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( A Case Study with Reference to Installation of Expansion Project 3MT to 6.3MT) WITH REFERENCE TO RASHTRIYA ISPAT NIGAM LTD, VISAKHAPTNAM


A C K N O W L E D G E M E N T I express my profound sense of gratitude for the administration of VISAKHAPATNAM STEEL PLANT, for giving me an opportunity to take up the project wok in organization. My sincere thanks to Mr. XYZ


accepting my request of doing the project in this esteemed organization. I also wish to thank all the staff of the HRD for their co-operation and help extended to me during my project. I take this opportunity to express my countless gratitude to my project guide Sri.XYZ,

also I record my special thanks to sri XYZ, HRD,

VISAKHAPATNAM STEEL PLANT who have given kind assistance in my project work.

Last but not least but though I could not find words to express my gratitude to my family members who have rendered great support and encouragement to bring













INTRODUCTION A project is an activity sufficiently self-contained to permit financial and commercial analysis .In most cases projects represent expenditure of capital funds by pre-existing entities which want to expand or improve their operation. In general a project is an activity in which, we will spend money in expectation of returns and which logically seems to lead itself to planning. Financing and implementation as a unit, is a specific activity with a specific starting point and a specific ending point intended to accomplish a specific objective.

To take up a new project, involves a capital investment decision and it is the Top management’s duty to make a situation and feasibility analysis of that particular project and means of financing and implementing it. Financing a project involves a good deal of risk. Project finance is a rapidly expanding field, which focuses not on the credit status of a company, but on cash flows that will be generated by a specific project Project finance has its origins in the natural resource and infrastructure sectors. The current demand for infrastructure and capital investments is being fuelled by deregulation in the power, telecommunications, and transportation sectors; by the globalization of product markets and the need for manufacturing scale; and by the privatization of government-owned entities in developed and developing countries. The concept of private finance is a new method based on the use of privatesector resources to build, maintain, manage and operate public infrastructure. 6

Interest in this approach has grown steadily as fiscal resources become more constrained. One key advantage is the potential to use the management skills and other resources of private enterprise to provide better public services at a lower cost. Another benefit is economic revitalization through the creation of business opportunities for private enterprise. In addition, it is possible to form new publicprivate partnerships based on the appropriate sharing of roles between the Government And Private Enterprise. The advantage of the project finance method is that the various parties, (including financial institutions) which are able to control these risks most appropriately can share the various risk factors inherent to projects. In this way, project risk can be both spread and reduced. In recent years there has been a rapid increase in the number of companies opting for project finance. There are three basic reasons for this trend. First, companies have become aware of their own credit ratings. Second, improved risk control is needed for large-scale projects. Third, access to finance can be facilitated by isolating good projects from the reduced credit status of business corporations. Project Finance can be defined in many ways and there does not exist any single definition for it. Finnerty ‘s definition is that, Project financing is the raising of funds to finance an economically separable capital investment project in which the providers of the funds look primarily to the cash flow from the project as the source of funds to service their loans and provide the return of and a return on their equity invested in the project.


While Nevitt and Fabozzi define it as: A financing of a particular economic unit in which a lender is satisfied to look initially to the cash flow and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the economic unit as collateral for the loan. The International Project Finance Association (IPFA) defines project finance as: The financing of long-term infrastructure, industrial projects and public services based upon non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project.

Need for the study: Now-a-days the Project Finance is necessary to study because to learn how the allocation of financial resource in the implementation of new project or expansion of existing project of any company. To study the financial planning for ongoing expansion project at Visakhapatnam Steel Plant, it tells about the allocation of financial resources for the project. A proposal for expansion of units at Visakhapatnam steel plant was made to combat to the increasing demand for steel in order to cater the needs of domestic market. The overall cost of the completion cost is Rs 8,692 Crores as expansion project-up gradation to 6.3 MT.


Objectives of the study: The main objectives of the study i.e. The Project Financing of the expansion plans are,( 3.0 MT to 6.3 MT), To study the cost incurred in developing a project. To know the sources of financing the project. To study how the project serves the company as a long-term Asset. To study the feasibility analysis of the project (expansion project) To study project appraisal of ongoing expansion plan.

Scope of the study: The study of the project finance will helpful to know the allocation of the financial resources and know how it is applicable to individual projects that any Organization takes up. The scope of our study ‘The project finance of “ongoing expansion plan” in steel plant is confined to that particular project(3.0 MT TO 6.3 MT). If the management wants to go further future plans it needs to conduct project appraisal again. They can not rely upon this report of the expansion plan and should make an exclusively new study for it. Methodology: Methodology is a systematic procedure of collecting information in order to analyze and verify a phenomenon. The collection of information is done through two principal sources. 1. Primary Data. 2. Secondary Data. 9

Primary Data It is the information collected directly from financial department for further studies, it was mainly through interviews with concerned officers and staff, either individually or collectively, sum of the information has been verified or supplemented with personal observation. The data collection includes: Conducting group seminars and with the concerned managers and officers of finance department of V.S.P.

Secondary Data This is taken from the annual reports, websites, company journals, magazines and other sources of information of steel plant. Limitations: Though the project is completed successfully a few limitations may be there. 1. Since the procedure and policies of the company will not allow to disclose confidential financial information, the project has to be completed with the available data given to us. 2. The period of study that is 6 weeks is not enough to conduct detailed study of the project. 3. The study is carried basing on the information and documents provided by the Organization and based on the interaction with the various employees of the respective departments.


Frame work of the study The study is organized into 8 Chapters. Chapter – I

Gives the introduction, need, objective and methodology of study.

Chapter –II

Focuses on the Indian Steel Industries.

