Extended essay Manan ShahDhirubhai Ambani international School

Extended essay

Business and Management

What is the most appropriate external source of finance for Ashapura Minechem Ltd. for the funding of its Rs.3902 crore ($867 million) 1 project to construct a Alumina Complex at Ratnagiri, Maharashtra?

1 Thee exchange rate used throughout this project is pegged at Rs45/$

Acknowledgements

Chetan Shah M.D. AMLSandeep Nadkarni Manager of Finance and

Strategic planningKetan Shrimankar Practicing chartered accountantPricewaterhouseCoopers Auditing and Consultancy

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Abstract

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TABLE OF CONTENTS

Sn. Contents Page

1 Acknowledgements 2

2 Abstract 3

3 Table of contents 4

4 Introduction 5

5 Methodology 7

6 Findings and Analysis 9

7 Conclusions 17

8 Appendices 19

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Introduction

BRIEF HISTORY AND MILESTONES FOR ASHAPURA MINECHEM LTD 2

Current Stats for Ashapura Minechem Ltd.Market cap Rs.404.48crore (Rs51.20/share)3

Book value Rs.209.74crore4

2 Ashapura Minechem ltd. “ASHAPURA GROUP OF COMPANIES, About us: History/milestones”, Ashapura Minechem ltd. http://www.ashapura.com/history.html (accessed on 5th September, 2009)

3 Rediff.com , ‘Rediff Moneywiz, Ashapura Minechem ltd’ www.rediff.com, http://money.rediff.com/companies/ashapura-minechem-ltd/17020078 (accessed on 17th September, 2009)

4 Rediff.com, ‘Rediff Moneywiz, Ashapura Minechem ltd’ www.rediff.com, http://money.rediff.com/companies/ashapura-minechem-ltd/17020078/balance-sheet (accessed on 17 th September, 2009)

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1960 Ashapura is formed as a partnershup, in the business of extracting and trading bentonite

1972 First big order is recieved by Ashapura

1982 Ashapura is converted to a pvt. ltd. company.

1993 Ashapura, went public with its current name - Ashapura Minechem ltd.

1995 Diversification into bauxite business

1997 Forward intergration, with JV to create value added bentonite products

2003 Calcined bauxite plant set up

2006 Recieves OK from state government to set up refinery plant in Kutch, Gujarat.

2009 Signed MOU with government of Maharashtra to set up a state of the art Alumina-Complex.

Today AML is a significant player in the bauxite industry, and is in the world’s 5 premier bentonite companies, AML also dominates the value added segments in the country for different mineral related products.

The current project being discussed is in the region of Ratnagiri, on the west coast of Maharashtra, India. The location is ideal due to the very close proximity to the raw materials, as well as the Tie up with the state government of Maharashtra. An Rs.3902 crore ‘Alumina Complex’ will be constructed which will be fully operational within 3 years. It is expected to bring in a significant increase to the size in the business. At capacity utilization, the refinery has a source base to support it over 45years. To understand the size of the project, over 15 years the refinery is expected to generate revenues of Rs.23456 crore and generate a PAT5 of Rs4888 crore, through the export of Alumina, a raw material in the production of aluminium. These figures are very sizable compared to the current revenues for AML, which are at Rs 700 crore; it also helps to add value to their product, hence can help in improving margins.6

LOCATION OF RATNAGIRI, MAHARASHTRA, INDIA

However the project is in a nascent stage, hence AML has yet to look into appropriate sources of finance to fund this activity.

5 Profit After Tax6 Refer to Appendix 17 for project estimates, and appendix 2 for current revenues

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But the evaluation and recommendation for a particular source of finance is likely to be important as in recent times of recession, credit availability has become important but difficult for firms. Also the size of the project is 12 x AML’s market cap 14 x book value. The size of the project will make it a significant part of the business, and any debt taken on (if any) is likely to have a significant impact on cash flow, and the cash reserves of the business. Also such a massive funding activity will result in lesser available methods to AML; hence the short listed methods can be well evaluated. An appropriate source of finance should not the burden the financials of AML, as well as maximize its shareholder value, keeping promoters objectives in mind.

Complete internal financing cannot be considered due to the lack of cash on the books of the company.

Hence the research question is:

What is the most appropriate external source of finance for Ashapura Minechem Ltd. for the funding of its Rs.3902 crore ($867 million 7 ) project to construct a Alumina Complex at Ratnagiri, Maharashtra?

7 At an assumption of Rs45/USD, Sandeep Nadkarni, E-mail message to Manan Shah, 6th August, 2009

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Approach to the investigation

Sources of finance can be broken into two components, DEBT and EQUITY.

DEBT EQUITYBank loan (Domestic institutional borrowings) IPO/QIPECB (External commercial borrowings) Strategic partnership (joint venture)

FCCB (equity + debt)

I will require a range of qualitative and quantitative data to assert the viability of each option available. Each option will be judged on the basis of the cost of capital, as well as the other possible impacts of any instrument, such as the time period available, implications on financial health of the business.

To gauge at the sources of finance from this aspect, I will be conducting two interviews, one with the M.D. for Ashapura Minechem ltd. and with Investor and practicing chartered accountant Ketan Shrimankar.

The business environment is changing faster with each passing day; hence I will try and keep in sync with any updates through articles in various forms of media. A good idea would be to also look at few Indian companies which have, in the recent past, raised substantial amounts of capital.

Data Required P/S Source Usage/applicationP&L account S From the company To assess the financial health of

the company, see what sources of finance can be appropriate, and what sources of finance can be eliminated

Balance sheet SCash flow S

Details of Alumina project, insight

P Interview with M.D. To gain his insight on the project, to see his aims, and to see if any particular source of finance is preferred or not liked.

Understanding types of credit and its usability

P Interview with a financial expert, perhaps more.

To help with the appraisal of sources of finance, to also understand any qualitative factors.

Project specs. S Executive project summary To see if the project can be considered risky, and whether that would dissuade/persuade any partners/lenders/ any source of finance

Articles S Papers/ Company news letter/Magazines

To stay in sync with any happenings, such as interest rates, etc, that could have any impact on any sources of finance.

How previous capital requirements have been met recently (examples)

S (Other than above) consider examples from Adani power, any recent firm in India that has successfully met capital requirements.

To outline any trend or preference in the recent times.

To get a holistic picture, other implications along with the financial cost of raising capital must be considered. In all I will look at:

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Financial Costs

a. Cost of Capital: The amount of interest, that is expected to get that capitalb. Cost of raising capital: The cost for capital transaction between parties.

Intangible/long term costs

a. Long term implications: whether any sources of finance will affect AML in the long run.

b. Qualitative costs and feasibility: every source of finance comes with regulations and conditions that AML must meet in order to avail of a particular source.

I will conduct a SWOT for each source of finance after assimilating and analysing all collected and processed data.

Main results and findings

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Financial cost

s

Intangible/ long term costs

SWOT for

each source

of financ

e

Basic Project specifications

Total Cost: Rs.3903 crorePayback period (based on cash profit) 8 years 10 months89

Average rate of return (over 15 years) 12.06% p.a.10

Expected Debt/equity ratio 2:111

After doing the interview with Mr. Shrimankar, FCCBs could not be considered for many reasons, it was a very complex structure for raising capital, and its complexity would make it hard to deal with, given the need to extensively evaluate the other sources within the debt/equity structure.

So now the following options remain open to AML in our research.

The ratio between debt and equity from two different sources, the promoter and the consultant interviewed came up with same ratio of 2:1. This ratio is important, as no bank will lend without the business itself committing a share of the capital required for the investment. It basically means that no project can be completely funded by debt alone, and a minimum 33% equity is expected. While it possible to have complete funding via equity, There is not enough cash on the books of AML to have a majority stake in a 100% equity issue, hence will not be considered as M.D. Chetan Shah has clearly stated that he would want a majority or equal stake.

Debt

8 At an assumption of 2249USD/Ton Aluminium, Sandeep Nadkarni, E-mail message to Manan Shah, 6th August, 20099 Appendix 17, Payback has been calculated according to estimates by AML.10 Appendix 17, Statement of P&L, data has been used to calculate ARR.11 Appendices 4 and 5, the Interviews conducted result in similar expectation for the ratio.

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Sources of finance

Debt

Domestic loan External commercial borrowings

Equity

Private equity

Strategic partner (J.V.)

