Sunday, July 20, 2014

RBI guidelines on issue of long term infrastrucure tbonds by Banks

Key points of RBI guidelines on issue of long term bonds released on July 15, 2014:

1. Banks can issue long-term bonds with a minimum maturity of 7 years to raise resources for lending to (i) long term projects in infrastructure sub-sectors, and (ii) affordable housing. Housing loans upto Rs. 50 lakhs for houses of values upto Rs. 65 lakhs in six metropolitan cities and up to Rs. 40 lakh for houses of values upto Rs. 50 lakhsin other centres have been included under this.

2. The bonds shall be fully paid, redeemable and unsecured and would rank pari-passu along with other uninsured, unsecured creditors.
The RBI, however has specified that the long term bonds must be plain vanilla in forms and cannot have a call or put option

3. These bonds will be exempted from computation of net demand and time liabilities (NDTL) and would therefore not be subjected to CRR/SLR requirements. Eligible bonds will also get exemption in computation of Adjusted Net Bank Credit (ANBC) for the purpose of Priority Sector Lending (PSL)

4. The bonds may be issued with a fixed or floating rate of interest. The floating rate of interest shall be referenced to market determined benchmark rates

5. The bonds may be issued through a public issue or private placement in full compliance with SEBI guidelines / norms including mandatory rating and listing. 

Issuance of long term bonds by banks for financing infrastructure project loans and affordable housing

Flexible structuring and refinancing of new project loans to infrastructure and core sector

Sunday, July 13, 2014

Indian Union Budget FY2015

As expected in FY2015 Union budget, the push on increase in infrastructure creation is evident. Banks have been permitted to raise long-term financing for infrastructure projects with minimal requirement of cash reserve ratio, statutory liquidity ratio and priority sector lending to improve availability of funds and reduce the cost of funds. A huge fillip is being given to the construction of highways. A big push is also being made to upgrade urban infrastructure, including the creation of smart cities. There are initiatives to stimulate low-cost housing, including rural housing.

For Power sector, to ensure 24×7 uninterrupted power supplies in rural areas, Budget has announced Deendayal Upadhyaya Gram Jyoti Yojana and allocated Rs. 5.00 billion for the scheme.The Budget has also extended 80-IA Tax exemption for power sector player sector till 2017, it means a 10 year tax holiday for power projects that starts power production by March 31, 2017. On the transmission and distribution front, budget allocation has nearly doubled to Rs. 80 billion
For Road sector, the Budget allocates Rs. 144 billion  for Pradhan Mantri Gram Sadak Yojna and Rs. 379 billion for national highways and state roads (up 20% and 12 % y-o-y, respectively and plan to build 8500 km of road in the current fiscal. Rs. 5 billion set aside to initiate work on expressways

For Port sector, Sixteen new port projects to be awarded this year, development of inland waterway project, and special economic zones at Kandla and JNPT ports

For Urban infrastructure, Budget has allocated Rs.71 billion for developing smart cities, 20-fold increase in allocation for water resources (including Rs. 36 billion under National Rural Drinking Water Programme, Rs. 10 billion for a new irrigation scheme, Rs. 20 billion for cleaning up of River Ganga), and Rs. 1 billion viability gap funding for metro rail projects in Lucknow and Ahmedabad. Corpus for Pooled Municipal Debt Obligation Facility has been increased by 10 fold to fund urban infrastructure projects. Allocation for National Housing Bank has also been increased to Rs. 80.00 billion to support Rural housing and Mission on Low Cost Affordable Housing anchored in the National Housing Bank to be set up.


A REIT is an investment vehicle for rent-yielding properties. The key requirements are investment of a certain minimum corpus in operational rental assets, of which certain portion has to be rent generating. While most REITs globally do not pay corporate taxes, they must necessarily distribute most of their net income as dividends to investors. To the real estate developers, REIT provides additional source of fund raising while ensuring that they maintain control of properties. Further, it helps developers split assets according to its risk characteristic and offer products to investors with differing risk appetite in turn increasing the overall value proposition. In Union Budget FY2015, government has declared that REITs and Infrastructure Investment Trusts (InvestIT) to have a pass-through for the purpose of taxation.

SEBI had floated draft regulations for discussion on October 10, 2013 and invited public comments on the same to be submitted latest by October 2013
Key proposals in the draft regulations in India
Size, structure and listing norms
1. Minimum asset size of Rs. 10 bn                                                                                                       
2.      Minimum initial offer size of INR 2.5bn and minimum public float of 25%
3.      Minimum investment – INR0.2mn and minimum unit size – INR0.1mn

Open to foreign investors Investment conditions
1. Must invest at least 90% of the value of its assets in completed revenue generating properties (defined as property having minimum 75% of its area leased out) and Balance 10% of REIT assets can be invested in
o   Development properties which shall be held by the REIT for not less than three
years after completion and shall be leased out
o   Listed or unlisted debt of companies
o   Mortgage backed securities
o   Shares of public listed companies which derive at least 75% of their revenues from
real estate activity
o   The government securities or money market instruments or cash equivalents

c   2. REIT can invest up to 100% of its corpus in one project provided minimum size of such a project is INR10bn                                                                                                                                               3Must distribute at least 90% of the net distributable income after tax as dividends annually
   4. Not allowed to invest in vacant land or agricultural land or mortgages other than mortgage backed securities 
5. REIT must not invest in units of other REITs

Power crises in India

Sunday, July 6, 2014

Economic Value Added

Economic Value Added is a financial measurement of how much value was created or destroyed during a period. It equals net operating profit after tax minus average cost of capital employed.
Economic Value Added (EVA) = Net Operating Profit after Taxes − WACC × Capital Employed
Net operating PAT=EBIT*(1-tax rate)

Thus, EVA can simply be viewed as earnings after capital costs. EVA has little to offer for capital budgeting because EVA focuses only on current earnings. By contrast, NPV analysis uses projections of all future cash. Another problem with EVA is that it may increase the short-sightedness of managers. As per EVA, a manager will be well rewarded today if earnings are high today. Thus, the manager has an incentive to run a division with more regard for short-term than long-term value.

Sunday, June 29, 2014

Difference between DSCR, LLCR and PLCR

Difference between DSCR, LLCR and PLCR

DSCR (Debt service coverage ratio) measures the ability  to pay the debt in any particular year. A debt service ratio of 1.3 means that for a total debt and interest obligation of $ 100 the free cash flow available to service the same is $ 130. The higher ratio gives more comfort to the lenders and it becomes easier to obtain a loan. A DSCR of less than 1 would mean a negative cash flow. A DSCR of less than 1, say .95, would mean that there is only enough net operating income to cover 95% of annual debt payments. For example, in the context of personal finance, this would mean that the borrower would have to delve into his or her personal funds every month to keep the project afloat.
DSCR = [CFADS over Loan Life] / [Debt Balance b/f + Interest repayment]

DSCR = (Annual Net Income + Amortization/Depreciation + Interest Expense + other non-cash and discretionary items (such as non-contractual management bonuses)) / (Principal Repayment + Interest payments + Lease payments)

Loan life coverage ratio measures the ability of the borrower to repay an outstanding loan. The Loan Life Coverage Ratio (LLCR) is calculated by dividing the net present value (NPV) of the money available for debt repayment in the loan repayment period by the amount of senior debt owed by the company.
LLCR = NPV [CFADS over Loan Life] / Debt Balance b/f

The PLCR is similar to the LLCR – it is the ratio of the net present value (NPV) of the cash flow over the remaining full life of the project to the outstanding debt balance in the period.
LLCR = NPV [CFADS over Project Life] / Debt Balance b/f