Cost of Feasibility Studies: – IFCI provides subsidy for the fees paid for
consultancy assignments relating to feasibility, project reports etc. The amount allowable is
80 per cent of the fees of Rs. 7,500 whichever is less. This limit is Rs. 8,500 or 100 per cent
of the total fees whichever is less for handicapped or scheduled caste persons.

4. Promoting Small Scale and Ancillary Industries: – For the identification of products
suitable for ancillary or further processing in small scale sector and preparation of feasibility
reports a subsidy of Rs.0.1 million per annum for technical consultancy organization is
allowed.

5. Revival of Sick Units: – There is a subsidy to the extent of 80 per cent or Rs. 5,000
(whichever is less) for the fees charged by a technical consultancy organization for carrying
out a diagnostic study or for the implementation of rehabilitation programme. This facility is
allowed to tiny units or units in small scale sector.

6. Self-development and Self employment Scheme: - An unemployed person in the age group
of 21 to 35 years may be allowed a soft loan for providing margin money for getting a loan
from a bank or a financial institution. The soft loan at interest free rate in first year and has
confessional interest later on. The amount available under this scheme is 25% of margin
money subject to Rs. 5000.

27
Mckensy’s 7s model

This paper discusses McKinsey's 7S Model that was created by the consulting company
McKinsey and Company in the early 1980s. Since then it has been widely used by
practitioners and academics alike in analyzing hundreds of organizations

The McKinsey 7S model was named after a consulting company, McKinsey and Company,
which has conducted applied research in business and industry (Pascale & Athos, 1981;
Peters & Waterman, 1982). All of the authors worked as consultants at McKinsey and
Company; in the 1980s, they used the model to analyze over 70 large organizations. The
McKinsey 7S Framework was created as a recognizable and easily remembered model in
business. The seven variables, which the authors term "levers", all begin with the letter "S":

These seven variables include structure, strategy, systems, skills, style, staff and shared
values. Structure is defined as the skeleton of the organization or the organizational chart.
The authors describe strategy as the plan or course of action in allocating resources to achieve
identified goals over time. The systems are the routine processes and procedures followed
within the organization. Staff are described in terms of personnel categories within the
organization (e.g. engineers), whereas the skills variable refers to the capabilities of the staff
within the organization as a whole. The way in which key managers behave in achieving
organizational goals is considered to be the style variable; this variable is thought to
encompass the cultural style of the organization. The shared values variable, originally

28
termed super ordinate goals, refers to the significant meanings or guiding concepts that
organizational members share (Peters and Waterman, 1982).

1. Structure:

The corporation has 13 members Board of Directors, including Chairman. The Chairman is
appointed by Government of India after consulting Industrial Development Bank of India. He
works on a whole time basis and has tenure of 3 years. Out of the 12 directors, four are
nominated by the IDBI, two by scheduled banks, two by co-operative banks and two by other
financial institutions like insurance companies, investment trusts, etc. IDBI normally
nominates three outside persons as directors who are experts in the fields of industry, labour
and economics, the fourth nominee is the Central Manager of IDBI. The Board meets once in
a month. It frames policies by keeping in view the interests of industry, commerce and
general public. The Board acts as per the instructions received from the government and
IDBI. The Central Government reserves the power up to the Board and appoints a new one in
its place.

Structure at management level:

NAME DESIGNATION

ShriAtul Kumar Rai CEO and Managing Director

B N Nayak Chief General Manager and CFO

Shri P G Muralidharan Chairman of the Board

Manju Jain Vice President- Accounts

RupaSarkar Company Secretary

Shashi Sharma Executive Director

T K Ray Executive Director

ShriAnurag Jain Director

Smt. UshaSangwan Director

Prof Omprakash Mishra Director

Vijendra Singh Jafa Director

29
Structure at branch level:
IFCI has been spread throughout the country. Industrial Finance Corporation of India head
office is in New Delhi, it has 10 regional office and 5 branch office across the country. These
branches are headed by the manager and all the employees of the branch are accountable to
the manager and he is also responsible for the day to day operations.
2. System:
With a pan-India presence across 16 key locations, IFCI, apart from being in the business of
undertaking techno-economic and financial viability studies for projects and extending
financial assistance, is today an organization catering to the diverse needs of Indian and
overseas organizations providing a host of specialized services in the areas of Corporate
Advisory, Project Development, Project Appraisal, Risk Analysis, Credit Syndication,
Placement of Debt and Equity, Corporate Restructuring, Infrastructure and Legal Advisory.

3. Style:

All organizations have their own distinct culture and management style. It includes the
dominant values, beliefs and norms which develop over time and become relatively enduring
features of the organizational life. The IFCI has been playing very important role as a
financial institution in providing financial assistance to eligible industrial concerns. However,
no less important is its promotional role whereby it has been creating industrial opportunities
also. It has been taking up directly as well as indirectly; such steps and activities are regarded
necessary for the acceleration of the process of industrialization in the country.

The promotional role of IFCI has been to fill the gaps, either in the institutional infrastructure
for the promotion and growth of industries, or in the provision of the much needed guidance
in project intensification, formulation, implementation and operation, etc. to the new tiny,
small-scale or medium scale entrepreneurs or in the efforts at improving the productivity of
human and material resources.

4. Staff:

The organization is build up with the people, who are termed as staff and they are the ones
who define the organization and build its scope and prospects. The employees appointed for
the job must be well trained, provide them training with necessary skills and knowledge so
that they can perform their work effectively and efficiently. Professionals hired from best of

30
the campuses across India including Top B- schools and Law colleges. The institution will
provide regular technical and soft- skill development workshops, to the new as well as
existing entrants.

5. Skills:

Skills refer to set knowledge and talent which the employee need to have in him to attend the
organization goal. Skills are possessed based on the qualification of an individual and the
sound knowledge and experience that the employee would possess on his work. IFCI believes
that the skills are the integral part of the institution and the employees are appointed with the
specific skills required to perform its operations.

Today, IFCI is rated amongst the world’s top 500 global financial brands. A strong and
dynamic management team comprising of highly motivated and seasoned industry
professionals, with values rooted in excellence, integrity and innovation making it uniquely
poised to emerge as a major player in corporate finance which is future - ready.

6. Strategy:

Strategy means actions a company plans in response to or in anticipation of challenges in the

external environment. IFCI has been able to achieve a financial turnaround with the
consistent support and cooperation of all its stakeholders and is now endeavoring to re-
position itself.

In addition to its core competence in long term lending to industrial and infrastructure
sectors, IFCI aims to enhance its organizational value through better realization of its Non-
performing Assets (NPAs) and unlocking of value of its investment portfolio including
unquoted investments as well as real estate assets.

7. Shared values:

All members of the organization share some common fundamental ideas or guiding concepts
around which the business is built. This may be to make money or to achieve excellence in a
particular field. These values and common goals keep the employees working towards a
common destination as a coherent team and are important to keep the team spirit alive.

31
The institution values are based on its understanding towards its customers and employees
and achieving the goals on timely basis.

SWOT analysis of company

Strengths
 Quick Processing.
 Transparent Terms.
 Exclusive products for Capital Structure Enhancement.
 Geographic Spread across India.
 A Young Team of MBAs, CAs and Law Professionals
Weaknesses
 90% revenue is From single product.
 Not concentrating on promotional activity.
 Less workforce.
Opportunities
 Expand in other countries.
 Government support to boost capital strength.
 Foray into high growth areas likely to broaden income sources
 Expanding branches of the bank is the sign of growth.
Threats
 Stiff competition from banks and other financial institution.
 Economic slowdown could affect the credit off-take.

32
Analysis of financial statements

The Comparative Balance Sheet shows the difference dates to make comparisons of absolute
balances and also of changes if any from one date to another. The Comparative Balance Sheet
may be helpful in analyzing and evaluating the financial position of the firm over a period of
number of years.

