Development Financial Institutions

Presented to: Prof. K. K. Jindal, MFI

Group Members

Ankur Konwar, N-12

Chirag Sapra, N-18

Kavita Sharma, N-33

Mayank Jain, N-41

Mukesh Kumar, N-43

Vijay Kumar Gupta, N-80

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Development financing

Risky business

Involves financing of industrial and infrastructure projects

Long gestation period

Repayment of the long term project loans depends on performance

of the project and cash flows arising from it

Reasons for project going wrong

Technological obsolescence

Market competition

Change of Government policies

Natural calamities

Poor management skills

Poor infrastructure

Averseness of markets and banking institutions

Uncertain outcome

Do not possess enough information and skills to predict with any

certainty the outcome.

Cost considerations associated with such risky ventures.

The long term loan comes with a higher price tag.

Renders the project financially unviable.

DFIs were established with the Government support for

underwriting their losses

Making available low cost resources for lending

At a lower rate of interest than that demanded by the market for

risky projects.

worked well in the initial years of development

Financial system moved higher

on the learning curve and acquired information and skills necessary

for appraisal of long term projects.

It also developed appetite for risk associated with such projects.

Banks and bond markets

became sophisticated in risk management techniques

They wanted a piece of the pie in the long term project financing

Distinct advantages over the traditional DFIs such as low cost of

funds

And benefit of diversification of loan portfolios

Government support to DFIs waning

For fiscal reasons or

In favour of building market efficiency.

Following the recommendations of the Narasimham Committee II,

the Reserve Bank’s annual policy statement of April, 2000

suggested that any DFI intending to transform into a bank, could

approach RBI or convert itself into an NBFC.

Definition

A DFI is defined as "an institution promoted or assisted by Government mainly to

provide development finance to one or more sectors or sub-sectors of the

economy. The institution distinguishes itself by a judicious balance as between

commercial norms of operation, as adopted by any private financial institution and

developmental obligations.”

An efficient and robust financial system acts as a powerful engine of economic

development by mobilizing resources and allocating the same to their productive

uses. It reduces the transaction cost of the economy through provision of an

efficient payment mechanism, helps in pooling of risks and making available long-

term capital through maturity transformation. By making funds available for

entrepreneurial activity and through its impact on economic efficiency and growth,

a well functioning financial sector also helps alleviate poverty both directly and

indirectly.

DFIs in India

1. The first government sponsored DFI was created in Netherlands in 1822.

2. The first DFI established in India in 1948 was Industrial Finance Corporation of India (IFCI) followed by setting up of State Financial Corporations (SFCs) at the State level after passing of the SFCs Act, 1951.

3. Financial Institutions set up between 1948 and 1974:

ICICI Ltd. was set up in 1955,

LIC in 1956,

Refinance Corporation for Industries Ltd. in 1958 (later taken over by IDBI),

Agriculture Refinance Corporation (precursor of ARDC and NABARD) in 1963,

UTI and IDBI in 1964,

DFIs in India Contd…

• Rural Electrification Corporation Ltd. and • HUDCO Ltd. in 1969-70,• Industrial Reconstruction Corporation of India Ltd.

(precursor of IIBI Ltd.) in 1971 and GIC in 1972

Note:-It may be noted here that although the powers toregulate financial institutions had been made available to RBI in 1964 under

the newly inserted Chapter IIIB of RBI Act, the definition of term ‘financial institution’ was made precise and comprehensive by amendment to the RBI Act Section 45-I (c) in 1974.

DFIs set up after 1974 and Notification of certain institutions as Public Financial Institutions

Another important change that took place in 1974 was the insertion of Section 4A to the Companies Act, 1956

NABARD was set up in 1981,

EXIM Bank (functions carved out of IDBI) in 1982,

SCICI Ltd. in 1986 (set up by ICICI Ltd. in 1986 and later merged into ICICI Ltd. in 1997),

PFC Ltd. and IRFC Ltd. In 1986,

IREDA Ltd. in 1987,

DFIs set up after 1974 and Notification of certain institutions as Public Financial Institutions Contd.