Chapter –III

Profile of Visakhapatnam Steel Plant.

Chapter –IV

Project Evaluation

Chapter –V

Project Finance

Chapter –VI

Contain the summary Findings Suggestions.

Chapter –VII


Chapter –VIII



Steel Industry Steel is a versatile, constantly developing material that underpins all manufacturing activity. If a product is not made from steel, then it is certainly made using steel at some point in the manufacturing process. OVERVIEW OF IRON AND STEEL INDUSTRY HISTORICAL PERSPECTIVE The finished steel production in India has grown from a mere 1.1 million tonnes in 1951 to 29.27 million tonnes in 2000-2001. During the first two decades of planned economic development, i.e. 1950-60 and 1960-70, the average annual growth rate of steel production exceeded 8%. However, this growth rate could not be maintained in the following decades. During 1970-80, the growth rate in steel production came down to 5.7% per annum and picked up marginally to 6.4% per annum during 1980-90, which increased to 6.65% per annum during 1990-2000. Though India started steel production in 1911, steel exports from India began only in 1964. Exports in the first five years were mainly due to recession in the domestic iron and steel market. Once domestic demand revived, exports declined. India once again started exporting steel only in 1975 touching a figure of 1 million tonnes of pig iron export and 1.4 million tonnes of steel export in 1976-77. Thereafter, exports again declined to pick up only in 1991-92, when the main producers exported 3.87 lakhs tonnes, which rose to 2.79 million tonnes in 199596. The steel exports in 1999-2000 were 2.36 million tonnes and in 2000-01 it was 12

2.57 million tonnes. The growth in the steel sector in the earlier decades since Independence was mainly in the public sector units set up during this period. The situation has changed dramatically in the decade 1990-2000 with most of the growth originating in the private sector. The share of public sector and private sector in the production of steel during 1990-91 was 46% and 54% respectively, while during 2000-01 the same was 32% and 68% respectively. This change was brought about by deregulation and decontrol of the Indian iron and steel sector in 1991. A number of policy measures have been taken since 1991 for the growth and development of the Indian iron & steel sector. Some of the important steps are Removal of iron & steel industry from the list of industries reserved for the public sector and also exemption from the provisions of compulsory licensing under the Industries (Development & Regulation) Act, 1951, deregulation of price and distribution of iron & steel, inclusion of iron and steel industry in the list of high priority industries for automatic approval for foreign equity investments up to 74%, lowering of import duty on capital goods and raw materials etc. THE INDIAN STEEL SECTOR AFTER LIBERALISATION The Indian steel sector was the first core sector to be completely freed from the licensing regime and the pricing and distribution controls. This was done primarily because of the inherent strengths and capabilities demonstrated by the Indian iron and steel industry. During 1996-97, finished steel production shot up to 13

a record 22.72 million tonnes with a growth rate of 6.2%, while in 1997-98, the finished steel production increased to 23.37 million tonnes, which was 2.8% more than the previous year. The growth rate has drastically decreased in 1997-98 and 1998-99 being 2.8% and 1.9% respectively as compared to 20% in 1995-96 and 6.2% in 1996-97. The growth rate in 2000-2001 has improved to a healthy 9.60% with the total production touching 29.27 million tonnes. The production of finished steel during 2001-02 has been 30.61 million tonnes, which means a lower growth rate of about 4.5% compared to the previous year. This fall in the growth rate of steel production has been brought about by several factors that, inter-alia, include general slow down in the industrial production and construction activities in the country coupled with lack of growth in major steel consuming sectors. The total production of finished steel and the share of main and secondary producers during 90's and up to 2002-03 are given in the annexure. APPARENT CONSUMPTION OF STEEL Apparent consumption of steel is arrived at by subtracting export of steel from the total of domestic production and import of steel in the country. Change in stock is also adjusted in arriving at the consumption figures. It is also treated as the actual domestic demand of steel in the country. The year-wise apparent consumption of finished steel since 1990-91, is given in the table in the annexure.


In order to have a long-term perspective and planning, a Sub-Group on Steel and Ferro Alloys was constituted for steel sector under the aegis of Planning Commission. The Sub-Group deliberated upon all aspects including supplydemand projections for finished steel during the period 2001-02 to 2011-12. Considering a GDP growth rate of 6.5% as realistic during the 10 th Plan, the SubGroup has projected the demand for finished carbon steel in the country. The figures are given in enclosed chart. The iron and steel sector has experienced slow down from the year 1997 to 2001. The growth of the steel sector is dependent upon the growth of the economy in general and the growth of industrial production and infrastructure sectors in particular. The major reasons for the slow growth in the steel sector during the last few years include: (a)

Sluggish demand in the steel consuming sectors Steel being the basic raw material for the construction industry, the capital goods and engineering goods industry, as also the auto sector and white goods sector, its growth is dependent upon the demand for steel by these segments of the industry. Since no major infrastructure or construction projects have been implemented in the last few years, demand for steel has remained low. No major projects in the oil sector, power sector, fertilizer sector, where intensity of steel consumption is high, have come up in the recent past.


Overall economic slow down in the country. All major core sectors of the economy have been facing an economic slow down. These include, power, coal, cement, industry, mining and steel. The slow down phenomenon is 15

not restricted to the steel sector alone. Only when the overall economy of the country picks up, the steel sector would also show signs of revival. (c )

Lack of investment by Government/private sector in major infrastructure projects Due to budgetary constraints, no major construction activity in mega projects including fertilizer, power, coal, railways etc. have been planned by the Government. Despite liberalization of the economy and relaxation in the investment norms, private sector investment is yet to materialize in the core sectors of the economy. This has also contributed to slowing down demand for steel.