BALANCE SHEET AS AT MARCH 31, 2012

EQUITY & LIABILITIES As at As at Changes Increase

March 31, March 31, in % age or
2011 2012 decrese
% age
Shareholders funds
Share capital 1,001.68 1,001.68 100%
Reserves and surplus 4,001.72 4,534.07 113.30 13.30
Share application money pending - -
allotment

Non- current liabilities

a) Long- term borrowing
b) Other long term liabilities 17,420.22 17,493.22 100.42 .42
c) Long term provisions
288.47 195.97 67.93 (32.07)

Current liabilities
a) Short term borrowings - 384.44 100
b) Trade payables
c) Other current liabilities 179.43 334.29 186.31 86.31
d) Short term provisions
2,736.46 4,239.93 154.94 54.94

33
Total 25,627.98 28,183.80 109.97
ASSETS
Non- current assets
a) Fixed assets
i. Tangible assets 1,199.58 1,150.97 95.94 (4.06)
ii. Intangible assets 0.46 .41 89.13 (10.87)
iii. Capital work- in- 8.75 14.45 165.14 65.14
progress 6,255.14 8,728.29 139.54 39.54
b) Non- current investments 1,020.91 836.92 81.97 18.03
c) Deferred tax asset (net) 10,717.12 9,819.07 91.62 (8.38)
d) Long term loans & advances
e) Other non- current assets 389.28 260.10 66.81 (33.19)

Current assets
a) Current investments 1,588.66 2,033.58 128.00 28
b) Trade receivables 75.67 15.58 20.58 (79.42)
c) Cash and cash equivalents 527.86 898.61 170.24 70.24
d) Short term loans & advances
e) Other current assets 3,483.44 4,127.17 118.47 18.47

261.11 298.56 114.34 14.34

Total 25,527.98 28,183.80 110.40 10.40

Interpretation: Financial position of the IFCI is good. Long term borrowings has increased by
.42% and long term provisions decreased by 32.07% . Other current liabilities increased by
86.31% and short term provisions increased by 54.94%.

34
Learning and experience

From this project came to know in detail about the history of this Financial Institution. The
bank manager and the staff are very friendly and were available at all times when needed
them.

Understood various services provided by the financial institution apart from the basic
functions of accepting lending medium and long term loans.

Part B

GENRAL INTRODUCTION

Credit Appraisal

The last year financial crises have become the main cause for recession which was started in
2006 from us and was spread across the world. The world economy has been majorly affected

35
from the crises. The securities in stock exchange have fallen down drastically which has
become the root cause of bankruptcy of many financial institutions and individuals. The root
cause of the economic and financial crises is credit default of big companies and individuals
which has badly impacted the world economy. So in the present scenario analyzing one’s
credit worthiness has become very important for any financial institution before providing
any form of credit facility so that such situation doesn’t arise in near future again. Analysis of
the credit worthiness of the borrowers is known as credit appraisal.

Credit appraisal as a technique by which a financial institution or for that matter any banker
estimate the soundness of a credit proposal or a project appraisal from the point of view of
technical and financial liability or feasibility.

The decision to sanction or reject the proposal has to base on a careful analysis of various
facts and data presented by the borrower concerning him and the proposal as assessed by the
relationship manager. Such an objective and in-depth study of the information and data
should convince the sanctioning authority that the money lent to the borrower for the desired
purpose will be safe and it will be repaid with interest over the desired period, if the
assumption and terms and conditions on which it is sanctioned, are fulfilled. Such an in-depth
study is called the pre-sanction credit appraisal. It helps the approver to sanction the proposal.

Statement of the Problem

It is important for any financial institution to understand and analyze the credit standing of
the borrower in order to hedge the probable Credit Risk from Lending of funds. With this
regard it becomes important to conduct a thorough study on credit appraisal system followed
by the financial institution with special reference to Industrial Finance Corporation of India.

Reason for selecting the project

Whenever an individual or a company uses a credit that means they are borrowing money
that they promise to repay with in a pre- decided period. In order to assess the repaying
capability i.e. to evaluate their credit worthiness banks use various techniques that differ with
the different types of credit facilities provided by the financial institution or banks. In the
current scenario where it is seen that big companies and financial institutions have been
bankrupted just because of credit default so credit appraisal has become an important aspect

36
in this sector and is gaining prime importance. It is the incident of credit defaults that has
given rise to the financial crises of 2008-2009. But in India the credit default is comparatively
less than other countries such as US. One of the reasons leading to this may be good appraisal
techniques used by financial institutions and banks in India. Eventually the importance of this
project is mainly to understand the credit appraisal techniques used by the financial
institutions with special reference to Industrial Finance Corporation of India.

Theme of the project

“A study on credit appraisal and practices with special reference to IFCI”

Objective
1. To analyze the credit appraisal system by IFCI for granting long term fund
requirements.
2. To study credit appraisal process by IFCI to grant financial assistance.
3. To know the information required by the bank to grant loan.
4. To analyse the credit appraisal system with the help of case study.

Scope of the study

The study is based on understanding the credit appraisals process adopted by IFCI with
regard to granting financial facilities to their clients. Therefore the study has been conducted
relating to credit appraisal system followed by Industrial Finance Corporation of India which
is situated in Bengaluru City.

Methodology
The source of the basic data relating to the study has been the annual reports and accounting
statements of various years of IFCI. Information was collected from discussion with the
institution’s guide and the details given by them.

Data required for methodology have been collected from two sources:

1. Primary data: Primary data

 Unstructured interview with Finance Manager
 Unstructured interview with Auditor

37
2. Secondary data: Secondary data are obtained from annual report and company report of
IFCI. It also includes reference from textbook to write brief about theoretical aspects. It
also publishes website .

Limitations of the study

Every project has constraints and limitations that are out of the control of the researcher. My
project also has some limitations, which are enlisted below:
 The study will be conducted on the basis of the information provided by the financial
institution.
 The study is limited to the extent of available information supplied by the financial
institution.
 Time seems to be one of the biggest limitations due to which it was not possible to get
information that is more detailed. All the proposals cannot be studied due lack of time.
 Non-availability of confidential matter is one of the limitations of the study.

INTRODUCTION TO CREDIT APPRAISAL

Risk is an inherent part of business of financial intermediation. Financial Institutions in

general suffer from three types of risks: Credit Risk, Market Risk and Operational Risk. IFCI
recognizes that identification, measurement, monitoring and management of risks are critical
to building a sound asset base and improving overall profitability. In this context, it is
proposed to evolve, in course of time, an Enterprise-Wide, Comprehensive, Integrated Risk
Management Structure in IFCI based on prevailing / emerging regulatory guidelines and
international best practices.

The essence of Enterprise-Wide Risk Management (EWRM) is the management of overall

institutional risk across all risk categories (market risk, credit risk, etc.), products and
business units. An essential pre-requisite of EWRM is that the risk management concept must

38
become a central element in an institution's overall management system. Risk management
must be firmly established at all levels of the organization.

A Comprehensive Risk Management Structure implies drawing wholesome policies,

structures and systems that address the whole gamut of risks faced by the institution.

Integrated Risk Management envisages existence of perfect coordination between various

risk monitoring centers through information sharing, which ensures proper understanding of
the correlation between various types of risks and thereby making it possible to aggregate
risks for the whole institution on a consistent basis taking all forms of inter-relationships into
account.

Credit risk management:

Credit risk is the potential that a borrower or counterparty will fail to meet its obligations in
accordance with agreed terms. The credit risk generally comprises of transaction risk and
portfolio risk. The portfolio risk, in turn, comprises of intrinsic and concentration risk. The
goal of credit risk management of IFCI is to maximise its risk-adjusted return by maintaining
credit exposure within acceptable level. IFCI is exposed to credit risk in various forms of its
business like, loans, guarantees, and investments. The guidelines in the following chapters are
meant to address identification, measurement, monitoring and control of credit risks faced by
IFCI.

Credit Risk Management Processes

Credit risk management system in IFCI would encompass the following processes:-

 Establishing appropriate credit risk environment

 Operating under sound credit granting process
 Fixing Prudential Limits of Exposure.
 Measuring risk through Internal Risk Rating.
 Risk based Pricing of loans/facilities.
 Establishing systems for Portfolio Risk Management.
 Controlling risk through Loan Review Mechanism/Credit Audit

39
Appropriate Credit Risk Environment
The Board of Directors shall review the credit risk strategies and significant credit risk
policies periodically (atleast annually). Such credit risk strategies and policies, which would
also clearly spell out IFCI's risk bearing capacity expressed in terms of potential risk
exposure would be effectively communicated to all offices and to all employees to develop a
clear understanding of IFCI’s approach to identifying, measuring, monitoring and managing
credit risk.

Sound Credit Granting process

IFCI's credit granting criteria have been defined in its loan policy document. IFCI has a
Board approved system of delegation of authority for approvals of various assistance. There
also exists a multi-tier credit approval mechanism by virtue of which assistances to clients are
approved by different levels of authorities depending on the nature and amount of assistance.
As far as practicable, all the group companies should be under jurisdiction of a single
regional office for better risk assessment and control. For first time borrowers of IFCI,
emphasis should be given to borrower's integrity and reputation as well as the projected cash
flow from the project.