Dormant/financial investor

Public equity

IPO QIP

Debt is similar to a loan, in terms of availing capital, and must be repaid with interest as per the contractual agreements between the institution and the corporation.DOMESTIC COMMERCIAL BORROWINGS

It is the equivalent of a standard bank loan at a fixed interest rate, in the domestic currency, here it is the rupee.

COST OF CAPITAL

While there is a negligible cost of raising this form of capital, there will be an overall cost due to the interest rates charged. According to the estimate of AML, they expect rates between 10% and 12%. There is also a loan processing fee of 0.5% which is charged by all banks. However Mr. Shrimankar sent me his estimates, which were relatively higher, at between 12% and 14%, he pegs that capital raising in today’s environment is a challenge, is it is also possible that the company manager is likely to have a positive bias for his estimates. Hence considering an average of the two rates:

Upper Bound for interest rates (14 + 12)/2 =13.5% 13.5% +0.5% = 14%Lower Bound for interest rates (12 + 10)/2 =11% 11% + 0.5% = 11.5%Average rate expected= (14+11.5)/2 = 12.75%

This is a very simplistic way of judging the expected interest rates, but banks negotiate interest rates separately for each project, hence to compensate for the simplistic calculation I will try to assess if there could be either a upside or a downside risk to the 12.75%.

Hence cost of capital can be assumed at 12.75%, at which it stands at 458.6 Crores.

After speaking to the Manager of Finance and Strategic Planning, I learnt that there is no definite way of assessing the exact interest rates that will be availed by AML. But I can look at the factors affecting interest rates and try to assess whether AML is likely to get high/low interest rates.

Hence I have constructed a table for assessing risk for this loan on the next page.

RISK ASSESSMENT MODELLING

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There are several factors affecting corporate lending interest rates that a firm can get from any institution. The idea is to assess the risk for the given loan, along with the cost of the capital for the bank, and the opportunity cost of lending the capital. Four broad headings under which the risk can be assessed,

Central rates Decided by the Reserve bank of India, this the rate at which banks borrow from the central government.

Risk assessment modelling

Every bank has its own way to judge the risk of lending for every particular project. This will decide what interest rate will be charged and how much collateral is expected as security.

SMEs/ Large businesses

SMEs are smaller hence are expected to be more affected by swings in economy, generally have a higher failure rate hence are riskier, making interest rates higher for smaller firms.

Demand and supply of capital

By economics, of the demand for capital is higher, for example during a boom phase of the economy, the interest rates will move up (market mechanism)

RISK ASSESSMENT MODELLING

Factor Its context to AML Upside/Downside risk to projection

Central rates (Reference to a secondary article) suggests that interest rates are going higher, due to concerns of inflation and excess liquidity.

Upside

Risk assessment modelling

Ashapura is an experienced player in the extraction of bauxite, the main ore for Alumina, it has no experience/track record in the value addition of its ore, as mentioned in the introduction, and this project is likely to bring out many firsts for AML.

Upside

SME vs. Large businesses

At a market cap of around Rs. 250 crore, it is considered by definition a small cap player (referencing to a chosen article)

Upside

Demand and supply of capital

Huge capital raising activities have already occurred, and it is likely to increase over a period of time (reference), but a reason that such heavy activity has occurred due to excess liquidity which has only been made available recently.

Neutral

Hence we can conclude that the cost of capital is at 11.75% with an upside risk to our projection.

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EXTERNAL COMMERCIAL BORROWINGS

This very similar to a bank loan but the chief difference being a more international interest rate and the transactions occur in a foreign currency, possibly the dollar. This is similar to a bank loan, but with LIBOR12 rates, with a certain mark up judged by the foreign institution.

COST OF CAPITAL

LIBOR is London Inter-Bank Offered rate, is usually the reference rate for foreign currency loans. Hence most ‘external’ loans consist of LIBOR + mark up, in terms of additional basis points.

Again, rates are very volatile, and differ from contract to contract, so estimates from sources would have to be used.

AML: expects rates of around 4.6%13

Mr. Shrimankar: expects a percentage point loan processing fee and rates 4% to 6% on ECBs.14

PricewaterhouseCoopers: they expect a 500bps15 (%) rate (assuming a loan maturity of over 5 years).

12 London Interbank Offered Rate, it is usually the reference rate for foreign currency loans.13 Sandeep Nadkarni, email to author, 6th august 200914Reference to interview, appendix 415 PWC slides, appendix 8

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But there are many conditions to be approved for an ECB. All of these must be fulfilled.16

Condition AML’s status Does AML meet conditions?It can be availed by corporations including those in hotel, hospital, software sectorsUnits in SEZ (special economic zones)

The project at Ratnagiri will be in a SEZ, and AML does count as a corporation

YES

It can only be used for, Investment in import of capital goodsNew and expansion projectsOverseas direct investment in Joint VenturesSector-wise end use prescribed / restricted in certain cases

The project has just been commissioned, and yet has not begun, hence it would count as a part of the ‘new and expansion projects’ category

YES

It cannot be used for On-lending or investment in capital marketsAcquiring a company in India by a corporateReal Estate (except in integrated township)Working capital or general corporate purposeRepayment of a rupee loan

Does not fit in with any category

YES

Funds up to USD 500million can be borrowed via the automatic route, while an additional USD 250m can be borrowed using the approval route.

Ashapura must adhere to the debt equity ratio of 2:1 hence it will require USD 542 million in debt. (2/3 of 813m)

YES, it is possible through will require an approval from the RBI

Hence it is possible for AML to avail of an ECB

Constraints:

These conditions can cost in terms of time as they will be required to be proved, especially the last condition can take time, as the central bank is not as efficient.

16 Appendix 8, PWC slides, and appendix 10, report by Rajesh Relan, Mysore Cements

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A COMPARATIVE SWOT BETWEEN A DCB AND AN ECB

Domestic Commercial Borrowing External Commercial Borrowing

COMPARTIVE STRENGTHS

All capital machinery comes domestically, hence it would be easier and would save time on converting currency to that of the domestic rupee.

If AML faces unexpected costs then it can secure overdrafts, or additional loans easier as compared to ECBs which can be rigid in terms of working capital(refer to slides)

COMPARITIVE WEAKNESSES

Higher cost of capital

Indian banks have been very reluctant to lend in the upcoming recession and are conservative.

COMPARITIVE STRENGTHS

Lower cost of capital in terms of lower cost

Credit rating is not required by a ECB while it impacts lending and interest rates from Indian banks.

Have lesser regulations, conditions and procedures.(reference to Mysore cements ltd)

COMPARITIVE WEAKNESSES

Has many conditions for approval of an ECB

ECBs also have an upper cap to the limit of funds that can be raised by this route. This can be important to AML as the project size if fairly large.

COMPARITIVE OPPORTUNITIES

Government pressures on banks to increase lending in the economy.(referencing) This is due to lowered interest rates, which makes it harder for a bank to hold money supply as it is unproductive.

COMPARITIVE THREATS

Forex17 threats can occur as the revenue is earned in dollar terms, and this will need to be converted to rupee while the loan is being paid. Hence proper hedging needs to be undertaken before approving a DCB.

COMPARITIVE OPPORTUNITIES

Ashapura is exporting its final product, hence revenues will be in dollar terms, hence providing a natural hedge against currency fluctuations.Hence it can be repaid in dollars, directly from the revenues without any currency risk.

COMPATIRIVE THREATS

Government policies can impact ECBs, when government has fewer for-ex reserves, it can change policies to stop the outflow of foreign currency.

Project will have to seeking approval from the RBI, hence can take time, and have costs.

17 Foreign currency exchange

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Equity

PRIVATE EQUITY: STRATEGIC OR SLEEPING PARTNER

A sleeping partner is a firm/venture capitalist who brings equity required, but plays little or no role in the operations of the new project.

A strategic partner is a firm, generally in the same sector, or industry, which brings not only equity, but also resources and experience to the project.

I will explore both types of private equity through the course of this section.

COST OF CAPITAL

Any form of equity has cost of capital, i.e. it is available at 0% interest rates. This is because any one who is investing in the equity owns a part of the project.

COST OF EQUITY

However it cannot be considered a free way of raising capital, as equity cannot be erased, and dividends must be continuously paid till the end of the project lifespan. Equity with another shareholder can stay until they wish to exit the project, and buyback can always be more expensive, then gaining direct ownership in the initial stages, as any investor will expect a profit and return on his investment.

