I Squared Capital acquires toll road in India from IJM Corporation

I Squared Capital acquires toll road in India from IJM Corporation

Gujarat power sector

Key reasons for strong profitability for Gujarat distribution companies:

• The ‘Jyotigram’ scheme led to feeder separation and metering of agricultural load, and in-turn reduced AT&C losses - Gujarat implemented the Rural Feeder Segregation Scheme, popularly known as the ‘Jyotigram Scheme’, under which it bifurcated its transmission lines catering to rural areas for households and agricultural purposes. It helped the state in mapping and controlling the power supply to heavily subsidised agri consumers from residential consumers, who have to pay normal domestic tariffs. Whereas Agri consumers get a few fixed hours of regular single phasesupply, residential consumers are supplied 24x7 power at regular tariffs.

• Significantly higher industrial load (42%) at 20% higher tariffs

• It’s the only state to have significant surplus power sale to other states leading to Rs. 27 bn additional revenue advantage over other states.

The Gujarat tariff gap has been among the lowest. Key reasons why as it has been able to keep
the cost of power lower:

• Negligible debt/ interest costs
• Reduced AT&C losses 19%
• Advance action on building sufficient capacities and tie-ups for long-term power

Hydro Turbines

A reaction turbine is a horizontal or vertical wheel that operates with the wheel completely submerged, a feature which reduces turbulence. In theory, the reaction turbine works like a rotating lawn sprinkler where water at a central point is under pressure and escapes from the ends of the blades, causing rotation. Reaction turbines are the type most widely used.


An impulse turbine is a horizontal or vertical wheel that uses the kinetic energy of water striking its buckets or blades to cause rotation. The wheel is covered by a housing and the buckets or blades are shaped so they turn the flow of water about 170 degrees inside the housing. After turning the blades or buckets, the water falls to the bottom of the wheel housing and flows out.
Modern Concepts

(6) HYDRO TURBINES

Classified into two categories:

Impulse Turbine

1.  Uses the velocity of  water to move the runner & discharges to atmospheric  pressure.

2.  The water stream hits each bucket on the runner.

3.  There is no suction on the down side of the turbine.

4.  Water flows out the bottom of the turbine housing after hi tting the runner.

5.  Generally suitable for high head, low flow applications.

Reaction Turbine

Develops power from the combined action of pressure and moving water

Runner  is  placed  directly  in  the  water  stream  flowing  over  the  blades  rather  than  striking  each individually

Used for sites with lower head and higher flows

Certified emission reduction

The Clean Development Mechanism (“CDM”) allows a country with an emission-reduction or
emission-limitation commitment under the Kyoto Protocol to implement an emission-reduction
project in developing countries. Such projects can earn saleable certified emission reduction
(“CER”) credits, each equivalent to one tonne of CO2, which can be counted towards meeting
Kyoto targets. The mechanism stimulates sustainable development and emission reductions, while
giving industrialized countries some flexibility in how they meet their emission reduction or
limitation targets.


India ratified the Kyoto Protocol in August 2002 and, not being an Annex 1 signatory as a
developing country, is therefore exempt from the framework of the United Nations Framework
Convention on Climate Change (“UNFCCC”). As a result, India is able to benefit from the Kyoto
Protocol in terms of transfer of technology and related foreign investments. More importantly, this
enables the creation of CERs through the CDM, which can then be traded.
In order to qualify for CERs, each project must be registered with the UNFCCC. India has
the highest number of CER-qualifying projects registered with the UNFCCC.

Voluntary Emission Reductions
The emergence of a secondary market for carbon credits outside the Kyoto Protocol is driven
by corporations and individuals looking to reduce voluntarily their carbon footprint. Voluntary
Emission Reductions (“VERs”) arise from projects awaiting CDM clearance, special situations
carbon capture and storage) or smaller projects. Projects require third party verification and are
required to meet standards such as the Voluntary Carbon Standard (there are higher standards such
as “Gold” and “Gold+” reflecting higher levels of accreditation incorporating issues such as social
responsibility and sustainability). The quantity of the VER is based on the estimation of the
management, verification by an independent assessor and subject to the satisfaction of the buyer.
The market is currently small but expected to increase substantially. Due to the less regulated
environment and operating outside the regulated Kyoto Protocol, such VER certificates trade at a
discount to CERs.



Renewable Energy Certificates
The REC mechanism offers the potential to expand the market for renewables by broadening
the availability and scope of power products which are available to customers. RECs are a type of
environmental commodity intended to provide an economic incentive for electricity generation
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from renewable energy sources and represent the attributes of electricity generated from renewable
energy sources. These attributes are unbundled from the physical electricity and the two products,
first being the attributes embodied in the certificates and the commodity, and second being
electricity, may be sold or traded separately.