Prudential limits of exposure

IFCI has as per its loan policy, stipulated various prudential exposure limits for individual
borrowers, business groups and industry. Separate prudential limits have also been stipulated
for Guarantee assistance, Investment in shares/debentures and other short-term products.
Concentration risk is probably the single most important cause of credit problem for
Institutions. Substantial exposure limits for single borrower assistance and group exposure
should be fixed based on the historical data. Industry exposure limits would need to be

40
changed based on the growth potential. It would be desirable to have higher prudential
exposure limits for high growth industries and lower limits for low growth sectors.

Internal Rating

An important tool in monitoring the quality of credits, borrowers as well as the credit
portfolio is the use of an internal rating system. A well-structured internal risk rating system
is a good means of differentiating the degree of credit risk in the different credit exposures of
an FI. A rating serves as a single point indicator of diverse risk functions of a counter party
and facilitates in taking credit decisions in a consistent manner. This allows more accurate
evaluation of the quality of credit portfolio, the level of concentration risks, incipient
weaknesses, pricing of credits and adequacy of loan loss reserves. This also facilitates
adequate allocation of capital on the basis of quality of loan.

IFCI proposes to have a dynamic Internal Rating system in place, which will be robust
enough to absorb changes in the lending environment. The grading/rating symbols could be
alphabetic, numeric or alpha-numeric scale different from the symbols used by the external
rating agencies to avoid confusion in internal communication. There would be 8 to 10 grades
including 5 to 6 grades for acceptable levels of credit risk and 3 to 4 grades for unacceptable
levels of credit risk. The key parameter that would summarise all the credit risks, would be
the certainty in the business and the financial environment of the borrower and
correspondingly the extent to which cash flows would meet financial obligations.

To start with, only all the new borrowers/facilities and the existing borrowers under standard
or sub-standard categories, as per RBI norms, would be rated. However, over a period of
time, say 2-3 years, all the borrowers/loans would need to be rated for monitoring the risks of
the entire portfolio. In case of rating variance between ratings of a borrower and a facility, the
borrower rating would prevail. However, the level of security, strong corporate guarantee,
etc. would be taken into consideration for decision on pricing of the facility.

41
This credit risk assessment (rating) exercise would be repeated annually for the risk grades
under the acceptable levels of credit risk and biannually for others for assigning grades as per
assessment then. The updating of the credit ratings would be undertaken at half yearly
intervals in order to gauge the quality of the portfolio at periodic intervals. The frequency of
such updating would be gradually increased to quarterly intervals over a period of two years.

The rating exercise and approval of rating need to be separated. Accordingly, for new
proposals, the credit officer at Regional Office would assign a rating which is to be approved
by the Risk Rating Committee at Regional Office level. The proposed risk rating is to be re-
affirmed by the Credit Rating Committee (CRC) at corporate level. In case of variance in
opinion, the Committee may refer to Credit Risk Management Department (CRMD) at Head
Office. for re-calibration and final approval by the CRC. In respect of existing credits, the
rating assigned by the Regional Office would be approved by the CRC for the initial rating.
Subsequently, the rating so assigned would be reviewed and confirmed by the Credit
Auditors (Loan Review Officer) during periodical credit audits. The Committee at Regional
Office level may consist of the Head of the Office, the relationship manager and the project
leader. The Credit Rating Committee at Head Office may consist of 4-5 members including
CGM/GM, heading departments like, Industry Research, Credit, Legal, Credit Risk
Management. One Executive Director may chair CRC.

The ratings are to be construed solely as statement of opinion and not statement of facts. But,
since the internal rating of borrowers/credits could be used for various purposeful
requirements like risk based pricing, credit approval decisions, identification of problem
loans, determination of default rate, recovery rate, portfolio management and capital
allocation, etc., utmost care would be taken while assigning a rating to ensure the consistency
and accuracy of internal ratings. The study of Probability of Default (PoD), Loss Given
Default (LGD), Exposure at Default (EaD) and Rating Migration should follow only after the
stabilisation of the rating process and accumulation of data over a period of 2 to 3 years or
more.

42
Risk Based Pricing

Pricing of the loans/assistance would be based on the internal risk rating. However, perceived
values of accounts, value of collateral, future business potential, portfolio/industry exposure
and strategic reason may play important role in pricing.

Based on the historical database of ratings and defaults over a period of atleast five years,
IFCI would aim at determination of Probability of Default (PD) and Loss given Default
(LGD) which shall be vital for risk based pricing and valuation of loan portfolio.

The ultimate aim would be to institutionalise Risk Adjusted Return on Capital (RAROC)
framework, which calls for data on portfolio behaviour and allocation of capital
commensurate with credit risk inherent in loan proposals. This would be done over a time
horizon of 3 to 5 years.

Portfolio Management

4.8.1 Periodic monitoring of the portfolio would be done by CRMD at Head Office level.
The portfolio quality would be evaluated by analysing the composition based on rating. After
the internal rating stabilises and historical data are available for a period of two year or more,
the rating migration analysis would be done on half yearly basis to observe the trend of
portfolio credit risk and accordingly to take decision for change in the portfolio mix.

4.8.2 Evaluation of rating-wise distribution of borrowers in various industry, business

segments, products would be done on half yearly basis and accordingly exposure limits be
revised from time to time.

43
4.8.3 Aggregate exposure to any grade, as per internal risk rating, would not exceed 30% of
the total exposure.

4.8.4 Rapid portfolio reviews, stress tests and scenario analysis would be undertaken when
external environment undergoes rapid changes (e.g., volatility in forex market, economic
sanctions, extreme liquidity conditions, etc.), stress test at present may be done by simple
alterations of assumptions of economic, business parameters, etc. underlying the rating
assignment.

Securitisation

Excess exposure to any borrower, group or industry should be reduced by way of recovery
mechanism, OTS or securitisation. In case of securitisation, normally, the loan should be
valued on marked to market basis. But due to absence of secondary market for Institutional
loans in India, the valuation of loan to be securitised would depend upon yardsticks like
interest rate, asset quality, borrower rating and collateral, etc. In addition, the PLR and risk
perception of the buyer at the time of securitisation and also urgency for securitisation due to
situations like liquidity crisis or supervisory instructions shall also play an important role in
pricing securitisation deals. Endeavour would be made to securitise the assets having mid-
risk rating.

Credit Audit/Loan Review Mechanism (LRM)

LRM is an effective tool for constantly evaluating the quality of loan portfolio and to bring
about qualitative improvements in credit administration. IFCI would, therefore, have proper
loan review mechanism for large value accounts. Credit Audit Division of Credit Risk
Management Department shall have responsibility of such loan review.

44
Market risk management:

IFCI is exposed to three major types of market risks: Liquidity risk, Interest-rate risk and
Currency risk. The liquidity and interest-rate risks are addressed by an internal committee of
executives known as Asset Liability Committee (ALCO), headed by CMD and comprising
of, as members, Executive Directors, Chief General Manager (Economic Planning), General
Manager (Resources), General Manager (Accounts), General Manager (Investments),
General Manager (MIS) and General Manager (Credit Risk Management). Besides, all the
Chief General Managers and General Manager (IT) are invited to attend the meetings. The
Committee meets atleast once in a month and deliberates on various important matters
pertaining to asset liability mis-matches, liquidity problems, funding strategies, interest rate
review, etc. The Committee also deliberates and approves the various reports such as
structured liquidity gap reports and interest sensitivity report, on asset -liability management
submitted to RBI.

Liquidity risk is the potential inability to meet the institution's liabilities as they become due.
It originates from the mis-matches in the maturity pattern of assets and liabilities. Measuring
and managing liquidity needs are vital for effective operation of IFCI. Analysis of liquidity
risk would involve measurement of not only the liquidity position of the institution on an on-
going basis but also examining how funding requirements are likely to be affected under
crisis scenarios. Liquidity management would involve spelling out of the funding strategies,
liquidity planning under alternative scenarios, liquidity reporting and reviewing. ALM system
in practice, in IFCI measures cash flow mis-matches under different time buckets. ALCO
reviews liquidity position on a monthly basis. The Board of Directors of IFCI have fixed the
limits for liquidity as 50% of the outflows in different buckets from 6 months to 3 years and
25% of the outflows for the time bucket above 3 years.