Going with the promoter stake of 50% (+ managerial rights) profit would be expected to be shared equally, hence while there are no short run costs, AML will have to share a profit of 4888crore over 15 years which amounts to 163crores p.a. during the lifecycle of the project.18 While it cannot be counted as a cost, it will have some amount of significance on the long term goals of AML. However the promoter concedes that experience and equity from a strategic partner is needed as ashapura does not have 1300 crores minimum equity requirement, for the funding of its project, and does not have the necessary experience to take on a project of this size.

COMPARING THE TWO FORMS OF PRIVATE EQUITY:

STRATEGIC PARTNER SLEEPING PARTNERHas experience and brings skills resources and marketing strategies to the table.Has an interest other than just financial profits, which can be in sync with the promoter objectives (employment, etc...)However can interfere with management and execution process which can make the overall decision making process slower.Will ask for a good valuation due to their experience and contrastingly the lack of our experience.

Has less experience

Has only interest in financial profits

Does not interfere in the decision making process.

Will give a fair valuation to AML, as they play no role in the decision making and execution process.They are more likely to transfer ownership to AML over a period of time, due to only financial interest

18 Appendix 17

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IPO/QIP

An Initial public offering is a way of public equity which allows the public to buy shares of a company, which means holding a percentage of the company, for paid up capital. A QIP is a qualified institutional placement, which allows for the dilution of equity, in terms of allowing financial institutions to invest at preferential share rates, i.e. these are negotiable.

COST OF CAPITAL

Technically speaking there is no cost of this capital, as capital is being exchanged directly with a percentage holding in the company, however there could be dividend expectations from the shareholders, and these would be expected every year or so.

COST OF EQUITY

Dividends will be expected, and the company may face the brunt of speculation in terms of volatile and fluctuation of share prices, also, the company may face an unfair valuation in the short run, the shares that are floated in the exchanges are both susceptible to operator manipulation as well as a hostile takeover. Finally, AML will not get a good valuation as it is its first time in terms of managing a project of such size, which could result in the promoters losing a higher stake in the company for the same amount of capital.

DIFFERENCES BETWEEN AN IPO AND A QIP

QIP IPOCan be done only with a listed EntityNo capital cost as such.Dilution will occur in the flagship listed company, AML.

Does not require a previous listingNo capital cost, except a 2% capital raising feeDilution will only be in terms the new project as it will be listed separately, say for example as Ashapura Alumina ltd.

EXPECTATIONS FROM THE IPO/ QIP

If an IPO is done at the current stage, the valuations will be poor; hence will not benefit the promoters as much, a QIP is likely to be thrashed due to the reason given by the promoters, including lack of experience, commodity speculation and its risk. The promoter did not seem too keen in doing a QIP. Also many QIPs have failed in the recent past and have been scrapped, it also is a matter of pride and track record for AML hence it could be risky to do a QIP at the grass root of a new project of sizes of a new dimension to the business.

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A COMPARATIVE SWOT BETWEEN PRIVATE AND PUBLIC EQUITY

PRIVATE EQUITY PUBLIC EQUITY

COMPARTIVE STRENGTHS

Can provide needed experience

Can pump in more capital if required.

COMPARITIVE WEAKNESSES

Poor valuation expected as AML has no experience.

Higher and regular dividend expectations

COMPARITIVE STRENGTHS

Likely to bring in better valuations for AML

Lower dividend expectation

COMPARITIVE WEAKNESSES

No help from passive shareholders.

COMPARITIVE OPPORTUNITIES

COMPARITIVE THREATS

May not be able to ever buyback stake in the project, especially as the project looks very attractive in the long run.

COMPARITIVE OPPORTUNITIES

Can gain from positive share price movement, and is more likely to gain from FII inflows as it is easier for them to now invest in the new project.

COMPATIRIVE THREATS

Volatility of share prices

SEBI and other regulatories will constantly monitor the performance of AML and its share price.

Conclusion and Recommendation

Ashapura Minechem Ltd. has taken on and signed a MOU which will take the company to new dimensions in terms of size and revenues, and a forward vertical integration, one step closer to the end product.

It has been estimated that that debt: equity ratio has to be 2:1 hence I recommend

Debt External commercial borrowings

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Equity Strategic partner

In terms of debt, the predominant factors for ECBs were the lower interest rates as compared to DCBs, which could save AML up to 5% in terms of interest rates; also the revenues from the project will come in USD hence loan payments can be made without facing any currency risks. Indian banks not only are seen to charge higher interest rates, they are also very conservative and would require more time in approving a loan. They also depend on credit ratings which have dropped in general in the current recessionary phase.

Equity, though only 1/3rd of the full funding exercise, it is important as it impacts the promoter’s objectives for the project in the long run. In terms of equity, even though the promoters would like to hold the full equity stake in the company, it was not possible due to the lack of cash on the books. It cannot exercise a 100% debt issue as banks will not lend if the promoters do not bring capital to the table. Hence a external source had to be considered for equity. I think it is best brought in terms of a strategic partner, simply as the experience that could be brought in would be invaluable, and it would also result in similar goals and objectives other than profit hence better synergies, and a experienced partner is also likely to increase the chances of securing a loan, as well as at a lower interest rate. A sleeping partner is likely to give a slightly better valuation and stake, however, the profits will still be split almost equally, and the sleeping partner would not care for much other than the profit, which could lead to strategic conflicts. It would be more advantageous to choose a strategic partner over a sleeping partner. But the promoters of AML run the risk of not being able to buyback the project in the future as both firms would have strategic objectives. QIP does not seem possible due to several factors described above, while a IPO would give better valuations for both partners of the strategic partnership as they will gain better valuations once operations are in process.

I should have considered FCCBs as they too seem a popular way of raising capital, but due its complexity I could not do much analysis on that. There are many other ways of raising capital but I could not work all considering all options. There were also several estimates I have received from AML, which could have a positive bias, as these presentations were meant for investors. Also a stronger way of calculating the interest rates on debt instruments were needed other than expert and promoter’s opinion, but banks are not willing to reveal their exact rates, moreover these are generally meant to be negotiated.

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According to me, after the research study, this should be the final spread between debt and equity for AML

Appendix 1 (slides 2 and 6 out of the Ashapura Alumina presentation)

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3903 crores to be raised

Rs. 1303 crores to be raised by equity

Rs. 603 crores from promoter's funds

Rs. 600 crores from strategic partner

Rs 2600 crores to be raised debt

Should be raised in the form of ECBs at an estimated 5%

Appendix 2: ashapura statement of accounts

Rs.Crores

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PARTICULARS 05 - 06 06 - 07 07 - 08 08 - 09

Total Income        Net Sales/Income from operations  682.34 899.64 1,491.64 700.10

Add:Other Income  0.67 4.45 9.56 9.00

Total Income 683.01 904.09 1,501,20 709.10

         Total Expenditure         Less : Material Consumption, Trading          Purchases, Manufacturing and

       

          Mining Expenses  183.76 222.44 326.08 252.03

          (Increase) / Decrease in Inventory 

4.61 (18.18) (69.17) (43.26)

          Export Freight & Insurance 246.74 292.94 659.32 252.47

Exchange Rate & Fluctuation Loss/Gain

    (3.94) 439.80

          Other Selling & Administrative          Expenses 

151.10 231.27 395.98 172.37

Total Expenditure  586.21 728.47 1,308.27 1,073.42

         Profit before Interest & Depreciation 

96.80 175.62 192.93 (364.32)

Less : Interest (Net)  10.09 9.72 10.58 16.01

Less : Depreciation  2.41 3.45 4.85 6.60

Profit before Taxation  84.29 162.45 177.50 (386.93)

Less : Provision for Taxation   29.09 53.29 41.46 (132.54)

Less : Prior Period adjustment  0.67 0.90 0.14 0.56

Less : Extraordinary Items     0.31 0.53

Net Profit  54.53 108.26 135.59 (255.48)

         

Appendix 3: Balance sheet

   

Balance sheet  Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05 Mar ' 04

 

