Updated October 25, 2023
How is Project Financing in India?
Project Finance in India is one of the key focus areas in today’s world because of the continuous growth and expansion of industries at a rapid rate. It is a centuries-old form of financing high-risk, development-oriented projects.
Project finance is the long-term financing of infrastructure and industrial projects based upon the non-recourse or limited alternative of financial structure where project debt and equity used to finance the project are paid back from the cash flow engendered by the project.
They are most ordinarily non-recourse loans, which are fortified by the project assets and paid entirely from project cash flow rather than from the general assets or creditworthiness of the project sponsors, a decision in part braced by financial modeling.
Methods of Project Financing in India
A survey said that 90% of respondents identified money as the greatest obstacle to implementing any project.
The various sources of finance can be broadly divided into equity capital and debt capital (borrowed capital). The project manager can choose any one or a combination of two or more of these methods to finance the project. The combination of equity and debt should be judicious, and it will vary according to the nature of the project.
- Share capital – equity capital and preference capital.
- Term loan
- Debenture capital
- Commercial banks
- Bills discounting
Some more types of financing available are:
1. Seed Capital
In consonance with the Government policy, which boosts a new class of entrepreneurs and aims for wider spreading of ownership and control of manufacturing units, the Government presents a distinct scheme to complement the resources of an entrepreneur. Assistance in this scheme is accessible like seed capital, which is generally given through long-term interest-free loans. Seed capital aid is provided to small and medium-scale units promoted by eligible entrepreneurs.
2. Government Subsidies
Subsidies drawn out by the Central and State Governments form significant funds presented to a company for implementing its project. Subsidies may be available, like absolute cash grants or long‑term interest-free loans. While settling the means of finance, Government subsidy forms a key source having a vital bearing on putting into practice many projects.
Stages in Project Financing in India
Pre-Finance Stage
It includes the following
- Project Identification
A Project or Project selected should be in sync with the Strategic Plan of the Organisation. The project plan should match the goals of the organization. It should be realistic before implementation.
- Identifying Risk and Minimizing
“The right project at the right time at the right place and at the right price”.
There should be adequate resources available for the project that needs implementation.
- Technical and Financial Feasibility
Before starting any new project or expanding an existing one, an organization must analyze every factor essential for the project to be feasible. It must be financially as well as technically feasible.
Financing Stage
- Arrangement of equity/debt/loan.
- Negotiation and Syndication of the same.
- Documentation and checking all the rules and regulations or policies relating to starting the project.
- Payment.
Post Financing
- Monitoring and review of projects from time to time. The project manager must check on the project’s proper working.
- Project closure – It is ending the project
- Repayment and monitoring
The loan, equity, and debt amount must be repaid, and proper monitoring and control of the project must be carried out.
Framework and Guidelines
The list of major contracts for projects consists of
The concession agreement, license or mineral lease, construction or development management agreement, supply agreement, sales agreement, operating agreement, and other major contracts may occur in any specific project, depending on the structure accepted.
The borrower may have to get certain statutory and non–statutory clearances essential for projects like techno-economic clearance, pollution, environment, forest clearance, company registrations, financing, land availability/ concessions, etc.
The promoter, while applying to the financial institutions, records the documents, the most vital of which are:
- Copy of the letter of allotment of plot/ sale deed in good turn of the borrower of the plot.
- The local body approved a detailed plan for the project.
- Partnership deeds/ articles of association in the case of a company.
Boom of Project Financing in India
A study placed India on top in the global project finance market in 2009, ahead of Australia, Spain, and the US. The key market for project finance in 2009 was the domestic Indian market, which rose to $30 billion (Rs 1.38 lakh crore), accounting for 21.5 percent of the global project finance market. This was up from $19 billion in 2008.
The global project finance market was bolstered in 2009 by government-linked projects such as social infrastructure and renewables and by the detail that 20 percent of the market is in India, which poured to become the biggest and busiest market last year, knocking down Australia from the previous year’s top position.
Given the credit crunch and the collapse of major banks in the West, the global Project Finance figures were not as strong as in the previous couple of years. According to PFI data, globally, the Project Finance loan figure positions at $139.2 billion in 2009 compared to the overwhelming $250 billion in 2008 and $220 billion in 2007. The figures for project bonds totaled $8.2 billion, down from $11.9 billion in 2008. The global Project Finance market volume stood at $147.4 billion. That was a descent of 44 percent from 2008, but to put it in framework, the overall global Project Finance market set upright at $114.5 billion in 2004 and $166 billion in 2005.
SBI settled 36 deals amounting to $20 billion of debt – 35.2 percent of the total volume for the Asia-Pacific region. This comprised major contracts such as financing for the Sasan ultra mega power project, Adani Power and Sterlite Energy projects, and resources for Vodafone and Unitech in the telecom sector.
The power sector sustained decree lending and generated a record volume. Over $ 22.3 billion in loans in 53 transactions in the sector were signed globally throughout the year, accounting for almost 40 percent of the entire PF market. Also, a major contribution came from social infrastructure development patterns launched by the government lately.
In all, 224 financial institutions were ranked. Only prime arranger mandates are credited for the league table, while involvement in syndications is not credited. Also, PFI tables do not include property or real estate sector transactions. In addition, the Project Finance tables do not comprise corporate loans and those guaranteed by sponsors or governments.
2013 Project Finance Volume by Top 15 Nations
An Example of Project Financing in India
World Bank keen to finance solar projects in India
The World Bank has hurled consultations with the finance ministries and new and renewable energy for financing solar projects in phase II of the National Solar Mission.
It enthralls with the performance of phase I of the National Solar Mission, increasing the mounted capacity to 2,000 Mw from 30 Mw.
The World Bank collaborated with the Ministry of New and Renewable Energy during Phase I in working out the policy and positioning essential guidelines in place. But it failed to provide funds. In phase II, the World Bank ardently finances solar projects. The absolute prerequisite of funds is the directive of Rs 80,000 crore ($13 billion), of which as high as Rs 54,000 crore ($9 billion) will be debt based on a 70:30 debt-equity ratio. The World Bank has conveyed that it was a profound, to a degree, finance debt requirement. The total debt prerequisite of Rs 54,000 crore must come from the scheduled commercial banks.
In the course of the first phase, commercial banks lent $700 million. They needed to scale up to the levels foreseen. To make an investment in solar power more striking for scheduled commercial banks, the government will need to use limited public resources to leverage commercial financing tactically. These report structural barriers preclude commercial banks from contributing and expediting appropriate technology deployment.
The role of enabling public funding in leveraging commercial lending constantly through risk-plummeting instruments and innovations in financing is important and authoritative for moving solar development to a largely non-recourse financing mode in India. The World Bank, in its report titled “Paving the way for a Transformational Future: Lessons from Jawaharlal Nehru National Solar Mission Phase I”, recommends that the government could offer multiple financial ways out involving viability gap fund, generation-based incentives, credit guarantees, credit lines to banks at a concession to cut interest rates and secondary public finance to spread the tenor of loans. According to the World Bank, using public financing for lengthening the tenor of a loan and providing subordinated debt is the least expensive among all other options to decrease the solar tariff to Rs 5.50 per unit.
Conclusion
India required an investment of over $1 Trillion for infrastructure development in the 12th Five-year plan from 2012-2017. The government is putting a better prominence on infrastructure development and the successive need for many advanced capital levels to fund these projects. However, the knowledge & skill sets essential in these areas are absent, and as an outcome, there has been a rebirth of interest in PFI and PPP project finance deals.
The need for vigorous knowledge with respect to structuring and re-financing projects is greater now than ever before.
Project Financing in India Infographics
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