A major part of IFCI's rupee borrowings and lending are based on fixed interest rates. The
interest rates for borrowers are decided after adding a risk spread to the prevailing prime
lending rate (PLR). PLR is usually determined on the basis of cost of funds for the institution.
In certain specific projects having long gestation period, interest reset clause is included to
take care of future interest rate movements. In respect of foreign currency lending, both the
borrowing and lending rates, are based on the LIBOR or similar other bench mark rates.
Interest rate sensitivity statements, which indicate time lag between the interest rate changes

45
in the liabilities and assets, would be used for tenor selection to raise fresh funds to take on
the type of loan exposure, whether short term or medium term.

RBI has granted restricted authorization to IFCI to deal in foreign exchange under FEMA.
IFCI has been authorized to raise foreign currency resources and open Letters of Credit
against its sanctions for project finance. Even though IFCI has been raising different lines of
credit in different currency, as a matter of policy, IFCI has been lending back to back in the
same currency, thereby passing on the currency risk to the borrower. A daily statement of
mis-match position currency-wise is being prepared and reviewed at the top management
level. IFCI as a prudential measure creates revolving funds to be utilized for lending to the
sub-borrower or for repayment of liabilities. IFCI has been preparing and submitting a
currency-wise liquidity statement to RBI on regular intervals and the same is also being
monitored closely by the top management.

Operational Risk Management

Operational risk is defined as the risk of direct and indirect loss resulting from inadequate or
failed internal processes, people and systems or from external events. Operational risk
includes both internal and external risks:-

 People Risk, which is associated with employees

 Process Risk, due to errors in processes
 Technology Risk, caused by systems, programmes or data
 External Risk, due to human factors originating from outside the Institution.
 Physical Risk, caused by external physical factors over which the institution has
no control. These are traditionally covered by outside insurance.

Internal controls and internal audit are used as the primary means to mitigate operational risk.
Control measures include preventive control and damage limitation controls. The former
attempt to decrease the probability of a loss happening; the latter tries to limit the size of
losses when they occur.

46
It is proposed to measure operational risk through measurement of "loss frequency
distribution" and "loss severity distribution". The loss frequency distribution describes the
number of loss events over a fixed interval of time while the loss severity distribution
describes the size of the loss. From out of these two distributions, the "probable loss
distribution" can be computed. The operational risk management principle would also depend
on these two measures. If the loss frequency is high but the loss severity is low, the loss
would be treated as "expected loss" and has to be provided for or absorbed as an going cost
and managed through internal controls. If the loss frequency is low but loss severity is high,
the operational risk would be mitigated either through a capital charge or through outside
insurance.

Organization Structure for establishing a Comprehensive Risk Management System

A major issue for establishing an organization-wide, integrated risk management structure is

choosing between a centralized and de-centralized structure. The global trend is towards
centralized risk management with integrated treasury management. It is essential that the risk
management function is kept independent of operational functions. Credit Risk Management
Department must be independent of the Credit Administration (appraisal, operations and
monitoring) Departments. Similarly, Market Risk Management functions must be
independent of trading functions. Internationally, a committee approach to risk management
is being preferred. It is proposed to set up an independent Risk Management Committee
(RMC) headed by CMD and comprising of, as members, the Executive Directors and heads
(CGM/GM) of Credit, Investment, Industry Research, Treasury, Legal and Credit Risk
Management departments. RMC will report to the Board or a Committee of Directors.

In the short run, based on the prevailing organization structure, functional distribution and
reporting relationships, without suggesting any major dislocation, the following organization
structure (figure-1) has been proposed for developing an organization wide, comprehensive,
integrated risk management system in IFCI. However, in course of time, the risk
management structure for IFCI has to be modeled on the line of international best practices

47
(figure-2). The structure suggested in figure-2 would provide effective integration and unified
authority and responsibility.

Figure 1

BOARD OR COMMITTEE OF
DIRECTORS

RISK MANAGEMENT
COMMITTEE HEADEDBY
CMD

ED(s)

CREDIT RISK MARKET RISK OPERATIONAL

MANAGEMENT MANAGEMENT RISK FUNCTIONS
MANAGEMENT

CRMD Treasury dept, Inspection &

Resources dept, Audit dept RESPONSIBILITY
FCRO Dept CENTRE
48
 Figure 2

BOARD OR COMMITTEE

OF DIRECTORS

RISK MANAGEMENT

COMMITTEE

CHIEF RISK
OFFICER

CREDIT RISK RISK MIS,

MANAGEMEN MARKET RISK OPERATIONAL ANALYTICS &
T GROUP MANAGEMENT RISK RAROC
GROUP MANAGEMENT
GROUP

A pre-requisite for establishment of a comprehensive risk management structure is the

existence of a robust MIS, consistent in quality and timeliness of delivery. The existing MIS
would require substantial up-gradation and strengthening of the data collection machinery to
ensure the integrity and reliability of data. Risk management is a complex function and it

49
requires specialized skills and expertise. Efforts would be made to impart the required skills
and expertise through training and development.

REGULATORY RESTRICTION ON LENDING

Restrictions on loans to certain categories of borrowers

 IFCI will not grant any loans/ advances to or on behalf of any of its directors or to any
firm in which any of its directors is interested as a partner/ manager/ employee/
guarantor, or to a company or subsidiary or holding company in which any of the
directors of IFCI is a director/managing agent/ manager/ employee / guarantor or in
which he holds substantial interest, or any individual in respect of whom any of its
directors is a partner or guarantor.

 IFCI will not grant any loans and advances, without the prior approval of the Board,
to the ‘relatives’ of IFCI’s Chairman/ Managing Director or to Directors of other
banks and their relatives.

 IFCI will not grant loans and advances to industries producing or consuming Ozone
Depleting Substances, in terms of Montreal Protocol to which Government of India is
a party.

 IFCI will not sanction additional facility to the borrowers appearing in CIBIL’s
“Defaulters” and “Willful Defaulters” list as per extant RBI guidelines. Other
companies whose Board comprises the promoter directors or whole-time directors
(other than Professional Directors and Nominee Directors of FIs, Central/State
Governments) of the companies appearing in CIBIL’s list of “Willful Defaulters’ will
also not be granted any additional credit facilities by IFCI. IFCI will also not grant
any facility to new ventures floated by Entrepreneurs / promoters / companies
featuring in CIBIL’s will full defaulter list for a period of 5 years from the date their
name is disseminated in the list.

50
Restrictions relating to security for lending
(i) IFCI will not grant loans and advances against the security of:
a. Shares of IFCI
b. Partly paid shares of a company
c. Shares of a proprietary or partnership firm.
d. CDs
e. FDs issued by other banks
f. Money Market Mutual Funds.

(ii) IFCI will not hold shares in a company in the management of which Managing
Director or Manager of IFCI is interested.

Credit appraisal system:

General principles:
Any proposal (loan, equity or any other form of assistance) would involve a rigorous credit
appraisal process before it is recommended for sanction of specific credit facilities by the
designated authorities. Broad guidelines in appraising a credit proposal, irrespective of the
nature of the credit facility and the business segment involved are as follows: -

Bankability of the Proposal: The first step in the appraisal process in any credit proposal is
to ensure that there are no regulatory restrictions as regards the borrower, the security offered
and the purpose of the loan and that the proposal conforms to IFCI’s Prudential Exposure
norms and other credit policy guidelines.

Due Diligence: Due diligence and in-depth analysis of the technical/ commercial/ economic/
financial/ managerial aspects of the applicant’s business/ project; industry conditions;
applicant’s past track record/ standing in the industry and reputation in the market and other
critical aspects of the proposal would be conducted. For technical/ economic/ commercial
viability, the help of external consultants may be sought, where necessary. The process of due
diligence would broadly involve the following:

51
(i) Banker’s report.
(ii) Information from CIBIL about the prospective buyer.
(iii) Checking of name of borrower/company on RBI’s List of Defaulters and Willful
Defaulters
(iv) Media and Print reports
(v) Information available in the Internet
(vi) Visit to works
(vii) Informal enquiry from competitors
(viii) Analysis of financial statements
(ix) Past track record in case of borrowers who have been associated with IFCI
(x) Reports from credit rating agencies
(xi) Prospectus filed with SEBI etc.
(xii) Industry reports
(xiii) Comparison of various financial parameters with similar units

 Credit Need Assessment: This would involve determining the kind of credit facilities
genuinely needed by the applicant and the limits for each of the facilities with reference
to the purpose of the loan, nature of industry, scale of operations, business segment,
prudential exposure limits/ for single / Group borrowers and industry etc.