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Sources of funds

Owner's fund

Equity share capital 15.79 7.82 6.45 6.38 6.38

Share application money 0.79 - - 0.16 -

Preference share capital - - - - -

Reserves & surplus 475.26 357.89 119.89 69.17 58.36

Loan funds

Secured loans 238.56 129.14 96.69 178.82 143.79

Unsecured loans - - - 15.00 1.20

Total 730.41 494.85 223.02 269.53 209.74

Uses of funds

Fixed assets

Gross block 96.51 56.28 46.29 33.62 29.30

Less : revaluation reserve - - - - -

Less : accumulated depreciation 22.18 17.48 14.06 11.71 9.80

Net block 74.32 38.80 32.23 21.91 19.50

Capital work-in-progress 66.77 8.89 1.42 3.53 2.23

Investments 144.76 155.43 29.61 25.11 24.92

Net current assets

Current assets, loans & advances 599.61 381.29 282.92 259.63 206.18

Less : current liabilities & provisions 155.06 89.55 123.48 41.67 45.11

Total net current assets 444.56 291.74 159.43 217.96 161.07

Miscellaneous expenses not written - - 0.33 1.02 2.03

Total 730.41 494.85 223.02 269.53 209.74

Notes:

Book value of unquoted investments 144.64 155.30 29.61 25.11 24.92

Market value of quoted investments 0.12 0.12 - - -

Contingent liabilities 130.57 93.32 35.58 39.78 50.35

Number of equity sharesoutstanding (Lacs) 789.69 391.21 64.51 63.83 63.83

Appendix 4

Interview: Ketan Shrimankar (Practicing chartered accountant)

Mr.Ketan Shrimankar is a practicing chartered account, and also is a consultant for several SME’s. He also is an investor and research analyst and the equity markets.

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What sources of finance would you recommend to be researched? Would you look at debt or Equity?Any capital raising exercise cannot be undertaken only using debt, as any financial institution requires at least a 1:2 equity to debt ratio. While it can be done only through equity, it can often lead to dilution of promoter stake, and can prove to be expensive in the long term. One can look at domestic institutional lending, External commercial borrowings (ECBs) as a debt instrument, equity can be raised through private equity, such as promoter funds, strategic investment/partnership, financial/ sleeping partners. (Venture capitalists), or public equity: QIP, IPO and so on.

What about FCCB’s?This is a generally complicated way of raising capital and involves a mixture of debt and equity that involves bonds. It is not something I can explain clearly in a onetime interview.

I was looking at FCCB’s for my project, but I am likely to eliminate that option now. Can you give me an idea of the costs for raising capital for these different methods?While there is no cost of funds for raising equity, but there is a cost of raising these funds. These are generally fixed at around 2% for public equity. Indian banks will lend at around 12% to 14% interest rates, but there are no costs for raising funds except a 0.5% loan processing fee. ECB’s can be cheaper, at around 4% to 6%, with a percentage point cost of raising capital. Finally FCCBs cost of funds can be between anywhere between 0% and 3%, with a similar percentage point for raising the funds.

Equities then, seem to be a free way of raising cash. Are there any risks with raising excessive equity?The main threat is the dilution of ownership. Over the long term, equities are considered as an expensive way of raising capital, and it is permanent, it can never be erased from the books, like how debt can be. If the promoter aims to regain ownership, buybacks can often prove expensive; also he runs the risk of losing control or facing a hostile takeover. Dividends are expected from investors, and external monitoring of activity does occur by Pvt. Equities investors through a shareholder’s agreement. Hence the decision making process can be slower. Due to heightened manipulation in markets new IPO’s are constantly scrutinized by SEBI, and accounts have to be made available to everyone. While it is possible for an owner to get a favourable valuation, it is likely that in the current market over valued IPO’s will not get subscribed.

What do you mean by a favourable valuation?Basically the promoter can decide how much to charge for the stake he sells. For example, say the promoter wishes to raise a hundred rupees. If he wishes to hold 50% of the company, ideally he should contribute Rs. 50; however, he can sell a 50% stake at Rs.75, obtaining his 50% share at only Rs. 25 hence providing a good valuation. However this can only work if overall sentiment is good, and of the promoters have enough credentials or experience they can get a good valuation from the market.

What about private equity? Is there anything different with comparison to public equity?If it is a strategic investment, a lot of intangible benefits are gained from the experience of the partner. But it would be therefore difficult to get a rich valuation. A sleeping partner will only make a financial investment but will generally not interfere with the operation and execution process.So anyways let me give you a rough idea of how finance could be raised: (proceeds to draw this diagram, sticking to the Rs.100 example.

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The promoter could avail of all funding by just investing 10% of the full project size; he is also likely to get, say, for example, a 20 – 25% share of the project. Hence equity can be cheap.

Are there any requirements to raise debt?Debt has two broad requirements, firstly collateral is required by the institution to have the security that it needs, to assure itself that it will be paid. The second requirement is that, as a thumb rule, the promoters must pay for some part of the project. For domestic lending institution, any project must have a minimum 33% (1:2) equity; otherwise the banks will not lend capital. This is done to insure that the promoter has some financial holding in the project, hence providing the banks with a sense of security, which means that the banks are willing to lend 2x of whatever money the promoters themselves are bringing to the table.Can you give me pointers between ECBs and domestic lending?Roughly ECBs tend to be cheaper as international interest rates are lower. However you also run the risk of currency fluctuations and any regulatory changes in terms of the government’s ability to restrict payments in foreign currency, which could happen when it has depleted for-ex reserves.Would you like to offer any recommendation for AML?I would go for an IPO along with debt.Thank you for your time.

Appendix 5

Interview: Chetan Shah (M.D. Ashapura minechem ltd)

What are you expectations from the Alumina-complex project?

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Rs.100 to be raised

Rs. 33 equity

Rs. 10 promoter

Rs 23 public

Rs 67 debt

Financial institution

It will help Ashapura in terms of value addition through diversification, better use of natural resources; it also helps promoting employment in terms of ancillary businesses for backward people in the district of Ratnagiri. Also the value addition will bring us a competitive advantage as compared to only mining extraction and export, and gives us the edge over other mining corporations and state run entities.

What ratio of Debt to equity are you expecting?Two is to one.

Would you be comfortable with it?Yes, it is pretty good in today’s environment.

What kind of lending rate would you expect?Preference will be for around 10% but it is more realistic at around 12% for domestic banks, I think a lower figure is expected for ECBs but I’m not sure at this point of time, maybe around 6%?

What about the equity aspect?Ideally I would prefer a strategic partner, since we are inexperienced in implementing a project of such a large size. They should have experience, equity, resources…

What kind of a stake or dilution would you ideally want?I would like a 51% or controlling stake in the project, or a 50% equal stake with managerial rights.

Would you consider a passive or sleeping partner?No. if private equity is being considered, I would prefer an experienced partner

IPO?The project will not have any rich valuation in its initial stages, I guess after three years it may be considered, once operations are in full flow, as I would prefer a 20% project dilution to unlock value from the project and get a rich valuation.

QIP?It is likely to be rejected for several reasons. There would be no demand due to lack on managerial experience, stock market fears due to recession; commodity prices and speculation make the project too risky to attract enough QIP subscribers.

Do you have any personal objectives in this new project?I would like to not only see the company diversify; it would also be one of my aims to be a single largest promoter for this project, but it is not viable to raise any debt without an experienced partner. Hence I would just wish for things to get started.

Appendix 6 (banks should reduce lending rates)

http://economictimes.indiatimes.com/News/Economy/Policy/There-is-scope-for-banks-to-reduce-lending-rates-Subbarao/articleshow/4832375.cms

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There is scope for banks to reduce lending rates: Subbarao29 Jul 2009, 0625 hrs IST, ET Bureau

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 Print   EMail   Discuss  Share  Save  Comment Text:

Unlike his predecessors, RBI governor D Subbarao is quite direct on what actionbanks should take place on the interest Rate front front.Excerpts: 

On the scope for bank lending rates to come down... 

There is scope for a reduction in lending rates within the policy rate adjustment already done by RBI. Even if we take into account the inflation rate and returns to depositors, the lending rate should be around 9.5%, but they are 10.5% and above... so there is scope for banks to reduce lending rates. We have also said in the policy statement that as deposits mature and get re-priced, the cost of funds will go down for banks and they will have room for reduction of lending rates. 

On when can the market expect a reversal of the exapansionary monetary policy... 

We will look at non-oil imports, we will look at credit growth, we will look at inflation and we will look at manufacturing. However, it will be inappropriate and improper to speculate on the future. We have been debating to exit strategies in our internal meetings, but are not in a position to give any more details. In fact, central banks around the world have been talking of exit strategies... you must have heard Fed chairman Ben Bernanke’s statements and US president Barack Obama’s roadmap. 