When purchased, the owner of the REC is considered to have purchased renewable energy.
The CERC notified the Central Electricity Regulatory Commission (Terms and Conditions for
Recognition and Issuance of Renewable Energy Certificate for Renewable Energy Generation)
Regulations, 2010 (the “REC Regulations”) on January 14, 2010. The REC Regulations aim at the
development of market for power from non conventional energy sources by issuance of
transferable and saleable credit certificates. The REC Regulations facilitate fungibility and
inter-state transaction of renewable energy with minimal cost and technicality involved. The CERC
has nominated the National Load Despatch Centre as the central agency to perform the functions,
including, inter alia, registration of eligible entities, issuance of certificates, maintaining and
settling accounts in respect of certificates, acting as repository of transactions in certificates and
such other functions incidental to the implementation of REC mechanism as may be assigned by
the CERC. The REC mechanism provides a market-based instrument which can be traded freely
and provides a means for fulfilment of renewable purchase obligations by distribution utilities and
consumers.

Reserve Bank of India relaxes takeout financing norms for existing infrastructure loan:

Reserve Bank of India relaxes takeout financing norms for existing infrastructure loan:

RBI relaxed the norms pertaining to takeout financing vide circular dated August 07, 2014 for existing infrastructure loans by lowering the minimum takeout requirement to 25% from 50%.

As per RBI circular dated August 07, 2014 banks may refinance infrastructure loans by way of full or partial take-out financing, even without a pre-determined agreement with other banks / FIs, and fix a longer repayment period, and the same would not be considered as restructuring in the books of the existing as well as taking over lenders, if the following conditions are satisfied:

i. The aggregate exposure of all institutional lenders to such project should be minimum Rs.10.00 billion;
ii. The project should have started commercial operation after achieving Date of Commencement of Commercial Operation (DCCO);
iii. The total repayment period should not exceed 85% of the initial economic life of the project / concession period in the case of PPP projects and should be fixed by taking into account the life cycle of and cash flows from the project
iv. Loans should be ‘standard’ in the books of the existing banks at the time of the refinancing;
v. A minimum 25% of the outstanding loan by value should be taken over by a new set of lenders from the existing financing banks/Financial Institutions; and
vi. The promoters should bring in additional equity, if required, so as to reduce the debt to make the current debt-equity ratio and Debt Service Coverage Ratio (DSCR) of the project loan acceptable to the banks.
vii. The above facility will be available only once during the life of the existing project loans.

For RBI circular please refer the link below http://rbidocs.rbi.org.in/rdocs/notification/PDFs/167AT082014F.pdf

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
http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9103&Mode=0


Flexible structuring and refinancing of new project loans to infrastructure and core sector
http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9101&Mode=0

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.

REIT

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                                                                                                                                               3. Must 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

http://www.ndtv.com/video/player/truth-vs-hype/watch-truth-vs-hype-the-myth-of-power-crisis/328742

India to build railways lines through PPP

India to build railways lines through PPP

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.

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 

Mortgage, Hypothecation and Pledge

Mortgage, Hypothecation and Pledge- These terms are used for creating a charge on the assets which is given by the borrower to the lender as a security for any loan.

	Pledge	Hypothecation	Mortgage
Type of Security	Movable	Movable	Immovable
Possession of the security	Remains with lender (pledgee)	Remains with Borrower	Usually Remains with Borrower
Examples of Loan where used	Gold Loan, Advance against NSCs, Adv against goods (also given under hypothecation)	Car / Vehilce Loans, Adv against stock and debtors	Housing Loans

A letter of credit is a Bank direct undertaking to the supplier to pay. In contrast in Bank Guarantee, the bank pays only when the buyer is unable or unwilling to pay. In case of LC the liability solely rests on the bank so a LC is less risky for the merchant but more risky for the bank.

For detail please refer http://www.castleconsultants.in/pdf/LCAndBGComparisionCastle.pdf

A letter of credit can also be defined as an obligation given to a bank so that a criteria can be followed before payment is made. As soon as the terms from both parties have been confirmed and completed, it is now the bank’s role to transfer the funds.A letter of credit ensures payment for performed services

Just like a line of credit, a bank guarantee is being used to insure a sum of money to its beneficiary. It is actually a type of guarantee wherein a bank or another lending organization makes the promise to repay their debtor’s liabilities in the event that he is unable to do so.