 Credit Rating: A credit rating would be recommended by CRMD for each borrower /
credit facility, as per IFCI’s Credit Rating policy. The rating would reflect the credit risk
involved in the borrower/ facility and determine the pricing for the credit facilities
recommended for sanction. The credit rating from external rating agencies like CRISIL,
ICRA, CARE, FITCH, etc. may also be used as bench mark.

The credit proposal would be examined in depth by the sanctioning authorities for the
creditworthiness, assessment of credit requirement and risk rating of the borrower and the
credit facilities before according actual sanction. The sanction would cover, inter-alia, pricing
and terms and conditions specifically applicable to the facility/(ies) sanctioned.

52
Eligibility criteria:

IFCI shall be guided by the opportunities with regard to risk return profile, credit quality and
compliance of sector-wise eligibility criteria which have been set up as follows:

1. Manufacturing/Service Sector
 CRISIL equivalent investment credit rating of minimum BBB or

CRISIL equivalent corporate rating of minimum CCR BBB or

CRISIL equivalent short term instrument rating of minimum P3.

 Company presently having no rating but assisted by IFCI with good track and credit
record.

 Company presently having no rating but have very strong financials and satisfactory
operational results for last 2/3 years.

 Net-worth - minimum Rs.100 crore. However, in case of assisted concerns of IFCI

with good credit & track record the minimum networth criteria may be relaxed to an
extent.

 GP margin to be in line with particular industry trend for last 3 years.

 Maximum Debt Equity Ratio 1.5:1.

 Minimum average DSCR 1.5:1.

 Minimum FACR 1.5:1.*

 Minimum Current Ratio 1.33:1.

 Profit making for last 3 years.

* In case of service sector, where Fixed Asset Cover may not be adequate, Total Security
Cover (including Land & Building/Pledge of shares etc.) should be at least 2 times of the
Loan amount

2. Infrastructure Projects

53
  CRISIL equivalent investment credit rating of minimum BBB or

 CRISIL equivalent corporate rating of minimum CCR BBB or

 CRISIL equivalent short term instrument rating of minimum P3.

 Strong financial in case of companies having rating

 In case of new Company/SPV implementing infrastructure project, the

promoting company/companies should fulfill the above criteria of rating.

 Combined Net-worth of the promoters Companies should be minimum Rs.300 crore.

 Majority holding company/companies shall be profit making for last 3 years.

 Maximum Debt Equity Ratio 4:1 for the project

 Note: In case of infrastructure projects where IFCI shall be one of the sponsors, the
combined networth of the other developer should be minimum Rs.200 crore.
However, the project implementation capabilities of the other sponsors will be the
main criteria and the networth criteria can be relaxed in smaller projects with good
expected returns.

3. Investment in Equity

a) SPV/Holding company

 Minimum net-worth of the promoting company - Rs.200 crore

 The promoting Company or the holding Company or SPV company should have
excellent track record and investment would be made in the projects of high growth
areas including all type of infrastructure projects.
 Minimum IRR of 13% p.a. (upto 5 years)
 Minimum IRR of 18% p.a. (above 5 years)
 Exit option: 3 - 8 years or 3 years after COD through buy back or through IPO
depending upon term of participation.

54
  In case of investment in the holding company or in SPVs where substantial progress
has been made in implementation of the project IFCI may invest at a premium with
the option of exiting at a valuation/fixed return/IPO.

b) Pre-IPO/IPO/QIP/Renouncement of rights issue

 Minimum Networth of Rs. 300 crore

 IRR- 18-20% p.a.
 Promoters’ holding post issue should not be less than 26% of the paid up capital.
 The estimated PE ratio shall be in tandem with the average PE of the industry/sector

4. Funding to Holding/ Investment Company

 The Company should be the investment arm of the promoters or holding/group

company of the Company whose shares shall be pledged as security with substantial
shareholding to provide adequate cover.

 Rating of Company whose shares are being pledged,

 CRISIL equivalent investment credit rating of minimum A or

 CRISIL equivalent short term instrument rating of minimum P3.

 In case of un-rated company (whose share will be pledged), the company’s financials
should be strong with large market capital and high trading volume.

 Company whose shares shall be pledged should be profit making and preferably
dividend paying for last 3 years.

 Net-worth minimum Rs.200 crore of the company whose shares are pledged.

 Company whose shares are being pledged should be preferably listed entity.

 The shares should be pledged in demat form.

 Average trading volumes of the pledged shares in demat form for the last 12 month
should be such that IFCI can liquidate the shares in open market in 45 trading days.

 Pledge of shares of the listed entity shall give a security cover of at least 2 times of the
loan. However in case of very good Corporates, a mix of listed and un-listed or only
55
 unlisted shares may be accepted after internal valuation of the unlisted shares. In case
of un-listed shares, the minimum shareholding to be pledged should not be lesser than
26%.

 In case of very good Corporate, instead of direct pledge, the shares could be kept in an
Escrow Account with a Trustee with irrevocable power of attorney to pledge the
shares in case of default and non-disposal undertaking for the shares.

 In case the stipulated security cover falls by 10%, the company/pledger shall top up
with additional shares within 5 working days to restore the security cover

 In case market value of the pledged shares goes down by 25% from the initial pledge
price, the company shall provide cash margin which shall be adjusted against
outstanding loan amount.

 In case of default in payment, inability to top up or to provide cash margin, IFCI shall
have the right to sell the pledged shares without giving any notice to the borrower and
without any interference of any Court.

In case a proposal does not meet a few of the eligibility criteria as mentioned above, but
merits consideration on an overall basis or on the basis of certain specific strength, the
Competent Authority may accord approval, if satisfied with the justification given.

Rate of interest
The interest rate will be both variable and fixed, with or without linking to Prime Lending
Rate of IFCI. However, the same shall be based on the prevalent interest rate scenario, market
conditions and track & credit record of the borrower/group. Based on the above parameters,
the interest rate shall be negotiated with the borrower.

Case Study

56
Case study of Karle Infra Projects Pvt. Ltd. (KIPPL)

ASSISTANCE APPLIED FOR

In crore

Subscription to Compulsory Convertible Debenture (at par) of KIPPL. 100

Best effort Syndication of debt requirement of the project 116

PROPOSAL

Karle Infra Projects Pvt. Ltd. (KIPPL), an infrastructure development company, promoted by
Mr. Sudarshan Karle and Mr. Mahendra Karle, was incorporated in 2008 with the objective
of setting up specialized infrastructure such as SEZs, industrial parks, hospitality
establishments, townships etc. in Bangalore. The company proposes to develop SEZ for IT
and ITES in a project site of 26 acres in Bangalore which is a part of 70 acre ‘Town Center’
project being developed by Karle Group.

Karle Group is in the business of export of readymade garments since 1972. In recent past,
the group has diversified into real estate, biotech and pharmaceuticals employing over 6500
people in Bangalore city. The promoters of the group are Mr. Sudarshan Karle and Mr.
Mahendra Karle, sons of Late Sri L T Karle, Ex MLC of Hassan, a veteran Congressman.
The group’s turnover and profits for the last financial years were Rs. 228 crores and Rs. 17
crore respectively.

Group companies and Nature of Business

Following are the companies which are part of Karle Group.

(a) M/s L T Karle and Company (Partnership Firm) – Readymade Garments.

(b) M/s Karle International Pvt. Ltd. - Readymade Garments.
(c) Karle Integrated Packaging Pvt. Ltd – Packaging Products.
(d) J &F International (Partnership Firm) – Trading Silk and Silk Made-ups.
(e) Karle Properties (Partnership Firm) – Property Development

57
 (f) Karle Habitat (Partnership Firm) – Property Development

Date of Incorporation February 27, 2008

Constitution Private Limited Company

Sector Income producing Real Estate (Special Economic

Zone)

Term Lenders PNB

Registered Office No. 151, Industrial Suburb, Yeshwanthpur,

Bangalore 560 022

Location of the proposed SEZ Nagavara, Along Outer Ring Road, Next to
Manyata Tech Park, Opposite to Nagavara Lake,
Bangalore.