Cost escalation in the input materials for iron and steel Power tariff, freight rates, coal prices etc. have been under the administered price regime. These rates have been frequently enhanced, thereby contributing to the rise in input costs for steel making.


Continuous reduction in import duty on iron and steel. After liberalization, import duty rates on iron and steel items have been gradually reduced over the years. This has opened up the domestic iron and steel sector to international competition. Due to rationalization in the import duty structure in 1999- 2000, the rates of basic custom duty have generally gone up to about 35% average.

MARKET SCENARIO After liberalization, with huge scale addition to steel making capacity, there is no shortage of iron and steel materials in the country. Apparent consumption of steel increased from 14.84 million tonnes in 1991-92 to 27 million tonnes in 200116

02. During 2001-2002, due to economic slow down, certain sector like power and fertilizer projects, auto sector and white goods sector have shown a slump in demand for steel. Steel Industry has been facing a slow down in the level of demand due to slow down of the domestic economy and that of the major steelconsuming sector. Efforts are being made to boost demand particularly in rural areas and also to increase exports. Prices of iron and steel have declined in 200102 in tune with global trends, while input cost have gone up. However, of late, there has been resurgence in the price level mainly of flats and demand has also witnessed an upward trend. In 2003-2004 steel sector market demand increased mainly because of massive construction activity taken up in China. PRODUCTION Steel industry was de-licensed and decontrolled in 1991 and 1992 respectively. India is 8th largest producer of steel in the world. In 2001-02, finished steel production was 30.61 million tonnes. Pig iron production in 2001-02 was 3.95 million tonnes. Sponge iron production was 5.66 million tonnes in 1999-2000. In 2001-02, nearly 51% of crude steel production was by public sector the remaining 49% was by private sector. In 2001-02, the integrated steel plants produced 42% of finished steel and the remaining 58% was by the secondary producers. Interface with consumers by way of Steel Consumer Council exists, which is conducted on regular basis. Interface helps in redressing availability problems, complaints related to quality. 17

PRICING & DISTRIBUTION Price regulation of iron & steel was abolished on 16.1.1992. Distribution controls on iron & steel removed except 5 priority sectors, viz. Defence, Railways, Small Scale Industries Corporations, Exporters of Engineering Goods and North Eastern Region. Development Commissioner for Iron & Steel makes allocation to priority sectors. Government has no control over prices of iron & steel. Open Market Prices have been generally stable, though fluctuations have been noticed. Price increases of late have taken place mostly in long products than flat products. In the current financial year the long product prices have increased by about 20% because of raise in demand internationally. IMPORT AND EXPORT OF IRON AND STEEL India was importing about 10 to 15 lakh tonnes of steel, annually. Due to a rise in domestic demand, the import of saleable steel in 1996-97 reached a level of 1.80 million tonnes. The incidence of import was mainly in hot rolled coils, cold rolled coils and semis. Import of carbon steel during 2000-01 was about 1.41 million tonnes, which was about 12% less than the import in 1999-2000. The total imports of carbon steel during six years up to 2001-02 are given in enclosed chart. The Industry has been able to maintain its net exporter status from the last two years in the trading of finished steel. In fact exports of non-flat products


recorded a growth rate of 5.7% over 2000-01. The quantity of carbon steel exported from the year 1996-97 is as given in enclosed chart. Earlier, exports consisted mainly of plates, structural’s, bars and rods, whereas now additional items like semis, hot rolled coils, cold rolled coils, colour coated sheets, GP/GC sheets and pig iron are also being exported. In future, it is expected that the quantum of exports of more value added items would further increase. MEASURES ON IMPORTS Iron & Steel are freely importable as per the Exim Policy. India has been annually importing around 1.5 Million Tonnes of steel. Imports have largely dropped, partly an indication of greater self-sufficiency and partly the ability to control inflow of seconds and defectives. To check unbridled imports of cheap/seconds & defective steel, several measures have been put in place, like; The Government has fixed floor prices for seven items of finished steel viz. HR coils, HR sheets, CR coils, Tinplates. The other notable measure in this regard is that imports of certain types of steel have been subject to mandatory compliance of quality standards as specified by the Bureau of Indian Standards (BIS). Adherence to BIS norms imply supplying information like name and address of the importer, generic or common name of the commodity, net quantity in terms of standard units of weights and 19

measures, month and year of packaging and maximum retail sale price. Moreover all manufacturers/exporters of the listed products shall be required to register themselves with the BIS. Further protection in this regard has been the issuance of the Government notification to 3 major ports – Kolkata, Mumbai and Chennai to monitor the flow of foreign steel into the country. The customs duty on second and defective HR Coils has been raised to the bound rate of 40 per cent. Anti dumping duty has been levied on import of HR coils from Russia and Ukraine. MEASURES FOR EXPORT OF IRON & STEEL Iron & Steel are freely exportable and India is a net exporter of steel. Advance Licensing Scheme allows duty free import of raw materials for exports. Duty Exemption Pass Book Scheme also facilitates exports. Indian steel exports have been subject to anti-dumping/anti-subsidy duties actions by the stronger economies over the last few years. These include: Anti dumping duty on cut–to–size plate exports from Bhilai Steel Plant of SAIL with a total duty of 72.48 per cent, and an anti subsidy component of 14.82 per cent. India however, has been exempted from the safeguard duties under Section 201 of the US Trade Laws on almost all steel products except carbon flanges. This is on account of the country’s status as a developing nation. EU has also taken AD/CVD actions on import of HR coils. However, a Suspension 20