On the math behind RBI’s 6% growth rate estimate... 

We debated a lot internally on the growth rate for the economy. Besides numbers, we also looked at when the forecasts were made. Several of the forecasts were made before the monsoon situation became clear. But let us first consider the risk factors for the economy. A lot will depend on agriculture. We all know the rainfall situation at present is 19% below normal. The foodgrain production-weighted rainfall index number is at 69 against 129 at this time last year. The agriculture performance could spill into industry and services, with a lag effect. Exports have been negative for the past eight months. Although exports only account for 15% of the economy, they are significant, but they will depend on the state of the global economy. Lastly, investments(in the economy) also have to pick up, although some bankers said credit from the housing and retail side have picked up. 

On RBI’s stance on open market operations... 

We will follow the calendar that we have laid out in respect of OMOs and MSS desequestering. But let me clarify that the calendar is only indicative. It is very difficult to predict liquidity, but we do try to estimate it regularly. Should the numbers deviate from our estimates, we will tailor the OMO programme accordingly. But, by and large, we will stick to the calendar. We want to give the market as much certainty as we have, but cannot give you what we do not have. 

On the need for a government roadmap for fiscal consolidation... 

The government has given a number of 6.8% for the current year and I believe in the medium-term policy document, there are numbers for the next year and the year after.... we have said it will be good for the economy, the government, the central bank for everybody if those numbers are fleshed out. They have to be backed up by expenditure and revenue numbers. Also, in the process, the focus is on the quality of fiscal adjustment, i.e, how much do you spend on capital expenditure and how much do you spend on plan expenditure. Since I have been with the finance ministry in the past, now I can step back and speak more comfortably about fiscal adjustments from the Centre. But, it’s really the quality of fiscal adjustments that will be important. We do not expect market borrowings to be higher than what was mentioned in the Budget. Even the fiscal implications of the measures announced this week are small. Having said that, should there be any increase in borrowings from the government, RBI should (be able to) manage that.  

On analysts’ concerns that restructuring is dressing up of books... 

The focus on restructuring is not to hide anything. It is to provide liquidity to sectors that would have found it otherwise unviable. It’s so that they can get over difficult conditions and get back to business. Besides, its not that restructuring does not require provisioning. In fact, we are providing floating provisioning facility to banks for the restructured assets. So, the risk management systems are still in place. Some of the restructured loans could turn sour, but bankers tell us these are at acceptable levels. However, there is no proposal to extend the restructuring deadline from hereon. On continuation of floating provisions facility, we have an open stance and are awaiting international norms. 

Appendix 7 (http://economictimes.indiatimes.com/Market-News/Cos-turn-to-bonds-CPs-for-funds/articleshow/4908679.cms)

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paper due to uncertainties in the capital   market and banks’ reluctance to lend short-term funds.

The change was visible in the resource mix of companies in the quarter that saw funds flow to corporates dipping by 40% year-on-year. Resources mobilised through bank credit and public issue of sharesdipped by over 80% in the quarter compared with the year-ago period.

Reliance of corporates on bonds through private placements and commercial paper (CP) increased by 41% and 72%, respectively, in the quarter, compared with the same quarter last year. Foreign fund inflows through foreign direct investments (FDI), external commercial borrowings (ECBs), short-term debt and trade credits dipped by 60%. However, FDI still accounted for over 20% of the funds used by Indian businesses during the period.

Corporates raised Rs 29,135 crore and Rs 35,460 crore, respectively, through private placement of bonds and commercial papers, compared with Rs 16,955 crore and Rs 25,104 crore, respectively, in the year-ago period. They borrowed only Rs 11,735 crore from banks, compared to Rs 37,364 crore in April-June 2008.

As banks showed a reluctance to lend freely due to sluggish economic sentiment, companies turned to commercial papers to raise funds. For them, CPs turned out to be a cheaper option with average discount rate on the instrument ranging between 5% and 6%, as against benchmark prime lending rates (BPLR) of commercial banks that ranged between 10% and 16%.

“Bankers preferred to park funds in MFs and gilts and have been reluctant to lend for shorter tenors. With no takers for bonds, corporates have resorted to raising shorter-term funds through CPs,” said Sidhartha Roy, economic advisor to the Tata group.

Even if a top-rated corporate managed to get loans at 300 basis points below BPLR, CPs still worked out to be cheaper. Several corporates managed to raise cheaper funds through private placement of bonds. Among the large issuers in the CP market were HPCL, ONGC, SAIL, Sundaram Finance, L&T Finance and Bajaj Auto   Finance .

An official with HPCL, which regularly taps the CP market for its short-term funding requirements, said the company preferred to raise funds through this (CP) route whenever it was cheaper. Most corporates prefer to raise funds in a similar fashion, he said, requesting anonymity.

Jayesh Mehta, country treasurer, Bank of America Merrill-Lynch, said banks indirectly funded the businesses by parking funds with MFs. This is because MFs have been the largest subscriber to the CPs issued by corporates and NBFCs. For MFs, other investment options, such as gilts and equities, were not so attractive during the period, he said.

As for private placements, much of it happens through qualified institutional placements (QIP), said Mr Roy. Many private equity players prefer this route these days, he said. According to a Crisil study, Indian companies raised over Rs 12,500 crore this year through QIPs.

Appendix 8: PWC slides on FDI fund raising 28, 29

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COMPANIES TURN TO BONDS, CPs FOR FUNDS

MUMBAI: Companies that raised funds in the first quarter of the current financial year preferred to do so through issue of bonds and commercial

Appendix 8: PWC slides on FDI fund raising 30, 31

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Appendix 9: information on LIBOR (from Mr. Nadkarni)(sent via email) , alumina pricing

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LIBOR LIBOR Info: http://en.wikipedia.org/wiki/London_Interbank_Offered_Rate LIBOR Official site for rates: http://www.bbalibor.com/bba/jsp/polopoly.jsp;jsessionid=ai8zOoqpNCzg?d=1621

Foreign Currency Loans are generally negotiated as LIBOR + (x no. of basis points) For eg. Typically a proposal of the Alumina Refinery’s magnitude would be 12 moths USD LIBOR + 250 or 300 basis points,So if the USD 12 months LIBOR on June 30, 2009 is 1.60625, then the interest rate is 1.60625 + 3 = 4.60625 % Alumina and aluminium price linkage Unlike aluminium, alumina being a metal intermediate is not traded on metal exchanges. Historically, contracted/spot alumina prices have varied from 13% to 16% of the LME aluminium price. In fact the last NALCO price for sale of alumina (whose prices are watched by the industry as a global benchmark) on April 8, 2009 was USD 227.64 per ton (when the then prevalent aluminium price was USD 1,417 per ton) indicating a much higher range of alumina to aluminium prices of 16%. Aluminium Price Aluminium prices like most commodities have been volatile in for the last 18 months. Global aluminium prices reached their peak (USD 3, 291 per ton) in July 2008, the price levels rapidly deteriorated following the global financial turmoil and liquidity crunch. In February 2009 the LME aluminium price fell to USD 1,253 per ton. The prevalent aluminium prices are USD 1,950 ton. London Metal Exchange prices for Aluminium are considered to be the benchmark prices for the metal. Indicative long-term metal prices:

Period LME Price (USD/ton)

5 years average 2,249

A conservative long-term base price of USD 2,195 per ton has been factored into the projections. Rupee/Dollar Expectations:

Period Estimated for RS/USD5 years 45±1

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Appendix 10: ECB overview by Rajesh Relan (company secretary of Mysore cements Ltd) (pages 1-6) (http://www.taxmann.net/Datafolder/flash/article0412_1.pdf)

INTRODUCTION The world of Indian corporate finance revolves around a three letter word – ‘ECB’ (External Corporate Borrowings). ECBs are one of the modes of raising funds from abroad. ECBs refer to commercial loans, [in the form of bank loans, buyers' credit, suppliers' credit, securitised instruments (e.g., floating rate notes and fixed rate bonds)] availed from non-resident lenders with minimum average maturity of 3 years. ECBs provide an additional source of funds to the companies allowing them to supplement domestically available resources and take advantage of lower rates of interest prevailing in the international financial markets. ECBs have become very popular amongst the Indian companies, during the past few years due to the limitations in the Indian debt market in the form of short maturity period and high rate of interest. This article gives an overview of the regulatory framework for raising funds through ECBs. ADVANTAGES OF ECBs

The first and the foremost advantage is that ECBs are very economical source of raising funds, since the interest rate is far less as compared to the interest rate on the debt raised in India.