Project Sector

Construction of Special Economic Income producing Real Estate

Zone with a Processing Zone of 1.62
Million SFT of Built up area (Phase I)

The group is holding over 70 acres of land at Nagavara along Outer Ring Road near Herbal
Junction, North Bangalore city. The land is in High-tech Zone with permissible FSI of 3.25
times overall cost of the project is 563.43 crore.

Cost of Project

58
The estimated cost of project for the Phase I is Rs. 559.95 crore. The break-up of the cost of
Project is as follows:

(Rs. in crore)

Sl. No. Particulars Amount % of Total Cost

A Land to the Extent of 12.3 Acres 144.34 25.44%

B Construction Cost (Civil) 278.12 49.01%
C Services (MEP and others) 92.71 16.33%
Basic Cost
IDC 48.26 9.22
TOTAL 563.43 100.00%

Means of Finance
(Rs. in crore)

Amount Contributed up Means of Finance

Particulars Amount
to March 31, 2011

Equity 263.43 150.00 Infused by Promoter Till Date

CCDs 100.00 Proposed to be financed by IFCI

Sanctioned loan amount from PNB is for

Debt 200.00 53.00 Rs.84 Crores and balance amount of

Rs.116 to be syndicated by IFCI on Best
effort basis.
Total 563.43 206.00

59
IFCI also proposes to syndicate Rs. 116.00 crore of the total debt requirements of Rs. 200
crores for the project on a best effort basis. The total fee for the aforesaid assignment is 1.0%
of the debt amount syndicated less finance charges to Banks up to 0.25%. The upfront fees
for the same have been stipulated as Rs. 25 lacs.

Data analysis

Financial Analysis:

1) Profitability Projections

Assumptions taken for projections, Projected P&L, Balance Sheet, Cash Flow Statement,
DSCR Calculations (for the first 10 years of operations) and are contained in below table

Key underlying financial projections

Particular Assumption
Project COD December 31, 2013
Project Cost 563.43 crore
Debt:Equity:CCD 36:46:18 (Approximately)
Proposed Debt 200 Crore
Sanctioned Debt Till Date 84 Crore
Balance Debt to Be Syndicated by IFCI 116 Crores
Extent of Construction 16.62 Million SFT of BUA.
Promoters Equity 263.43 Crores
CCD from IFCI 100 Crores
Coupon for CCD 12.5% per Annum payable Monthly.
Lease Rental per SFT Rs. 52 per SFT.
Common Area Maintenance per SFT Rs. 8 per SFT
Depreciation Rates Particulars Companies IT Act
Act
Civil Works 3.34% 10%
Electro Mechanical 5.28% 15%

60
 Works

FY FY FY FY FY 17 FY FY FY FY 21
13 14 15 16 18 19 20

Interest Rate Term Loan 16.5%

Tax Rate MAT 20.33%
Income Tax 33.99%
Loan Repayment Tenure 10 years

6 months from
Moratorium (Months)
COD

61
 Rental Income from 3,0 9,319 12,33 12,95 13,599 14,27 14,99 15,74 16,530
Business 27 5 1 9 3 2
Expenses incurred in (10 (535) (808) (808) (808) (808) (808) (808) (808)
Business 6)
PBDIT 2,9 8,784 11,52 12,14 12,791 13,47 14,18 14,93 15,722
22 7 3 1 5 5
Interest Income on - - - - - - - - -
Surplus Cash
Interest Payments on (1, (3,02 (3,17 (2,55 (1,898 (1,23 (578) (41) -
debt 14 6) 6) 8) ) 8)
5)
CCD Coupon Payment (46 (1,16 (1,25 (1,25 (313) - - - -
4) 9) 0) 0)
PBDT 1,3 4,588 7,100 8,336 10,581 12,23 13,60 14,89 15,722
13 3 7 3
Depreciation (1, (3,34 (4,19 (4,19 (4,191 (4,19 (4,19 (4,19 (4,191)
13 9) 1) 1) ) 1) 1) 1)
4)
Profit Before Tax 17 1,239 2,910 4,145 6,390 8,043 9,416 10,70 11,531
(PBT) 9 2
Tax Payments (36 (252) (592) (843) (1,299 (1,63 (1,91 (2,17 (2,344)
) ) 5) 4) 6)
Profit After Tax 14 987 2,318 3,302 5,091 6,407 7,502 8,527 9,187
(PAT) 2
Projected Profit and Loss Statement

62
Projected Balance Sheet
FY FY FY FY FY FY FY FY FY FY
Balance Sheet 12 13 14 15 16 17 18 19 20 21
LIABILITIES
20,0 31,6 36,3 36,3 36,3 36,3 36,3 36,3 36,3 36,3
Equity 52 36 43 43 43 43 43 43 43 43
12,7 20,0 20,0 17,0 13,0 9,00 5,00 1,00
Term Loans 92 00 00 00 00 0 0 0 - -
1,85 2,07 2,07 2,07 2,07 2,07 2,07 2,07
Security Deposit - - 6 5 5 5 5 5 5 5
Accumulated Profit 1,13 3,44 6,75 11,8 18,2 25,7 34,2 43,4
from P&L - 142 0 8 0 41 49 51 77 64
Profit from Sale of
Asset
32,8 51,7 59,3 58,8 58,1 59,2 61,6 65,1 72,6 81,8
Total Liabilities 44 78 29 66 68 59 66 69 95 82
ASSETS
11,7 14,4 14,4 14,4 14,4 14,4 14,4 14,4 14,4 14,4
Land 61 34 34 34 34 34 34 34 34 34
21,0 36,0 37,4 33,2 29,0 24,8 20,6 16,4 12,2 8,08
Office Building (Net) 83 67 25 34 44 53 62 71 80 9
Cash and Bank 1,27 7,47 11,1 14,6 19,9 26,5 34,2 45,9 59,3
deposits - 7 0 97 90 72 70 63 81 58
32,8 51,7 59,3 58,8 58,1 59,2 61,6 65,1 72,6 81,8
Total Assets 44 78 29 66 68 59 66 69 95 82

63
Projected Cash Flow Statement

Cash Flow Statement FY FY FY FY FY FY FY FY FY FY

12 13 14 15 16 17 18 19 20 21
INFLOWS
IFCI Term loan 12,7 7,20 - - - - -
92 8
IFCI CCD 7,73 2,26 - - - - -
1 9
KIP Equity 560 6,64 4,70 - - - -
1 8
Loan from Building 1 & 2 - - - - - - -
Security Deposit - - 1,85 218 - - -
6
Profit after tax - 142 987 2,31 3,30 5,09 6,40 7,50 8,52 9,18
8 2 1 7 2 7 7
Depreciation - 1,13 3,34 4,19 4,19 4,19 4,19 4,19 4,19 4,19
4 9 1 1 1 1 1 1 1
Coupon payment as per P - 464 1,16 1,25 1,25 313 -
&L 9 0 0
TOTAL 21,0 17,8 12,0 7,97 8,74 9,59 10,5 11,6 12,7 13,3
83 59 70 7 3 4 98 93 17 77

64
 OUTFLOWS
Less: Deferred CCD - - - - - - -
coupon payment
Capital expenditure - 21,0 16,1 4,70 - - - -
Building 1,2 & 3 & 4 83 18 8
CCD coupon payment @ - 464 1,16 1,25 1,25 313 -
10% 9 0 0
CCD Principal repayment - - - - - - -
IFCI Debt Principal - - - 3,00 4,00 4,00 4,00 400 100
repayment 0 0 0 0 0 0
TOTAL 21,0 16,5 5,87 4,25 5,25 4,31 4,00 4,00 1,00 -
83 82 7 0 0 3 0 0 0

Opening Cash and bank - - 1,27 7,47 11,1 14,6 19,9 26,5 34,2 45,9
balance 7 0 97 90 72 70 63 81
Cash addition / deduction - 1,27 6,19 3,72 3,49 5,28 6,59 7,69 11,7 13,3
7 3 7 3 2 8 3 17 77
Closing Cash and Bank - 1,27 7,47 11,1 14,6 19,9 26,5 34,2 45,9 59,3
balance 7 0 97 90 72 70 63 81 58

DSCR Calculation
FY FY FY FY FY FY FY FY
DSCR Calculation 13 14 15 16 17 18 19 20