Agreement with exporters like SAIL allows the company to sell at a price not lower than the agreed one. The EU has also imposed safeguard duties for India; such measures apply on electrical steel sheets and stainless steel wire rods. Canada has covered pipes, hot rolled, cold rolled and galvanized products in the AD/CVD actions. China has recently imposed a safeguard duty on the import of steel, which ranges from 7-26%. The country-wise details are yet to be worked out. The rising trend in Indian steel exports that was being witnessed in the last couple of years was halted due to these anti dumping actions initiated by the advanced, developed nations of the world, which led to the loss of major markets for the Indian steel exporters. Despite the initial setbacks Indian exports have recovered - largely due to the ability to find out alternative export markets where selling steel has been profitable. Steel Exporters’ Forum has been recently set up to boost steel exports. An Anti dumping Directorate has been set up under the Ministry of Commerce & Industry with adequate power to fight trade actions while remaining within the WTO framework.



Peak rate of Custom Duty has been reduced sharply during last 5 years. In the Union Budget 2002-03 it has been further reduced to 30%. This has forced domestic industry to become internationally competitive. Custom Duty on seconds and defectives has been raised to the bound rate of 40%. Custom Duty has been reduced on a wide range of inputs, which would bring down the cost of production for the domestic steel industry. Custom Duty on Met Coke has been reduced to 5% for integrated steel plants using blast furnace, pig iron units and steel plants using Corex technology. Excise Duty Excise Duty on iron & steel has not been reduced in successive budgets. At present excise duty on all iron and steel products is 16% ad valorem called CENVAT. High excise duty has made domestic industry unviable.

LEVIES ON IRON & STEEL SDF- (Steel Development Fund) This was a levy started for funding modernization, expansion and development of steel sector. The Fund, inter-alia, supports: •




modernization, rehabilitation,


renewal & replacement of Integrated Steel Plants. •

Research & Development

Rebates to SSI Corporations 22


Expenditure on ERU of JPC

Fund was abolished on 21.4.94. Cabinet decided that Corpus could be recycled for loans to Main producers. Interest on loans to Main Producers be set aside for promotion of R&D. An Empowered Committee has been recently set up to guide the R&D effort in this sector. EGEAF This was a levy started for reimbursing the price differential cost of inputs used for engineering exporters. Fund was discontinued on 19.2.96. OPPORTUNITIES FOR GROWTH OF IRON AND STEEL The New Industrial Policy Regime The New Industrial policy has opened up the iron and steel sector for private investment by (a)

Removing it from the list of industries reserved for public sector and


Exempting it from compulsory licensing. Imports of foreign technology as well as foreign direct investment are freely permitted up to certain limits under an automatic route. Ministry of Steel plays the role of facilitator, providing broad directions and assistance to new and existing steel plants, in the liberalized scenario.

GLOBAL SCENARIO The global production of crude steel increased from 777 million tonnes in 1998 to 785 in 1999. The world steel consumption has also increased by 1%. The international steel trade constituted around 279.6 million tonnes or 39.8% of the 23

production. World steel industry witnessed major ups and downs in the last two decades and especially over the past five years. The pattern of trade has been upset by two important developments. These are the collapse of the Soviet Union and the severe financial crisis in most South East Asian countries as well as in Korea and Japan. The Asian crisis and the collapse of USSR have transformed importers of steel into exporters. Till the recent financial crisis, the Asian countries were large importers of steel. In 1996, eight of the ten largest steel producing nations were in Asia and import by the region in the mid 1990’s was around 80-90 million tonnes of finished and semi finished steel per year, which is equivalent of a third of total steel trade. After the Asian crisis, the region got transformed into a net exporter of steel. The world steel industry is today characterized by excess capacity and poor demand. This scenario has led to an undesirable impact in the form of increasing protectionism within the developed countries and large scale dumping in the international markets. During this year, Indian exports have been subjected to Anti- dumping/Counter-veiling duties investigations in EU, USA and Canada. There have also been instances of dumping of steel in our country. It is in this global context that the Indian steel industry will have to cast its future role. World production of crude steel in March 2003 rose by 8.2% to 79.6 million tonnes, the highest monthly total in over a decade. The total of the 3 months to date was 226.8 million tonnes, 8.8% higher than the January to March period in 2002.


World production of crude steel in March 2003 rose by 8.2% to 79.6 million tonnes, the highest monthly total in over a decade. The total of the 3 months to date was 226.8 million tonnes, 8.8% higher than the January to March period in 2002. In the former USSR, both Russia and the Ukraine showed an increase in steel production, up by 4.5% in Russia and 7.5% in the Ukraine. The 3 months total was up 6.3% in Russia to 14.7 million tonnes, while Ukrainian production increased by 10.5% to 8.7 million tonnes. Production in Kazakhstan, on the other hand, fell by 4.3% in March and by 0.3% in the three months to 1.2 million tonnes. Crude steel production in the USA is still rising, up by 5.4% in March 2003, bringing the first quarter total up by 6.5% to 23.1 million tonnes. Mexican production is also improving with March production up 21.4% and the 3 months total up 29.6% to 3.8 million tonnes, almost equal to the Spanish first quarter total. Canadian steel production, on the other hand, fell by 3.6% in March and by 3.5% in the year to date to 4.0 million tonnes. Steel imports by the USA have been falling with the total for the first two months of 2003 30% below the same period in 2002. In fact the February total was half the February 2002 total. Imports of blooms, billets and slabs were less than half what they were in the first two months of 2002. Total exports, on the


other hand, have risen, with the year to date 17% higher than in 2002. One of the largest rises was in hot rolled wide coil, which more than doubled in the first two months of 2003. Exports of hot rolled wide coil to Canada almost doubled in the first two months, and there was a very large tonnage exported to both China and Singapore in February 2003. Net shipments of steel reported by the AISI were 7.5% up in the two months at almost 16.5 million tonnes, with most of the increase going to the home market. In March 2002 the US President announced imposition of temporary safeguard measures on import of key steel products into USA. In retaliation to the US action EU has also imposed provisional safeguard measures against import certain steel products.

