debt restructuring options_adani

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  • 1.A SUMMER PROJECT REPORT ON Debt restructuring options & Indian port sector. FOR ADANI PORTS LTD.

2. CONTENTS 2. OBJECTIVE 3. INFRASTRUCTURE DEVELOPMENT AND FINANACING IN INDIA 4. INTRODUCTION TO INDIAN PORT SECTOR 5. GUJARAT ADANI PORTS LIMITED 6. CORPORATE BOND 7. SECURITISATION 8. PRIVATE INSURANCE SECTOR FUNDING 9. MEZZANINE FINANCE 10. CREDIT RATING PROCEDURE 11. CONCLUSION 12. BIBLIOGRAPHY 3. 2.OBJECTIVES OF PROJECT To study the Indian Infrastructure financing market. To study the Indian port sector . Understand the working and operations of GAPL To analyze different ways of substituting costly loans for other cheap debt instruments. To study the process of credit rating. 4. 3.INFRASTRUCTURE DEVELOPMENT FINANCING Introduction The availability of adequate infrastructure facilities is imperative for the overall economic development of the country. Infrastructure adequacy helps determine success in diversifying production, expanding trade, coping with population growth, reducing poverty and improving environmental conditions. Today, it is necessary to broaden one's concern from increasing the quantity of infrastructure stocks to improving the quality of infrastructure services. In recent years, there has been a revolution in thinking about that should be responsible for providing infrastructure stocks and services, and how these services should be delivered to the users. One of the bottlenecks in infrastructure development in India is the conflict arising out of the confusion over the government's role in being licensers for infrastructure development, an infrastructure developer and operator, and finally a regulator. A clear separation of these roles would be essential. To further aid this process, the financial, insurance and legal sectors would have to play a significant role. Provision of quality infrastructure services at reasonable cost, is a necessary condition for achieving sustained economic growth. In fact, one of the major challenges being faced by the Indian economy, as we enter the new millennium is to enhance infrastructure investment and to improve the delivery system and quality of services. There is a huge critical importance of the infrastructure sector and high priority for development of various infrastructure services such as power, telecommunications, seaports, airports, railways, roads etc. is being given these days. Investments in these sectors involve high risk, low return, and lumpiness of huge investment, high incremental capital/output ratio, long payback periods, and superior technology. These prerequisites pose a constraint on the Government's efficient delivery of quality infrastructure services. While 5. liberalizing the rules and procedures, the Government has created an environment conducive for private participation including foreign investment in infrastructure sector. A series of tax incentives and concessions have been announced, regulations and procedures have been simplified for enhancing competition in this sector. What is Infrastructure? As per India Infrastructure Report: "Infrastructure is generally defined as the physical framework of facilities through which goods and services are provided to public. Its linkages to the economy are multiple and complex, because it affects production and consumption directly, creates negative and positive spillover effects (externalities) and involves large flow of expenditure. Infrastructure contributes to economic development, both by increasing productivity and by providing amenities which enhance the quality of life. The services provided lead to growth in production in several ways: Infrastructure services are intermediate inputs to production and any reduction in these input costs raises the profitability of production, thus pertaining higher levels of output, income and or employment. These raise the productivity of other factors including labour and other capital. Infrastructure is thus often described as an "Unpaid Factor of Production", since its availability leads to higher obtainable from other capital and labour. 6. Why is Infrastructure Important? As per India Infrastructure Report: "The availability of adequate infrastructure facilities is imperative for the overall economic development of the country. Infrastructure adequacy helps determine reducing poverty and improving environmental conditions." "Research indicates that total infrastructure stocks increase by 1% with each 1% increment in per capita GDP." Key Issues in Infrastructure Development and Financing The Key issues in infrastructure development are: - Privatization The importance of privatization is because it brings along with it a) Additional resources and b) improved managerial efficiency in asset creation, asset utilization and customer service leading to better financial health, due to stake holding. Unbundling and Project Structuring Unbundling is a necessary condition before attracting private participation is unbundling the infrastructure into logical sub activities which can be privatized separately to enable private parties not to have to bite more than what they can chew. To enable unbundling necessary acts shall have to be overhauled. Regulatory reform would also be essential to provide increased autonomy, especially for capital investment, even as a precursor to unbundling. Another reason for regulatory reform is to exercise controls over implicit monopoly situations. Project Structuring is also a key issue as since projects have to be structured small enough to make them investment friendly, and at the same time "Commercial" viable. 