Repayment years 1 2 3 4 5 6 7 8

Cash available for debt

servicing

PAT 142 987 2,318 3,302 5,091 6,407 7,502 8,527

1,13 3,34
Depreciation 4 9 4,191 4,191 4,191 4,191 4,191 4,191

65
 Interest on TL + int. on 1,60 4,19
CCD 9 5 4,426 3,808 2,210 1,238 578 41

2,88 8,53 10,93 11,30 11,49 11,83 12,27 12,75

Total Cash Available 5 2 5 1 2 6 1 9

Debt Servicing

Term Loan Instalment - - 3,000 4,000 4,000 4,000 4,000 1,000

1,60 4,19
Interest 9 5 4,426 3,808 2,210 1,238 578 41

Total debt servicing 1,60 4,19

requirement 9 5 7,426 7,808 6,210 5,238 4,578 1,041

DSCR 1.79 2.03 1.47 1.45 1.85 2.26 2.68 12.25

Average DSCR 2.15

Minimum DSCR 1.45

2) Sensitivity Analysis:

 The impact on the project IRR, equity IRR and DSCR on account of variations in
key project- related assumptions has been analyzed to test the robustness of project
financials. The results of the sensitivity analysis are summarized below:

Project Equity Minimum Average

Sensitivity Parameter Scenario IRR IRR DSCR DSCR

52 24.0% 26.4% 1.45 2.15

Rental -10 42 21.1% 22.7% 1.24 1.83

-5 47 22.6% 24.6% 1.34 1.99

66
 5 57 25.4% 28.1% 1.55 2.31

10 62 26.7% 29.8% 1.66 2.47

1840 24.0% 26.4% 1.45 2.15

-10% 1656 25.1% 28.0% 1.44 2.16

Construction Cost -5% 1748 24.6% 27.2% 1.44 2.16

5% 1932 23.5% 25.7% 1.45 2.15

10% 2024 23.0% 25.0% 1.45 2.15

Yes 20.33% 24.0% 26.4% 1.45 2.15

80 IA Benefit
No 33.99% 23.1% 25.2% 1.37 2.00

5% 24.0% 26.4% 1.45 2.15

-2% 3% 23.0% 25.2% 1.40 2.05

Revenue Growth Rate -1% 4% 23.5% 25.8% 1.42 2.10

1% 6% 24.5% 27.0% 1.47 2.21

2% 7% 25.0% 27.6% 1.50 2.26

Interpretation: As can be seen from the analysis presented above, the operations of
the Project are profitable throughout the operating period. Adequate cash flows and
healthy DSCRs generated by the Project would provide comfort to the lenders.
Moreover, the Project DSCRs and returns remain comfortable even in the case

67
 of reduction in lease rental by 10% as mentioned above, thereby ensuring the
attractiveness of the Project.

Terms o f Ass istan ce:

Salient terms for CCD sub scri ption

Subs cri ptio n to CCDs worth Rs. 100 Crores

Facility Details

Investee Karle Infra Projects Pvt. Ltd.

Company

Promoters Mr. Mahendra Karle and Mr. Sudarshan Karle

Nature of the Con vertib le D ebenture s, to b e compulsori ly co nve rted into equity
Faci lity of the company at the end of 6th year from the date of issue.

Facility 100 Crores

Amount

Purpose The Company will use the funds for IT SEZ processing zone
development of 1.62 mn sqft office space along the outer Ring Road
(Opposite Nagavara Lake)

Project Cost & The cost of the Project is : Rs. 563.43 crore.
Funding
The Project Cost shall be funded as follows:

Promoters equity : Rs. 263.43 crore

Compulsory Convertible Debenture (CCDs) : Rs. 100 crore

Term Loan from PNB : Rs. 84 crore

Term Loan to be Syndicated by IFCI : Rs.116 crore

68
Rank The CCDs shall rank senior to the Ordinary Shares which may come
into force pursuant to conversion of debt or all other shares with respect
to dividends/repayments/dissolution of the company or any other
distribution of assets of the company among its shareholders whether
voluntary or otherwise.

The CCD’s shall rank subordinate to senior debt with reference to

annual debt service obligation

Facility 6 months from date of signing documents.

Availability
Period

Schedule of The drawdown shall be in proportion to the promoter’s envisaged equity

drawdown in the project.

Upfront Charges 1.0 % + taxes on the sanctioned amount on or before the signing of
facility agreement.

Coupon 12.5% per annum payable monthly

Coupon Payment Monthly payment on the 15th day of each calendar month.

Exit Option Put Option to IFCI

IFCI shall have the Put Options on the Promoter to buy out the
issued CCDs in 4 equal tranches, after the expiry of the following
months from the date of issue :
1. 37th month – 25% of issued CCDs
2. 42th month – 25% of issued CCDs
3. 48th month – 25% of issued CCDs
4. 54th month – 25% of issued CCDs
So as to give IFCI an IRR of 18% p.a.

Call Option to promoters

The promoters shall have call options to buy out the issued CCDs in
tranches, after the expiry of the following from the date of issue :
1. 36th month – 25% of issued CCDs

69
 2. 41st month – 25% of issued CCDs
3. 47th month – 25% of issued CCDs
4. 53rd month – 25% of issued CCDs

So as to give IFCI an IRR of 18% p.a.

In addition to above call options, the promoter has additional call

options after the expiry of 12 months, 24 months and 36 months
respectively to buy out all the outstanding CCDs held by IFCI with an
Early buyout Premium of 2% on the paid up value of the CCDs bought
out.

Conversion in case of an IPO

The outstanding CCDs along with the accumulated coupon will be

converted into equity shares of the Company 2 days before the filing
of the RHP as part of the IPO of the Company or as per relevant
listing guidelines at that point in time. The CCDs shall be converted
so as that the conversion amount ensures a rate of return of 18%
p.a.to IFCI till the date of conversion. Further, the price of
conversion should be at a discount of 10% to the lower price band of
the IPO Price.

At the time of the IPO, IFCI will have the right to Offer for Sale
(“OFS”) up to 100% of its shareholding during the IPO

Conversion at the  CCD would be converted into equity of the company at par at
end of maturity the end of 6th year from date of issue

Pre Disbursement The Issuer shall at all times keep monies equal to coupon due
Condition over next three month under this Facility (the “Required
Balance”) in a bank account ("Coupon Service Reserve

70
 Account" or "CSRA") maintained with a bank acceptable to the
Investor.

Representation IFCI shall have the right to appoint a nominee director on the board of
on Board Karle Infra Projects Pvt. Ltd. during the tenor of the assistance.

Security  Pledge of shares held by the promoters to the extent of holding

49% of the total equity of the Company.
 Exclusive charge on the land parcel giving total security
coverage of 2 times of the Sanctioned amount. Land Parcel
offered as collateral should be able to give twice cover to IFCI’s
exposure taking distressed asset valuation as the benchmark
price of the land mortgaged
 Personal Guarantee of the promoters.
 PDCs.

Salient terms for Debt syndication

Project Cost & Funding The cost of the Project is : Rs. 563.43 crore.
The Project Cost shall be funded as follows:
Promoters equity : Rs. 263.43crore
1.
CCDs : Rs. 100 crore
Term Loan from PNB : Rs. 84 crore
Term Loan to be Syndicated by IFCI : Rs.116 crore
Amount of Debt Syndicated Syndication of remaining debt of Rs. 116 crores out of the
2. on Best Effort Basis total debt of Rs. 200 crores

The Company will use the funds for IT SEZ processing zone
3. Purpose of Debt development of 1.62 mn sqft office space along the outer
Ring Road (Opposite Nagavara Lake)

Project IT SEZ processing zone development of 1.62 mn sqft office

4.
space along the outer Ring Road (Opposite Nagavara Lake)

71
 Not exceeding SBI Base rate + 450 bps p.a. payable
5. WAC of Debt
monthly.

6. Door to door tenor 5 years

7. Construction Period From 1 July’11 till Dec’13

8. Moratorium 6 months post the construction period of 30 months

9. Debt Repayment In 8 equal quarterly instalments starting from Oct’14

10. Upfront Fees Rs. 25 lacs

1.0% of the loan amount syndicated plus applicable taxes

11. Syndication Fee (including fees payable to banks and financial institutions,
up to a maximum of 0.25%).

1. A first charge by way of mortgage of all of project’s

movable and immovable properties, present and
future
2. A first charge by way of hypothecation of all the
project’s movable assets, present and future,
intangible, goodwill, uncalled capital, present and
future relating to the project
3. A first charge on all the book debts, operating cash
flows, receivables, commissions, revenues of
whatsoever nature and whatever arising, of the
12. Security
Project, present and future
4. A first charge on the TRA/Escrow Account, Debt
Service Reserve Account and other reserves and any
other bank accounts of the project, wherever
maintained, present and future;
5. A first charge on all the rights, title, interest,
benefits, claims, demands, and all insurance
contracts/ Insurance proceeds whatsoever of the
Project;
6. Personal guarantee of the promoter

72
Detailed term sheet for CCD is included in Annexure XVI.

Detailed term sheet for Debt syndication is included in Annexure XVII.