China, Canada and Thailand are some of the other

countries that have initiated safeguard investigations against import of steel products into their countries. On the pricing front the steel prices have been spiralling up especially since mid 2002 mainly due to the shortfall in supply. This can be attributed to the facts. •

Cessation of gas supply in Venezuela stopped about 6 million tonnes of annualized production of steel.

Ukraine has imposed export duty on scrap steel, which is a raw material.

There has been series of blast furnace outages in USA.

Shut down of many coking coalmines in China due to safety reasons.

Internal consumption of China has increased. 26

Global scrap prices increased

Capacity addition is not significant except in China.

US Dollar is weakening

The fascination for cheap steel has come down.

THE GROWTH PROFILE AFTER LIBERALISATION The liberalization of industrial policy and other initiatives taken by the Government have given a definite impetus for entry, participation and growth of the private sector in the steel industry. While the existing units are being modernized/expanded, a large number of new/Greenfield steel plants have also come up in different parts of the country based on modern, cost effective, state ofthe-art technologies. Increasing role of private sector in total production can be seen from the fact that its share has increased from 51.4% in 1991-92 to approximately 67% in 1998-99. This trend is likely to continue. At present, total (crude) steel making capacity is over 34 million tonnes and India, the 8 th largest producer of steel in the world, has to its credit, the capability to produce a variety of grades and that too, of international quality standards. As per the ratings of the prestigious " World Steel Dynamics", Indian HR Products are classified in the Tier II category quality products – a major reason behind their acceptance in the world market. EU, Japan have qualified for the top slot, while countries like South Korea, USA share the same class as India. 27

In pig iron also, the growth has been substantial. Prior to 1991, there was only one unit in the secondary sector. Post liberalization, the AIFIs have sanctioned 21 new projects with a total capacity of approx 3.9 million tonnes. Of these, 16 units have already been commissioned. The production of pig iron has also increased from 1.6 million tonnes in 1991-92 to 3.94 million tonnes in 200102. The share of Private/secondary sector has increased over time and is currently around 74% of total production. Considering the facts of current low levels of per-capita consumption in India, the huge potential for its increase and the estimated GDP growth, the steel industry is likely to have substantial growth in the medium to long term perspective.

Chapter-4 Profile of Visakhapatnam Steel Plant INTRODUCTION Steel occupies the foremost place among the materials in use today and pervades all walks of life.

All the key discoveries of the human genesis, for

instance, steam engine, railway, means of communication, automobile, aeroplane 28

and computers are in one way or other, fastened together with steel and with its sagacious and multifarious application steel is a versatile material with multitude of useful properties, making its indispensable for furthering and achieving continual growth of the economy be it construction, manufacturing, infrastructure or consumables. The level of steel consumption has long been regarded as an index on industrialisation and economic maturity attained by a country. At the time of independence India had only three integrated Steel Plants-Iron $ Steel Company at Burnpur, Tata Iron And Steel Company at Jamshedpur, Iron $ Steel Company in the erstwhile princely state of My sore. Keeping in view the importance of steel, the following integrated steel plants with foreign collaborations were set up in the public sector in the post-independence era.


Durgapur Steel Plant



Bhilai Steel Plant

Erstwhile USSR


Bokaro Steel Plant

Erstwhile USSR


Rourkela Steel Plant


BACKGROUND To meet the growing domestic needs of steel Government of India decided to set up an integrated steel plant at Vishakhapatnam. An agreement was signed with erstwhile USSR in 1979 for cooperation in setting up 3.4 MT integrated steel


plant at Vishakhapatnam. The foundation stone for the plant was laid by the then prime Minister on 20th January 1971. The project was estimated to cost Rs. 3897.22 Crores based on prices as on 4th quarter of 1981.

However on completion of construction and

commissioning of the whole plant in 1992, the cost escalated to around 8500 Cores. Visakhapatnam Steel Plant is one of the most modern steel plants in the country. The plant was dedicated to the nation on 1st August 1992 by the then Prime Minister Sri P.V. Narasimha Rao. New technology, large scale computerisation and automation etc are incorporated in the plant. To operate the plant at international levels and attain such labour productivity, the organisational manpower has been rationalised. The plant has a capacity of producing 3.0 MT of liquid steel and 2.656 MT of saleable steel. VSP TECHNOLOGY: STATE-OF-THE-ART

7 Metre tall Coke oven batteries with coke dry quenching

Biggest Blast furnaces in the country

Bell less top charging system in Blast furnace

100% slag granulation at the BF cast house.

Suppressed combustion – LD gas recovery system. 30

100% continuous casting of liquid steel.

“Tempcore” and “Stelmor” cooling process in LMMM & WRM.

Extensive waste heat recovery systems.

Comprehensive pollution control measures.

MAJOR SOURCE OF RAW MATERIALS Iron ore lumps and fines

Bailadilla, MP

BF lime stone

Jagayyapeta, AP

SMS lime stone

Jaisalmer, Rajasthan

BF Dolomite


SMS Dolomite

Madharam, AP

Manganese Ore

Chipurupalli, AP

Boiler coal

Talcher, Orissa

Coking coal


WATER SUPPLY Operational water requirement of 36 Mgd is being met from the Yeleru Supply scheme.