Huge sum of money can be raised through ECBs from the international financial market, depending upon the risk perception of the foreign market, which is not possible in the domestic market.

ECBs provide foreign currency funds to the corporate sector that are necessary for import of capital goods etc.

There is no need for credit rating. Moreover, ECBs carry fewer covenants as compared to the debt raised from Financial Institutions / Banks in India.

DISADVANTAGES OF ECBs Since the funds are raised through ECBs in foreign currency and the interest &

redemption proceeds are also payable in the foreign currency, the issuing company has to hedge its foreign exchange exposure, which involves expenditure. In case the company opts to keep its foreign exchange exposure unhedged, it carries a huge risk due to fluctuation in foreign exchange rates. RBI has also acknowledged this problem and has vide its circular dated 22nd October 2008 instructed the banks to put in place a system for monitoring the unhedged foreign exchange exposure of small and medium enterprises.

1

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The funds raised through ECBs have to be utilised in accordance with the end uses permitted under the guidelines., as such these funds can not be utilized for working capital or general corporate purposes.

REGULATORY FRAMEWORK FOR ECBs The guidelines on ECBs were issued by the Ministry of Finance (ECB division) on 30th June 1997. Detailed guidelines were announced in July 1999. The said guidelines have been amended from time to time keeping in view the changes in the international financial markets and the requirements of the Indian corporate sector. ECBs are governed by Section 6(3)(d) of the Foreign Exchange Management Act, 1999 read with Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 which is also known as Notification No. FEMA 3 / 2000-RB dated 3rd May 2000. The latest guidelines on ECBs have been consolidated by RBI at one place in the Master Circular No. /07 /2008-09 on “External Commercial Borrowings and Trade Credits” dated 1st July 2008. The aforesaid circular has been issued with a sunset clause of one year. Therefore it shall stand withdrawn on 1st July 2009 and will be replaced by an updated Master Circular. The guiding principles of the ECB policy are to maintain long maturity period, low all-in-costs and give impetus to the infrastructure and core sectors, which are essential for the overall accelerated growth of the economy. The ECB policy basically deals with the following aspects :-

Eligibility criteria for accessing international financial markets. Total quantum / limit of funds that can be raised through ECBs. Maturity period and the cost involved. End uses of the funds raised.

ECBs can be accessed under two routes viz., (i) Automatic Route and (ii) Approval Route. ECBs for investment in real sector - industrial sector, especially infrastructure sector in India, are under the Automatic Route, i.e. do not require RBI / Government approval. Borrowers may enter into loan agreement(s) in compliance of the ECB guidelines with the recognised lender(s), for raising ECBs under the Automatic Route. In case of doubt as regards eligibility to access Automatic Route, applicants may take recourse to the Approval Route. ELIGIBLE BORROWERS ( I ) The following entities may borrow funds through ECBs under the automatic route :-

Companies registered under the Companies Act, 1956 except financial intermediaries (such as Banks, Financial Institutions (FIs), Housing Finance companies and NBFCs).

Units in Special Economic Zones (SEZ) are allowed to borrow funds through ECBs for their own requirements. They cannot transfer or on-lend ECB funds to their sister concerns or any other unit in the Domestic Tariff Area.

(Individuals, Trusts and Non-Profit making organisations are not eligible to raise ECBs).

( II ) The following entities may borrow funds through ECBs under the approval route:- Financial Institutions dealing exclusively with infrastructure or export finance such as

IDFC, IL&FS, Power Finance Corporation, Power Trading Corporation, IRCON and EXIM Bank.

Banks and Financial Institutions which had participated in the textile or steel sector restructuring package as approved by the Government are also permitted to the extent of their investment in the package.

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ECBs with minimum average maturity of 5 years can be raised by NBFCs from multilateral financial institutions, reputed regional financial institutions, official export credit agencies and international banks to finance import of infrastructure equipment for leasing to infrastructure projects.

Special Purpose Vehicles, or any other entity notified by RBI, that has been set up to finance infrastructure companies / projects.

Multi-State Co-operative Societies engaged in manufacturing activities.

Non-Government Organisations (NGOs) engaged in micro finance activities having satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank, which is authorised to deal in foreign exchange, can also raise ECBs. Such NGOs would be required to furnish a certificate of due diligence on `fit and proper’ status of its Board / Management Committee from the designated Authorised Dealer Bank. Such NGOs can raise ECBs upto USD 5 million during each financial year. The designated AD Bank has to ensure that the forex exposure is hedged immediately at the time of drawdown.

Corporates in service sector viz., hotels, hospitals and software companies can also avail ECBs upto USD 100 million in each financial year for import of capital goods.

RECOGNISED LENDERS ( I ) An eligible borrower can raise ECBs under the automatic route through any of the

following recognized lenders :- (i) international banks, (ii) international capital markets, (iii) multilateral financial

institutions (such as IFC, ADB, CDC, etc.,), (iv) export credit agencies, (v) suppliers of equipment, (vi) foreign collaborators and (vii) foreign equity holders (other than erstwhile OCBs).

A "foreign equity holder" in order to be eligible as a recognised lender under the automatic route would require minimum holding of equity capital in the borrower company as detailed below:

(a) For ECBs upto USD 5 million - equity shareholding of 25 % or more. (b) For ECBs of more than USD 5 million - equity shareholding of 25 % or more and

debt-equity ratio not exceeding 4:1 (i.e. the proposed ECB should not exceed four times the foreign equity directly held by the lender ). It is worth noting here that for the purpose of calculation of debt-equity ratio in this case, only the paid up equity share capital directly held by the lender is taken into account and the Reserves and Surplus are excluded.

( II ) Under the Approval Route, ECBs can be raised from any of the following recognized lenders:

(i) international banks, (ii) international capital markets, (iii) multilateral financial institutions (such as IFC, ADB, CDC etc.,), (iv) export credit agencies, (v) suppliers' of equipment, (vi) foreign collaborators and (vii) foreign equity holder (other than erstwhile OCBs). It may be noted here that ECB can be raised from a ‘foreign equity holder’ subject to the condition that such 'foreign equity holder' directly holds minimum 25 % of the paid up equity capital of the borrowing company. In such cases the debt-equity ratio may exceed 4:1, if the RBI permits.

Overseas organisations and individuals may provide ECBs to Non-Government Organisations (NGOs) engaged in micro finance activities subject to the following conditions:- (i)

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The concerned overseas organization furnishes a certificate of due diligence from an overseas bank. The said “due diligence” certificate confirms that the lender is maintaining an account with the bank since at least last two years; the lending entity is organised as per the local laws and holds good esteem in the business / local community and there is no pending criminal action against it. (ii) Similar “due diligence” certificate has to be furnished by an individual lender. Other documents to be submitted include audited statement of accounts, income tax return etc. Individual lenders from countries wherein banks are not required to adhere to Know Your Customer (KYC) guidelines are not eligible to extend ECBs.

QUANTUM OF FUNDS AND MATURITY PERIOD Automatic Route

The maximum amount that can be raised by a corporate through ECBs under the automatic route is USD 500 million or equivalent during each financial year.

ECBs upto USD 20 million or equivalent in a financial year should have minimum average maturity period of three years. ECBs upto USD 20 million can have call / put options provided the minimum average maturity period of three years is complied with before exercising the call/put option.

ECBs above USD 20 million and upto USD 500 million or equivalent should have minimum average maturity period of five years.

Approval Route In case the requirement of funds is more than USD 500 million in a financial year or it is not possible to adhere to the minimum average maturity periods given above, the concerned company has to seek prior approval of RBI. Corporates can avail ECBs upto an additional amount of USD 250 million with average maturity period of more than 10 years under the approval route. This limit of USD 250 million is over and above the existing limit of USD 500 million during each financial year under the automatic route. However, prepayment and call / put options are not permitted in respect of the aforesaid additional limit upto 10 years.