Standby letter of credit

http://articles.economictimes.indiatimes.com/2014-02-11/news/47235798_1_indian-bank-india-bank-leading-private-bank

Tax liability

Calculation of net tax to be paid in project finance case

Calculation of corporate tax calculation (CTL)

Step 1. Calculate PBT (for income tax purpose) = PBT+ Book depreciation –Tax Depreciation

Step 2. CTL= if (mat year(80IA)=Y or PBT <0),0, PBT (for income tax purpose)*tax rate )  

Step 3. MAT liability= PBT (Book Dep)*MAT rate

Step 4. Tax liability without MAT credit=Max(MATL, CTL)

MAT Credit earned in this period= MAX(0, MATL-CTL)

Cumulative MAT Credit Available=

MAT Credit Utilized in this period=IF(CTL>MATL),(CTL-MATL),(0))

Step 5. Net tax paid= if (MATL>CTL, MATL, CTL-MAT Credit utilized in the period)

FM clears policy to defer premium payment by road developers - Angel Broking - EquityBulls.com

FM clears policy to defer premium payment by road developers - Angel Broking - EquityBulls.com

RBI framework for Revitalising Distressed Assets

RBI released its framework of Revitalising Distressed Assets on January 30, 2014. The Key points are

Firstly, banks must categorise borrowers not paying interest on loans for one month into an SMA 1 or special mention account 1. Loans with interest unpaid for two months must be put in SMA 2. And all loans of over Rs 500 million must be reported to RBI's central repository of information on large credits.

Once, one bank puts a loan in the SMA 2 box, all the lenders to that borrower should form a joint lender forum led by the bank with the largest exposure. The forum must first try to rectify the stress by asking promoters to put in money, sell off non-core assets or get another equity partner.

However, where the lenders forum finds out that rectifying won’t work, they may restructure the loan taking appropriate personal guarantees and collateral. If the forum finds that restructuring won’t work, it may resort to recovering what is left of the asset. The forum has only 30 days to arrive at its solution. For loans above Rs 5.00 billion, the forum must seek advice from an independent evaluation committee to ensure fair restructuring. Loans under restructuring will attract lower provisioning of 5 percent. But if lenders fail to resolve SMA 2 loans early, they have to provide more; 25 percent in the first year, instead of 15 percent currently.

Secondly, RBI allowed banks to refinance existing infrastructure project loans through take-out financing agreements with any financial institution. As per circular even if the revised repayment period is longer than the residual repayment period in the earlier bank's books, the account will not be considered restructured, as long as a proper due diligence has been done by the refinancing bank or institution. 

This framework will be fully effective from April 01, 2014

Average DSCR

How to calculate average DSCR(Debt Service coverage ratio)

There are two ways to calculate ADSCR

1.   Take average of each year DSCR (Cash flow available for Debt servicing(PAT+ Depreciation + Interest + Deferred Tax + Lease Rental income)/ (Interest payment in year + Principal repayment in the year)
2. Divide the total Cash flow available for Debt servicing over the life of the loan by sum  total Interest payment and Total Principal repayment)

The first method give equal importance to each period but second method treats each element by the relative importance of the sum of principal and interest

Both method with give same result if denominator is same for all year i.e. / (Interest payment in year + Principal repayment in the year) but result will be different in case of differential repayment

So it is all preferable to calculate ADSCR using second method as

1. It does not treats all period as equally important
2. It does not cover the distortions due to differential repayment
3. It is more accurate representation of average

SBI Macquarie infra fund acquires road project in India

SBI Macquarie infra fund acquires road project in India

Infrastructure bottlenecks

We are hearing a lot about slowdown in infrastructure investment and in GDP growth in last couple of years. I have tried to analyse sector wise key concerns in infrastructure

Power sector- In the last few years there have been not a single Power purchase agreement (PPA) signed by any discom and due to lower demand the merchant tariffs have decreased a lot. This has impacted the topline of the power producers. Moreover due to increase in coal price of imported coal EBIDTA margin of companies has decreased. The problem is more for power plants which are located far away from mines and ports and this increases the transportation cost ( presently coal transportation cost is about Rs 1~1.5 per tonne per km). 

Hydro power projects- hydro power projects are dependent on rainfall. moreover many hydro projects are facing delay in implementation due to geology risks. 

key steps required to increase investment in infrastructure:

1. Granting external commercial borrowing for takeout financing and refinancing of rupee loan

2. Restricting the provising requirement due to delay ( esp hydro projects) to 2% from the existing 5%

3. Ensuring Gas supply to gas based power plants

4. Effective and prompt dispute resolution mechanism for road sector projects

5. Allowing Banks to floats infrabonds with tax incentives

Registered vs equitable mortgage

Mortgage is a transfer of specific interest in the property owned by a person in favour of the creditor

Registered mortgage- Mortgage as per the Transfer of property act section 58(b) is registered mortgage, where the mortgagor registers the mortgage with a Sub Registrar.

In case of Simple/Registered Mortgage

•  Mortgage Deed is registered
• Stamp duty on deed and registration fees are required to paid
•  Possession of the property is not given to the mortgagee (bank)
• Mortgagee has right of foreclosure i. e. get the property sold for recovery of dues

Equitable mortgage - Mortgage as per section 58(f)is a equitable mortgage which is collateral security type of mortgage where only title deeds of the property are deposited with the mortgagor.

Delivery of documents of title to immovable property to creditor or his agent

·         Such delivery at notified town

·         Delivery of documents with intention to create mortgage to secure existing or future debt

·         Needs no registration but needs stamp duty