Operational power requirement of 180 to 200 MW is being met through Captive Power Plant. The capacity of the Power plant is 286.5 MW. VSP is exporting 60 MW power to APTRANSCO. MAJOR UNITS


Annual cap ‘000 T Units (3.0 MT stage) 3 Batteries each of 67 ovens and 7 Meter height 2 Sinter machines of 213 m2 grate area each

Coke ovens


Sinter Plant


Blast furnace


2 Furnaces of 3200 m3 volume each

Steel melt shop


3 LD converters each of 150 m3 volume and strand bloom casters



3 Stand finishing mill



2 x 10 stand finishing mill



6 stand finishing mill


By products


Granulate slag


Lime fines


Coal tar


Anthracene acid


HP Naphthalene 32







Wire rods

Wash oil Ammonium sulphate

THE VISION OF VSP CORPORATE PLAN OF VSP VISION To establish as an excellent corporate citizen and ensure optimal return on investment.

MISSION To become a 10 million tonne world class integrated steel plant by 2019-20. OBJECTIVES 

Towards growth – Expand the plant capacity to 6 MT by 2009-10, 8 MT by 2014-15 and 10 MT by 2018-19.

Towards Profitability – Achieve net profits continuously from 2002-03.

Towards Stakeholders – Make VSP the company of choice. 33

Towards Technology – Continuously upgrade technology to operate at international efficiency levels.

Towards Safety, Environment and Society – Continue efforts towards safety of employees, conservation of environment and be socially responsive.


Value foresight is crucial in today’s competitive businesses climate VSP values 


Customer satisfaction

Continuous improvement

Concern for environment

MARKETING NETWORK The Company markets its products through headquarters marketing office and a network of regional offices, branch offices and stockyards located all over the country. It also takes the help of consignment agents and consignment sales agents for the marketing of its products. The exports are carried out by the export wing of marketing division with the help of different agencies. The Company is recognised as “Star Trading House” by the Director General of Foreign Trade, Ministry of commerce, Government of India.


The end users of the steel products manufactured at the plant include amongst other construction industry, automobile industry, engineering industry, re-rolling industry, forging industry, cable industry, wire drawing industry, fastener industry, electrode manufacturers and railways. The Company is ideally located to serve the southern Indian market. Regional Mangers/Branch managers meet at Head quarters regularly to assess the market situation and decide market strategies.


HISTORY In the industrial horizon of India, Rashtriya Ispat Nigam Ltd., (VSP),

Visakhapatnam Steel Plant (VSP) stands as a monument of advanced technology. VSP is the first shore based integrated Steel Plant in the country. The decision of Government of India to set up an integrated steel plant at Visakhapatnam was announced by the Prime Minister Smt. Indira Gandhi in Parliament on 17th April, 1970 followed by foundation stone laying by her. The initial project cost was sanctioned at Rs. 2256 Crores with an Internal Rate of 35

Return (IRR) 4.20%. The Indian government and USSR signed an agreement on 12th June 1979 for cooperation in setting up the 3.4 million tonne integrated steel plant at Visakhapatnam. Thereafter the project has undergone three revisions as detailed below. First revision

Second revision

Third revision




Capital asset.

Rs. 3897.28 Cr.

Rs. 6849.70 Cr.

Rs. 8593.29 Cr.

Financial IRR







Date of sanction by GOI

Liquid steel capacity (in MT per annum)

The broad reasons for revisions were: (1)

Non-availability of funds on time


Price escalation


Enhanced currency exchange rates


Revision in taxes and duties


Change in ocean freight.


Inadequate fund flow & its delay


Midway revision of project concept




Dislocation of Soviet equipment suppliers


Delay in supplies made by major PSUs.


Delay in providing water by AP Government

RATIONALISED CONCEPT The construction of the plant started in 1981 and scheduled to be

completed in 4 to 6 years in two stages. However, due to inadequate funds availability, there was a threat to project continuance. In order to contain project cost, a Rationalised Project Concept was evolved where while retaining the Hot Metal capacity, the liquid steel capacity was brought down to 3.0 MT from 3.4 MT by dropping one SMS converter and up rating the capacity of other converter. Further on the finishing line, Universal Beam Mill was dropped. The Rationalised Concept helped in reducing the project cost by Rs. 1497 Crores. Details of major production facilities under original concept and revised concept are given at annexure. The plant was commissioned in two stages. The 1 st BF viz., ‘Godavari’ was commissioned in March 1990. The 2 nd BF viz ‘Krishna’ was commissioned in March 1992 and finally the plant was dedicated to the Nation by the then Honourable Prime Minister Sri PV Narasimha Rao in August 1992.



FIRST CAPITAL RESTRUCTURE Long gestation period in commissioning the plant and escalation of the project cost to Rs. 8593.29 Crores







necessitated capital restructuring, in order to ensure viability and to prevent from becoming potentially sick under Sick Industrial Company (Special Provisions) Act 1985.

Action was taken for restructuring the capital base even before the

Company became totally commercially operational. The first capital restructuring took place in July 1993. SALIENT FEATURES

Conversion of Rs. 1184 Crores Government of India loans into Equity Capital.

Conversion of Rs. 1185 Crores Government of India loans into 7% non-cumulative preference shares redeemable at the end of 10 years.

Conversion of Rs. 791 Crores interest due on Government of India loans into interest free loans for a period of 7 years.

Conversion of GOI loans receivable in 1992-93 into 7% noncumulative preference shares redeemable at the end of 10 years


from the date of allotment (Rs. 419 Crores released after 31 st July 1992).

Conversion of GOI loans receivable in 1993-94 into Preference Shares to be decided after review.