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Appendix 11: Fund raising in India (http://economictimes.indiatimes.com/News/Economy/Finance/India-Inc-on-fund-raising-spree-mops-up-Rs-11714-cr-in-Q1/articleshow/4735234.cms

India Inc on fund raising spree; mops up Rs 11,714 cr in Q14 Jul 2009, 0310 hrs IST, ET Bureau

Print EMail Discuss Share Save Comment Text:

KOLKATA: India Inc mobilised a whopping Rs 11,714 crore in the first-quarter (Q1) ended June 30, 2009. Of the total funds mopped up in the

April-June quarter, as much as 56 % amounting to Rs 6,553 crore was raised in the last week of June itself.

Stats available with Delhi-based research firm Prime Database indicate the quarter saw one initial public offering (IPO) of Rs 278 crore, one follow-on public offer (FPO) of Rs 23 crore, three rights issue, three ADRs/GDRs and 10 qualified institutional placements (QIPs) aggregating to Rs 11,259 crore.

QIPs, therefore, cornered over 96 % of the total money mobilised, said Mr Prithvi Haldea, chairman, Prime Database. The leading QIP issuers during the quarter included Unitech (Rs 4410 crore), Indiabulls Real Estate (Rs 2656 crore), HDIL (Rs 1674 crore), Sobha Developers (Rs 526 crore), Shree Renuka Sugars (Rs 506 crore) and PTC. Mahindra Holiday was the solitary IPO in the entire quarter, while Rishabdev Technocable, the solitary FPO.

In the preceding quarter (January-March 2009), India Inc raised a tiny sum of Rs 872 crore through one IPO, four rights and two GDRs/ADRs. Compared to the preceding quarter, the said April-June quarter witnessed an increase of over 13 times. On the other hand, a sum of Rs 2,623 crore was mopped up in the previous corresponding quarter ended June 30, 2008.

"Uncertain of the direction stock   market may take after the Union Budget 2009-10, many companies have decided to raise money beforehand. The country witnessed a hectic pre-budget capital raising activity. The capital raising plans of India Inc are totally dependent upon the state of the secondary market that will emerge after the Budget. If the market goes on an upward trajectory post-budget, one can hope for a steady stream of issuances thereafter," Mr Haldea added.

On the IPOs/FPOs front, Prime Database is of the view that the first to hit the market would be some 19 companies including two PSUs — NHPC (Rs 2,500 crore) and Oil India (Rs 1400 crore) who plan to mobilise Rs 8,959 crore and already have Sebi approval for the same. It also includes names like Adani Power (Rs 2,200 crore), Godrej Properties (Rs 750 crore) and Pipavav Shipyard (Rs 700 crore).

These companies would be followed by another 15 companies looking to raise some Rs 2,186 crore but are awaiting Sebi approval. There are scores of other companies preparing to file their offer documents with the market watchdog. PSU divestments through the IPO/FPO route are also on the cards.

On the rights front, some 9 companies including Fortis Healthcare will raise Rs 1,605 crore. Another 14 companies with plans to raise Rs 3,637 crore are awaiting Sebi approval.

According to Prime Database, QIPs are also in the pipeline. As many as 50 companies have already announced their plans to raise money through this route since January 2009 and several more including the likes of Hindalco, Cairn, GVK Power, HDFC, JSW Steel, Essar Oil, Parsvanath and Omaxe are in the pipeline to raise over Rs 60,000 crore. "The first IDR may also happen in the coming quarter, apart from a few ADR/GDR issues," Mr Haldea feels.

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Appendix 12: Definition of small cap (http://www.indianexpress.com/news/mfs-want-uniform-definition-of-small-in-sm/31501/)

MFs want uniform definition of ‘small’ in small cap firms

If there’s one common theme binding small investors, small companies and funds launching small cap

funds for small investors, it is: ambiguity. Coming up for debate is definition of “small cap”, a company

whose market capitalisation is, well, small. But that “small” value could range between Rs 10 crore to over

Rs 6,000 crore. At stake: investor expectations.

“In the absence of a clear classification accepted uniformly across the industry, there are as many

definitions as there are small-cap schemes and indices. Says T P Raman, managing director of Sundaram

BNP Paribas Mutual Fund: “We need to organise a meeting or seminar of fund houses, Sebi, NSE and

AMFI officials, define a proper classification and monitor it every three to six months, as the size of

companies is changing fast.”

At present, there are two dedicated small-cap funds — Sundaram BNP Paribas Select Small Cap and DSP

Merrill Lynch Micro Cap Fund — and one portfolio management scheme — Kotak Origin of Kotak

Securities. In the Sundaram scheme, small cap is defined as companies other than the top 100 NSE

companies ranked by market capitalisation. As on Friday, that meant companies whose market cap was

less than Rs 6,138 crore.

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Appendix 13: overview on research question

Ashapura Minechem to invest Rs 4200cr

Ashapura Minechem Ltd (BSE Code : 527001) formalized an agreement today to set up a State-of-the art Alumina Complex at Ratnagiri, in the coastal belt ofMaharashtra. The project will be spread across 1500 acres of land at an investment of Rs. 4,200 crore and will create direct and indirect employment for over 3000 people.

 

The Memorandum of Undertaking (MoU) was signed by Mr Chetan Shah, Managing Director of Ashapura Group, and Mr. A.M. Khan, Principal Secretary (Industries) of the Government of Maharashtra, in the presence of the Honourable Chief Minister of Maharashtra, Mr. Ashok Chavan and a host of other dignitaries.

 

The Alumina Complex project being set up by Ashapura Minechem has been granted “Mega Project” status by the Government of Maharashtra. Ashapura’s proposed project includes a 0.5 million tons Alumina Refinery, 0.15 million tons Aluminium Smelter and a 330 MW Captive Power Plant at Rajapur, Ratnagiri District. The proposed investment is to the tune of Rs. 4,200 Crores, including an investment of Rs. 1,320 Crores for a 330 MW Captive Power Plant.

 

Speaking on the occasion, Honourable Chief Minister, State of Maharashtra, ShriAshok Chavan said, “We have taken various steps to ensure speedy developments of industrial projects in Maharashtra. These measures from the state has madeMaharashtra an extremely investor friendly state. We envisage a manifold increase in investments in the coming years. It’s a pleasure to have mega projects from successful and growing companies like Ashapura Minechem in Maharashtra. I am happy that like many others, Ashapura preferred Maharashtra over other states for this mega project. I wish Ashapura all the best for their future endeavours.”

 

The project is estimated to employ more than 3000 people directly & indirectly. Ashapura, going by tradition, will set up training facility to train the locals to attain the required skills. Mining is the second largest occupation in India after Agriculture and currently, Ashapura Minechem employs over 25,000 people in the mining sector.

 

Mr. Chetan Shah, Managing Director, Ashapura Minechem said, “We started our journey way back in 1998 by applying for various licenses for the mining of Bauxite in Maharashtra. Mining operations commenced in 2001. Today, Maharashtra has over 200 billion tonnes of bauxite reserves which offer us a conducive environment to set up a complete integrated state- of- the -art Alumina Complex. This project, a first of its kind in India, is the largest project on the west coast of Maharashtra. In terms of potential markets we plan to export alumina to the Middle East which has an annual requirement of over 2.5 million tons.

 

Mr. Shah further stated that “another key factor of the project is that it not only helps generate employment, but also adds to the growth of the state. We have over 40 years of experience in the mining sector and have successfully followed a well tried & tested module of creating employment by

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adopting different training institutes in vocational & trade. These institutes will serve as training centres for local people to harness their skill and acquire job knowledge resulting in employment generation for the local people of Ratnagiri district. ”

 

In addition to employment for trade, Ashapura is known for working towards the upliftment of women and has set up academies that help women in all round self development by gaining computer knowledge & various other skill sets. This helps local women to gain employment with the company and be self dependent. This module has been well established at various locations that the company has its operations, the same will be replicated in Maharashtra.

 

Mr. Joseph, Chief Secretary of Government of Maharashtra, while appreciating the progress made by Ashapura Minechem, assured all necessary assistance for development and execution from Government of Maharashtra.

 

Mr. A. M. Khan, Principal Secretary (Industries), Government of Maharashtra, speaking on the occasion, expressed his satisfaction at the deployment of indigenous and environment friendly technology in the mega project by Ashapura Minechem in Maharashtra. 