Compliance with Lending Policy 2011-12:

1. Compulsorily Convertible Debentures

Criteria Eligibility

Combined Net-worth of the promoters The net worth of Karle Group of companies is Rs.
Companies should be minimum 336 crore as on 31/03/2011. The combined Net
Rs.200 crore. worth of individual promoters is greater than Rs.
500 Crores as on 31.03.2010

The promoting Company or the The proposed investment is in high growth income
holding Company or SPV company producing real estate sector
should have excellent track record and
investment would be made in the
projects of high growth areas
including all type of infrastructure
projects.

Minimum IRR of 13% p.a. (upto 5 IFCI’s investment would be at an IRR of 18% p.a.
years)

Exit option: 3 - 8 years or 3 years after Exit through buyback by promoters during 3rd and
COD through buy back or through 4th year in 4 semi annual instalments.
IPO depending upon term of
participation.

73
 Criteria Eligibility

Majority holding company/ The Karle group is profit making for the last 3
companies shall be profit making for financial years
last 3 years

Maximum Debt Equity Ratio 4:1 for The Project has debt equity ratio of 0.35:1
the project

Reference to CIC
The proposal was considered by CIC on 26/04/11, wherein CIC recommended for further
processing for the approval of the Executive Committee of Directors.

Risk factors and mitigation thereof:

Risk Mitigation

Promoters Risk Total equity requirement for the project is Rs.359.95 crore.
Promote Group would be infusing Rs.259.95 crore (72% of total
equity) and Rs.100 crore (28% of total equity) is proposed to be
infused by IFCI by way of CCD.

The promoters have already infused equity of Rs. 153 crore out of
their share of Rs.264 crores as on 30.03.2011

Execution Risk - The Company has engaged the eminent global project management
Capability to consultants M/s Assetz, a UK based Company, to complete the
implement the project as per Schedule.
project on time

Execution Risk - Company has already appointed following consultants

Ability to deliver the
(1) Preparation of Master Plan : M/s. Woods Bagot, Australia
infrastructure as per
the international (2) Preparation of infrastructure development plan including

74
 Risk Mitigation

standard. building, conceptual, water, sewage, utility, ETP and all the
required plans: M/S Connell Wagner Australia.

(3) Cost Consultants: M/s Davis Langdon and Seach consulting

India private limited.

(4) PMC : M/s Assetz a UK based company

(5) Architect: M/s RSP Inc. Singapore is the main architect for the
company.

(6) Infrastructure Consultants: M/s Consortia of Infrastructure

Engineers,

(7) Brand Building Consultants : M/s Mudra communication

(8) EPC Contractors : Shapoorji Pallonji & Co. Ltd – short listed

Market Risk Bangalore market scenario for the office space absorption demand
has been growing over the past 3 quarters and the outlook as per
analysts is on the rise for the subsequent quarters of 2011.

SEZ benefits/incentives will gain more importance in the light of

withdrawal of benefits under STPI. Presently, IT companies are
compelled to move into SEZ in order to avail the benefits for their
expansion programmes.

Company is in advance stage of signing MOU with leading MNC

Players for SEZ Space to the extent of 0.5 Million SFT through
CBRE.

Cost/Time overrun The Project is to be implemented by way of fixed time fixed cost
Risk contract. The contracts provide for liquidated damages for delay in
implementation. However in the sensitivity analysis 10% increase
in construction cost y-o-y and reduction in rental income by 10%
y-o-y is considered which has no significant impact or change in

75
 Risk Mitigation

the project DSCR.

Operational Cost Operation cost of SEZ is non-inflationary as the maintenance cost

Risk is collected separately on per SFT basis from the tenants.

SWOT Analysis

Strength 1) Karle SEZ for IT and ITeS has all necessary approvals and the
construction work of the project has already commenced.

2) The SEZ Land is free hold Property unlike other SEZs where land is
taken on land term lease for developing SEZ.

3) Subject property abuts one of the most prominent SEZ developments

in Bangalore, Manyata Tech Park, which would enhance the visibility
and image of the subject development.

4) KIPPL has already roped in leading consultants for all the activities of
development of SEZ.

5) Promoters of KIPPL have already brought in over 150 Crores of

equity in to the project.

Weakness The recent MAT and DDT exemption from SEZ developers and units
might erode the competitiveness of companies and developers of SEZs

Opportunity 1) North Bangalore is considered an important growth vector in the city

and thus is expected to emerge as a prominent activity hub going forward

2) Due to the withdrawal of tax exemption for STPI from 2011 onwards,

76
 the demand for SEZ space is expected to witness a rise in short-medium
term (approx. 2-5 years), in alignment with the commencement of
operations of subject development

3) The Project IRR is over 18%. More over The proposed investment by
IFCI through the route of CCD will earn a coupon of 12.5 % per annum
payable monthly and is secured by a land parcel abutting the project
worth over 200 Crores and pledge of 49% of Equity Shares of KIPPL.

Threat Under section 10AA, exemptions on SEZs will be extended only if the
occupier begins manufacturing or producing articles or products or
provides any service from the SEZ unit on or before 31 March 2014.
Hence the KIPPL has to complete processing area well before March
2014, in order to ensure higher occupancy.

Findings

 Karle Group is one of the known groups in the state of Karnataka

predominantly engaged in processing and exports of garments apart from
other business interests in real estate, packaging business and others. The
group has developed its own position in Bangalore and Mysore over a period
of time maintaining consistency in its operations in different business areas.
 The group has 70 acres plot of land at a strategic location which is
approximately valued at Rs. 1200 crores which has been suitably identified
for IT SEZ development.
 Financials of Karle Group are satisfactory and the facility structure offered to
KIPPL is in the form of CCD with a coupon of 12.5% per annum payable
monthly and committed IRR of 18.00% payable at the time of buyout
(including coupon already paid) and upfront fee of 1% for CCD along with
security coverage of more than 2 times.
 The projected financials of the project based on the underlying assumptions
are satisfactory and the project appears capable of servicing its financial
77
 obligations. The project also demonstrates its ability to stand the test of
sensitivity on various parameters.
 There is possibility of IFCI’s association in other/upcoming projects under
Karle Group, in the areas of appraisal and syndication.
Having regard to the foregoing, it is recommended that EC may sanction financial assistance
to KIPPL by way of:

1. Subscription to Compulsorily Convertible Debentures of KIPPL, aggregating to Rs. 100

crore
2. Syndication of debt of Rs. 116 crores on best effort basis.

Suggestion and Conclusion

 The projected financials of the project are satisfactory and the project appears capable
of servicing its financial obligations.
 There is possibility of IFCI’s association in other/upcoming projects under Karle
Group, in the areas of appraisal and syndication.
 IFCI can accept a proposal of KIPPL by considering the financial analysis.

78
Findings
 The credit appraisal process followed by IFCI is satisfactory as they fulfill almost all
the criteria’s by assessing the borrower’s credit worthiness in term of their financial
indicator.
 IFCI has good regulatory restriction on lending.
 IFCI’s having three risk management
a)Credit risk management
b)Market risk management
c)Transaction risk management
 IFCI’s Credit risk management having seven processes to evaluate the risk
Conclusion
Credit Appraisal is essential for the bank to know the creditworthiness of the borrower.
As discussed in the project above, Credit Appraisal appears to be the back bone of the
banking institution. It is equally important and dangerous, as there is always the chance of
default or some other risk. After dealing with almost every aspect of loans and advances one
can summarize that with a little bit of strict measures and a keen eye and understanding of a
company’s balance sheet one can very well save the institute the risk other than the default
risk.

Suggestions
 The risk rating model should be reviewed / or revised periodically in view of changed
market scenario.
 It is better to consider the other sources of income of the borrower like agricultural
income, rental income etc in the credit rating sheet used to evaluate the
creditworthiness of the borrower
 They can come out with different credit appraisal procedure for individual &
institutional.
 It can Optimum the loan settlement by conducting more recovery camps all over the
nation.
 IFCI can also consider the NPV and ARR method.

79
80