Waiver of penal interest that becomes due up to July 1992 (Rs. 149.40 Crores).

Government of India ensures funds (RS. 1507 Crores) in the plan period for the project.


Reduction of loss by Rs. 432.47 Crores annually on account of interest saving due to conversion of loans to equity capital, Preference Capital and Interest free loan.

Reduction of loss by Rs. 149.40 Crores on account of interest saving due to waiver of penal interest.


SECOND CAPITAL RESTRUCTURE Owing to historical capital burden, long gestation period in the


of the








commissioning, the general recession set in Steel Industry from mid 1996, the Company continued to incur net loses and getting close to erosion of 50% of net-


worth of the Company. At this stage, to avoid a situation of reporting a technically viable integrated steel plant to BIFR, a second capital restructuring was sanctioned by the Government. The second capital restructuring was approved in May 1998, whereby Rs. 542.47 Crores of Government loan was converted into 7% non-cumulative preference share capital redeemable after ten years from the date of release of these loans. Further, conversion of Rs. 791 Crores interest free loan to 7% noncumulative preference capital was also agreed to.

Benefits from this capital

restructuring was a reduction of loss by Rs. 235.85 Crores on account of interest saving and an annual interest saving of Rs. 88.47 Crores.

While approving

second capital restructure, government of India-Inter-alia desired to appoint a financial consultant of repute to suggest a turnaround strategy for the organisation. e)

FINANCIAL AND PHYSICAL PERFORMANCE FINANCIAL PERFORMANCE The financial performance of the organisation against the set targets right

from 1990-91 to 2002-03 is placed at Annexure. From this table it can be seen that the Company was gaining considerable gross margin which reflects the satisfactory performance of the plant for all the years except during the year 199899 and 1999-2000 when there was a major set back to Coke ovens. Further it


had also secured reasonable cash profits barring those two years and initial period up to 1992-94. The Company had again gained its momentum during 2000-01 when it made cash profit of Rs. 153 Crores and turned around during the year 2002-03 making a Net Profit of around Rs. 520crores for the first time. During the last few years, the Company had taken a number of steps like major capital repairs to Coke ovens, BF capital repairs, austerity measures to cut down the cost, restrictions on capital expenditure etc.

It may need a special mention that a

special drive took place to cut down the interest cost on term loans and working capital arrangements.

PHYSICAL PERFORMANCE The details of physical performance as against the targets set right from 1990-91 to 2002-03 are placed at annexure. From the table it can be seen that the targets set were reasonably met by the organisation, up to 1999-2000 and far exceeded the targets from the year 2000-01 onwards.



The Company turned around during the year 2002-03, making for first time Net Profit of Rs. 520 Crores, achieving Gross sales/turnover of Rs. 5059 Crores. The financial year 2002-03 is a happy note in VSP’s diary because of its remarkable performance in all fronts. On the production front, the Company far exceeded the targets set. The performance of the Company for the year 2002-03 is placed at Annexure. At the beginning of the financial year 2002-03, the Company was having total term loans to the tune of Rs. 1373.98 Crores. UTI (Rs. 590.29 Crores, LIC Rs. 580.80 Crores and Bonds Rs. 175 Crores) are the major outstanding. Apart from this the utilisation of working capital limits from the banks were Rs. 600 Crores (CC Rs. 96 Crores, WODL Rs. 395 Crores in the form of FCNR (B) DL Rs. 267 cores, DCDL Rs. 128 Crores and EPC Rs. 109 Crores). Taking advantage of falling interest rates, dynamism prevailing in the financial market, strong economic factors with reference to country’s strengthened foreign currency reserves; appreciation of rupee with reference to USD in the later part of the year, the Company has taken several initiatives to reduce the debt burden. STEPS TAKEN TO REDUCE DEBT BURDEN The significant steps taken by the Company to reduce debt burden include restructuring of dept through prepayment of high interest loans out of internal 42

resources, swapping of high cost loans with borrowings from banks at lower interest rates, swapping off high cost working capital demand loans with FCNR borrowings and commercial paper at cheaper rates of interest. The Company due to the above initiatives could prepay the entire term loan of Rs. 590 Crores from UTI during the year 2002-03 from out of internal resources and by swapping with bank loans. 15% working capital demand loan of Rs. 400 Crores was also substituted with commercial paper with an average interest rate of 7% and FCNR demand loan at an average interest rate of 3.4% to 10.09T. The above steps resulted in brining down outstanding term loans to Rs. 773.37 Crores as at the end of the year 2002-03 (debt free on date) and utilisation of working capital to the extent of only Rs. 368 Crores. The above steps resulted in containing the interest expenditure to Rs. 135 Crores for the year 2002-03 as against the previous year level of Rs. 290 Crores as shown in Annexure.


Hot metal 2943 3165

Liquid steel

Saleable steel




2507 43


























production performance 4500 4000 3500 3000 2500 2000 1500 1000 500 0

Hot metal Liquid steel Saleable steel

1999- 2000- 2001- 2002- 20032005- 20062000 01 02 03 04 2004- 06 07 05 years


Sales turnover

Domestic sales







































commercial performance


10000 9000 8000 7000 6000

Sales turnover Domestic sales

5000 4000 3000 2000 1000


0 19 9900

20 0001

20 0102

20 0203

20 0304

20 0405

20 0506

20 0607

20 0708



FINANCIAL PERFORMANCE (rs. In crs) Gross margin Cash profit Net profit 1999-00 252 -130 2000-01 504 153 2001-02 690 400