RCTC Ltd. and TDICI Ltd. (later known as IFCI Venture Capital Funds Ltd. and ICICI Venture Funds Management Ltd.) in 1988,

NHB in 1988,

TFCI Ltd. (set up by IFCI) in 1989,

SIDBI (functions carved out of IDBI) in 1989,

NEDFi Ltd. in 1995 and

IDFC Ltd. in 1997.

Categories of DFIs

DFIs can be broadly categorised as all-India or state / regional level

institutions depending on their geographical coverage of operation.

Functionally, all-India institutions can be classified as

(i) term-lending institutions (IFCI Ltd., IDBI, IDFC Ltd., IIBI Ltd.) extending

long-term finance to different industrial sectors,

(ii) refinancing institutions (NABARD, SIDBI, NHB) While most of them

extend direct finance, some extend indirect finance and are mainly

refinancing institutions viz., SIDBI, NABARD and NHB which also have

a regulatory / supervisory role.

Categories of DFIs Contd…

Section 4(A), which was inserted in the Companies Act in 1974, defines the

term Public Finance Institution (PFI).

Besides certain FIs regarded in terms of the said Section as PFIs, Central

Government by notification in the official Gazette may notify other

institutions as PFIs. As on date there are 46 PFIs which have been so

notified by the Central Government.

Identification of DFIs

(i) ICICI Ltd. and SCICI Ltd.: After merger of the latter with it, ICICI Ltd has

since converted to a bank.

(ii) UTI, which is regulated by SEBI.

(iii) LIC, GIC and other insurance companies viz., NIA, NIC, OIC and UII, which

are regulated by IRDA.

(iv) The two Venture Capital Funds viz., IFCI Venture Capital Funds Ltd. and

ICICI Venture Funds Management Co. Ltd., which need not be regulated by

RBI as DFIs as size wise they are too small to be of systemic significance.

Identification of DFIs Contd..

(v) HUDCO Ltd., which, being a housing finance company, is being regulated

by NHB.

(vi) National Co-operative Development Corporation and National Dairy

Development Board recently notified by GOI as PFIs: they do not appear to

be financial institutions in the classical mould.

The first category is the all India DFIs established by statute viz., NHB, SIDBI,

NABARD and EXIM Bank.

The second is the state level institutions set up by statute viz., SFCs. The third

is the DFIs that have been constituted as companies under the Companies

Act, 1956 and hence are, by definition.

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Infrastructure Development Finance Company Ltd. (IDFC) Vision

To build a diversified portfolio of viable infrastructure projects of national importance and to imbue the projects with best practices in

development, management, design, construction and operation while maintaining the highest regard for service, safety and environment.

History (1997-2009)

1997 IDFC was founded on the recommendations of the 'Expert Group on

Commercialization of Infrastructure Projects' under the Chairmanship of Dr.

Rakesh Mohan.

IDFC, a Public Private Partnership, incorporated in Chennai. Government

holds 40% of the company, 40% is held by foreign shareholders and the

rest by domestic entities.

IDFC commences business operations with a mission to lead private capital

to commercially viable infrastructure projects.

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2004 IDFC successfully raises $200 million for the India Development Fund,

the first infrastructure focused private equity fund.

2005 IDFC goes public through a successful public offering that is oversubscribed

38 times. Shares issued at Rs. 34 a share. Lists on the National and

Bombay Stock Exchanges.

Government shareholding reduces from 40% to 26%.

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2006

IDFC successfully raises $450 million for its second infrastructure focused private equity fund .

Acquired controlling stake in SSKI

♦ IDFC successfully raises $930 million India Infrastructure Fund (IDFC

Project Equity)

2007

IDFC raises additional capital of USD 500 million through a Qualified

Institutional Placement at Rs.

127 a share. Government shareholding reduces to 23%.

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2008 Acquired controlling stake in SSKI

IDFC successfully raises $930 million India Infrastructure Fund (IDFC

Project Equity)

IDFC successfully raises $700 million for its third infrastructure focused

private equity fund .