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Appendix 14: QIP information from PWC

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Appendix 15: Demand and supply of capital (Congressional research)

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Appendix 16: differences between small and large businesses (congressional research)

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Appendix 17: Financial Specs for the project

Snapshot of Balance Sheet

(Rs. Crores) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15Sources of Funds:Equity 1,203 1,203 1,203 1,203 1,203 1,203 1,203 1,203 1,203 1,203 1,203 1,203 1,203 1,203 1,203Reserves 214 569 1,022 1,496 1,984 2,286 2,500 2,621 2,645 2,570 3,023 3,488 3,958 4,425 4,888Shareholders Funds 1,417 1,772 2,225 2,699 3,187 3,489 3,703 3,824 3,848 3,773 4,226 4,691 5,161 5,628 6,091BorrowingsLong Term 2,700 2,700 2,430 2,160 1,890 1,620 1,350 1,080 810 540 270 0 0 0 0Short Term 198 231 257 258 259 260 259 259 260 261 262 263 263 263 263

Total 4,315 4,703 4,912 5,117 5,336 5,368 5,312 5,163 4,919 4,574 4,758 4,954 5,424 5,891 6,355

Application of Funds:Land & Site Development 65 65 65 65 65 65 65 65 65 65 65 65 65 65 65Fixed Assets Gross Block 2,593 2,593 2,593 2,593 2,593 2,593 2,593 2,593 2,593 2,593 2,593 2,593 2,593 2,593 2,593Less: Accumulated Dep. 122 243 365 486 608 729 851 972 1094 1215 1337 1458 1580 1701 1823Fixed Assets Net Block 2,471 2,350 2,228 2,107 1,985 1,864 1,742 1,621 1,499 1,378 1,256 1,135 1,013 892 770

Bank Guarantee Margin 540 540 540 540 540 540 540 540 540 540 540 540 540 540 540

Debtors 149 175 195 196 197 197 197 197 197 198 198 199 199 199 199 Cosing stock RM 34 39 43 43 43 43 43 43 43 43 43 43 43 43 43 Closing stock FG 26 28 32 32 32 32 32 32 33 33 33 33 33 33 33 Other Current Assets 30 36 40 40 40 40 40 40 40 40 40 40 40 40 40 Cash & Liquid Investments 359 859 1,187 1,536 1,899 2,076 2,165 2,161 2,061 1,861 2,189 2,528 3,143 3,755 4,364 Total Current Assets 599 1,137 1,497 1,846 2,210 2,388 2,477 2,473 2,373 2,174 2,503 2,844 3,459 4,071 4,680 Less: Creditors 42 47 53 52 53 53 52 52 52 53 53 53 53 53 53 Net Current Assets 557 1,090 1,444 1,794 2,158 2,335 2,424 2,420 2,321 2,122 2,450 2,791 3,406 4,018 4,627

Technical Service Payments 133 129 124 120 115 110 106 101 97 92 87 83 78 74 69Pre-operative & Cont. exp 548 529 510 491 473 454 435 416 397 378 359 340 321 302 284

Total 4,315 4,703 4,912 5,117 5,336 5,368 5,312 5,163 4,919 4,574 4,758 4,954 5,424 5,891 6,355

Statement of Profit & Loss

(Rs. Crores) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15

Sales 1,212 1,421 1,584 1,591 1,594 1,597 1,596 1,596 1,599 1,604 1,608 1,613 1,612 1,614 1,616Cost of ProductionRaw Material 325 366 408 407 408 408 407 407 407 408 409 410 409 409 409Power & Fuel 184 208 231 231 231 231 231 231 231 231 232 232 232 232 232Labour & plant salaries 25 26 26 27 27 28 28 29 29 30 30 31 32 32 33Other Overheads 92 94 96 98 100 102 104 106 108 110 112 114 117 119 121Change in stocks -26 -28 -32 -32 -32 -32 -32 -32 -33 -33 -33 -33 -33 -33 -33COGS 600 665 729 730 733 736 738 740 743 747 750 754 756 759 762

Gross Profit 612 756 855 860 861 861 858 856 856 857 858 859 856 855 854G P Margin 51% 53% 54% 54% 54% 54% 54% 54% 54% 53% 53% 53% 53% 53% 53%Staff Salary 25 26 26 27 27 28 28 29 29 30 30 31 32 32 33Other Administrative Costs 50 51 52 53 54 55 56 57 59 60 61 62 63 65 66EBITDA 537 680 777 781 779 778 774 770 768 767 766 766 761 758 755EBITDA % 44% 48% 49% 49% 49% 49% 48% 48% 48% 48% 48% 47% 47% 47% 47%Interest 178 180 179 162 146 130 114 98 82 65 49 33 21 21 21Depreciation (SLM) & Amortization 145 145 145 145 145 145 145 145 145 145 145 145 145 145 145Profit Before Tax 214 354 453 473 488 503 515 527 542 557 572 587 595 592 589

PBT % 18% 25% 29% 30% 31% 31% 32% 33% 34% 35% 36% 36% 37% 37% 36%Income Tax 0 0 0 0 0 201 301 406 517 632 119 123 125 125 125Profit After Tax 214 354 453 473 488 302 214 121 25 -75 453 465 470 467 464

PAT/Sales 18% 25% 29% 30% 31% 19% 13% 8% 2% -5% 28% 29% 29% 29% 29%Cash Profit 359 500 598 618 633 447 359 266 170 70 598 610 615 612 609

Cash Flow Statement

(Rs. Crores) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15Opening Balance - 359 859 1,187 1,536 1,899 2,076 2,165 2,161 2,061 1,861 2,189 2,528 3,143 3,755 Equity 1,203 - - - - - - - - - - - - - - Long Term Debt 2,700 - - - - - - - - - - - - - - Incr. in Short Term Debt 198 33 27 1.14 0.59 0.60 -0.16 0.09 0.60 0.86 0.87 0.87 -0.02 0.36 0.37Cash Profit 359 500 598 618 633 447 359 266 170 70 598 610 615 612 609 Total Inflow 4,460 532 625 620 634 447 359 266 170 71 599 610 615 612 609

Plant & Machinery 2,044 - - - - - - - - - - - - - - Building & Civil work 453 - - - - - - - - - - - - - - External Infrastructure facilities 96 - - - - - - - - - - - - - - Technical Service Payments 138 - - - - - - - - - - - - - - Land & Site Development 65 - - - - - - - - - - - - - - Pre-operative & Cont. exp 567 - - - - - - - - - - - - - - Bank Guarantee Margin 540 - - - - - - - - - - - - - - Increase/decrease in Working cap. 198 33 27 1.14 0.59 0.60 (0.16) 0.09 0.60 0.86 0.87 0.87 (0.02) 0.36 0.37 Loan repayment - - 270 270 270 270 270 270 270 270 270 270 - - - Total Outlfow 4,101 33 297 271 271 271 270 270 271 271 271 271 (0.02) 0.36 0.37

Closing Balance 359 859 1,187 1,536 1,899 2,076 2,165 2,161 2,061 1,861 2,189 2,528 3,143 3,755 4,364

Ratios

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15Capacity Utilisation 80% 90% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Sales/ Capital Employed 28% 30% 32% 31% 30% 30% 30% 31% 33% 35% 34% 33% 30% 27% 25%Gross Profit / Sales 51% 53% 54% 54% 54% 54% 54% 54% 54% 53% 53% 53% 53% 53% 53%EBITDA/Sales 44% 48% 49% 49% 49% 49% 48% 48% 48% 48% 48% 47% 47% 47% 47%PAT/ Sales 18% 25% 29% 30% 31% 19% 13% 8% 2% -5% 28% 29% 29% 29% 29%Cash Profit / Sales 30% 35% 38% 39% 40% 28% 23% 17% 11% 4% 37% 38% 38% 38% 38%Current Ratio 14.3 24.1 28.5 35.2 42.1 45.4 47.2 47.2 45.2 41.4 47.5 53.9 65.6 77.3 88.8Quick Ratio 8.6 18.2 22.6 29.3 36.2 39.5 41.3 41.2 39.3 35.4 41.6 47.9 59.7 71.3 82.8Debt Service Coverage 3.0 3.8 1.7 1.8 1.9 1.4 1.2 1.0 0.7 0.4 2.0 2.1 30.3 30.1 29.9Return on Capital Employed 10% 12% 14% 13% 12% 12% 12% 13% 13% 14% 14% 13% 12% 11% 10%Return on Equity 15% 20% 20% 18% 15% 9% 6% 3% 1% -2% 11% 10% 9% 8% 8%

Equity Payback 5 yrs 10 mProject Payback 14 yrs 11 m

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