7. Project Appraisal and Financing The key issue here is one of appraising the project against future cash flows rather than an asset base or collaterals. Various forms of revenue, control over revenue and risk guarantees would also be related concerns. A vital banking infrastructure to complement all this would be essential. Project Implementation Speed of project implementation would be imperatives, in the context of environmental and other regulatory issues. Classification of Infrastructure Sector Infrastructure is classified as: - *Economic Infrastructure which includes transportation (Roadways, railways, airways and other water transportation); Power Generation, transmission and distribution; telecommunications; port handling facilities; water supply and sewage disposal; urban mass transportation systems and other urban infrastructure (housing, etc) and irrigation. *Social Infrastructure which includes medical, educational and other primary services. Features of Infrastructure Projects in India Characteristics of Infrastructure Projects: 1. Multiple level project Risks: Infrastructure Financing involves risk participation at multiple levels and is complex to understand for individual investors. The nature of Project risk in various stages is volatile, it is the highest in the pre-commissioning stage and is sought to be mitigated through contractual framework which is concession driven or provides guaranteed returns. These guarantees and concessions are typically 8. extended by Government and Quasi-government organization (Municipal Corporations, PSU, etc) and thus minimizing financial risk. 2. Unconventional Asset Cover: Infrastructure Projects are typified by unconventional asset structure. As an illustration, the assets of an infrastructure project could comprise. a. Roads or a bridge or Flyovers b. Jetties, Container Terminals, Loading-Unloading Bay, Storage Tanks in the Port Infrastructure Projects c. Oil well or a coal mine-drills, rigs, etc d. Water Treatment Plant (ETP) These assets are not amenable to resale or reapplication and hence are unacceptable as security cover to conventional lenders. Furthermore, the step-in rights to lenders are non-existent since such projects are awarded on basis of concession and are on a Build Operate and Transfer basis (BOT) with the "Ownership" of such assets rests with the State of Central Government or Quasi Government Organization. Challenges in Infrastructure Financing Infrastructure projects are typically: 1. Long tenure projects and involving 2. High capital outlay and back-ended returns. Therefore such projects require long tenure funds i.e. in excess of 10 years. In the Indian context the availability of such funds is restrictive since Indian Financial Institutions/Banks are often constrained by: a. Preferred investment horizon of 7-10 years to avoid major asset/liability mismatches. b. Exposure norms and risk weightage on exposures for projects 9. Fiscal Incentives for Investment in Infrastructure Projects The Government of India has sought to alleviate some of these concerns/issues by providing certain fiscal incentives, concessions and policy reforms. Some of these reforms have been: a. Income Tax exemptions under Section 10 (23)(g) for interest and capital gains income earned for infrastructure projects b. Income Tax exemptions under Section 54 (EA/EB) for capital gains which can be reinvested in infrastructure project companies c. Deduction under Section 88 for investment in infrastructure projects - Deduction available for individual investors. d. Exemption from Minimum Alternative Tax e. Concessional import duties and port charges for project-related imports. f. Increased limits for External Commercial Borrowings. g. Five year tax holiday to be claimed within 12 years of operation. For the balance years, a 30% exemption is available. Characteristics of Infrastructure Projects Infrastructure Projects are typified by unconventional asset structure - Roads, Bridges, Jetties, Container Terminals, oil/mine drills, water treatment plant - investment not amenable to resale or reapplication - Unacceptable security cover - Step- in rights to lenders inadequate - Lack of implementation expertise Project risk in various stages of the project life cycle: - Highest pre-commissioning stage - would involve higher cost of funds, pa

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