IDFC enters into asset management by acquiring the AMC business of

Standard Chartered Bank in India.

2009

IDFC becomes part of Nifty 50. CMP is 143.

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Goals

Investment: USD 1 bn in 5 years.

Forging Partnerships: National and international developers,

contractors and operators.

Values

Fairness

Integrity

Trust

Professionalism

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Strategic Directions

Leverage core strengths

Develop large and complex projects

Build partnerships

Enhance in-house expertise

Establish credibility

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Infrastructure Investment (in Billion Dollar)

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Stakeholder pattern(march 31,2010)

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20.20%

9.60%

3.00%5.50%16.40%

45.40%

GoI

Retail

Corporate Bodies

MF

Fis/Insurance/BanksFII/FDI

Core Team Rajiv Lall - Managing Director and Chief Executive Officer Vikram Limaye - Executive Director, member of the Board of Directors

L.K. Narayan - Group Chief Financial Officer

Animesh Kumar - Group Head Human Resources, Corporate Communication

Rajeev Uberoi - Group Head Legal and Compliance

Naishadh Paleja - CEO Broking

Veronica John - President & CEO IDFC Capital, Singapore

Cherian Thomas Group Head of PPP Initiatives

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SUBSIDIARIES

IDFC has ten direct wholly owned subsidiary companies

IDFC Private Equity Company Limited

IDFC Trustee Company Limited

IDFC Project equity Company Limited

IDFC FINANCE Limited

IDFC Securities Limited (earlier known as IDFC-SSKI Securities

Limited)

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IDFC Capital company Limited

IDFC PPP Trusteeship Company Limited

IDFC Projects Limited

IDFC Asset Management Company Limited

IDFC AMC Trustee Company Limited

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JOINT VENTURES

IDFC has three joint ventures:

Infrastructure Development Corporation(Karnataka Limited)

(iDeC) in the state of Uttaranchal.

Delhi integrated Multi Modal Transit System Limited (DIMTS) in Delhi.

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Partnership PLUS Expressways Berhard

Indian Renewable Energy Development Agency Ltd. (IREDA)

Gujarat Urban Development Corporation (GUDC)

DP World

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Sectors of Operations

Infrastructure Development

Power

Transport

Real State

Water

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38%

20%

24%

8%

2%7%

Project Finance

EnergyTransportTelecomIndusrial & CommercialTourismOther Misc

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New sectors Opportunity

Exploration of four new frontiers

Urban services, Rural Infrastructure, HealthCare and Education.

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IFCI

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Background

Services ProvidedServices Provided

Regional Offices 11

Satellite Offices 6

IFCI: Nationwide ReachIFCI: Nationwide Reach

Iron & Steel21%

Infrastructure12%

Textiles11%

Chemicals6%

Synthetic fibres6%

Refinery5%

Fertiliser4%

Cement3%

Electronics2%

Others30%

Sectoral PresenceSectoral Presence

Project Finance Project Finance

IFCI : Corporate AdvisoryIFCI : Corporate Advisory

Corporate Finance & Investment BankingCorporate Finance & Investment Banking

The ongoing economic reforms in India have created a need for restructuring businesses to remain competitive, acquire businesses or merge existing ones for competitive advantage and economies of scale, spin-off or divest to remain efficient and effective.

Infrastructure AdvisoryInfrastructure Advisory

Infrastructure Financing & Advisory Infrastructure Financing & Advisory

IFCI: Monitoring Agency for Public IssuesIFCI: Monitoring Agency for Public Issues

Oil India

Indian Hotels

Institutional Positioning of IFCIInstitutional Positioning of IFCI

Debt

Take-Out Finance

Risk Participation Facilities

Guarantees

Advisory Services PROJECTS

Banks

Financial Institutions

External

Mutual / Pension Funds

IFCICapital Markets

• Direct Finance• Mezzanine Capital• Equity• Advisory Services• Financial Structuring

Other Functions

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Bid Process Management

Empanelment with PSUs for Investment/Financial Appraisal

Management Advisory