-562 - 291 -75 45

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

1049 2073 3271 2383 2632 3001

915 2024 3260 2355 2584 2977

521 1547 2008 1251 2222 2686

Financial performance 3500 3000 2500 values


Gross margin


Cash profit


Net profit

500 0 -500 -1000

1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 200700 01 02 03 04 05 06 07 08 years


POLLUTION CONTROL AND ENVIRONMENTAL PROTECTION Generally, integrated steel plant is seen as a major contributor to

environmental pollution as it discharges a large volume of waste products. Elaborate measures have been adopted to combat air and water pollution in VSP. In order to be eco friendly, VSP has planted more than 3 million trees over an area of 35 square Kms. and incorporated various technologies at a cost of Rs. 460 Crores towards pollution control measures. c)


Human resource initiatives at VSP are clearly linked to the corporate strategy of the organisation. VSP has exemplary industrial relations where the entire workforce works as a well knit team for the progress of the Company. The productive environment prevailing in the Company fosters an atmosphere of growth, both for the employees and for the Company. VSP has introduced multi skilling concept since inception and the employees are trained as per this concept. VSP has adopted a system of overlapping shifts, the first of its kind, in the industry.

This system ensures smooth change over of the shifts and

uninterrupted peace of operation of the plant during the shift change over. Another unique feature followed at VSP is the uniform working hours for the ministerial employees. i) TRAINING AND HUMAN RESOURCE DEVELOPMENT Training and HRD are given due emphasis at VSP. Each year, a minimum of 1/3rd of the employees undergo various training sessions either at Training and Development Centre or at Centre for HRD for sharpening their skills on the technical and management related issues. Training is also given in the area of safety, fire prevention, occupational health besides on the job at the shop floor. ii) WELFARE AMENITIES The welfare measures provided for the employees of the Company are the best in the industry. A modern township with all amenities has been developed 47

with 8032 quarters to house the plant employees and other government agencies in 11 sectors. The township is having best facilities in terms of drinking water supply, drainage system, roads, community centres, crèche, parks, schools, shopping complexes, medical facilities, recreational facilities, etc to cater to the needs of the employees and their dependent families.

The Company also

provides welfare facilities much beyond the statutory requirements by way of introduction of a unique superannuation benefit fund and a unique family benefit scheme. d)

ACHIEVEMENT AND AWARDS The efforts of VSP have been recognised in various forums. Some of the

major awards received by VSP are in the area of the energy conservation, environment protection, safety, quality, quality circles, Rajbhasha, MoU, sports related awards and a number of awards at the individual level. Some of the important awards received by VSP are indicated below. 

ISO 9001 for SMS and all the downstream units – a unique distinction in the Indian Steel Industry.

CII (Southern Region) Energy conservation award in 1995-96.

Gold star award for excellent performance in productivity.

Best Labour Management award from the government of AP.

SCOPE award for best turn around from 2001.

Best Enterprise award from SCOPE, WIPS for 2001-02.

Prime Minister’s trophy for 2002-03. 48


MoU excellence award for 2003-04.

Total quality, latest technology, sophisticated equipment, up to date knowledge, high skills, cost consciousness, production with less cost and customer satisfaction have become the hallmark of VSP.

Today, VSP is moving forward with an air of confidence and with pride amongst its employees who are determined to give their best for the Company to enable it to reach new heights in organisational excellence.




Capital budgeting is a complex process, which may be divided into six broad phases: Planning, Analysis, Selection, Financing, Implementation, and Review. The following chart shows the relationship among these phases








Project Planning The planning of a project is a technically pre-determined set of interrelated activities involving the effective use of given material, human, technological and financial resources over a given period of time. Which in association with other development projects result in the achievement of certain predetermined objectives such as the production of specified goods & services. Project planning is spread over a period of time and is not a one shot activity. The important stages in the life of a project are: • It’s identification • It’s initial formulation • It’s evaluation (whether to select or to reject). • it’s final formulation • It’s implementation. • It’s completion and operation (Management and control to ensure targeted benefits). The time taken for the entire process is the gestation period of the project. Contents of Project report: 1. Market and marketing. 2. Size of the project. 3. Project engineering dealing with technical aspects of the project. 4. Location and layout of the project building. 5. Building. 6. Production capacity. 7. Work schedule.


Details of the cost of the Project:

1. Cost of Land. 2. Cost of Building. 3. Cost of Research and Developing. 4. Cost of Plant & Machinery. 5. Cost of Furniture and Fittings. 6. Profitability of Projects. 7. Organisational Structure. 8. Proposed Financing of the Project.


At present Vizag Steel Plant is producing 3.5 million Tonnes of liquid steel. VSP wants to expand its plant capacity to 10 million Tonnes per year by 2020. Now it is in ongoing expansion plan by increasing its capacity from 3.0 MT Stage to 6.3 MT stage in order to cater the needs of the domestic market and inturn contributing for the growth of gross domestic product rate.VSP aiming to produce at international standards of cost and quality ; and to meet the aspirations of the stakeholders. In VSP there are three coke oven batteries they produce the required coke for steel production in VSP. Due to the expansion of the plant the three coke oven batteries, existing rolling mills, steel melt shop are not sufficient. The planning for the expansion project is very essential in order to complete the project in given time. Without proper planning of the material, human and technological resources the project cannot be completed efficiently. The detailed project report helps in estimating requirements of the project and completing the project systematically. Project analyzing After the primary stages of screening, the analysis of the market, technical, financial, economic and ecological aspects are to be taken up. The focus of this phase of capital budgeting is on gathering, preparing and summarizing relevant information about various project proposals. Based on the information developed in this analysis, the stream of costs and benefits associated with the project can be defined.

Project Appraisal In the project cycle, preliminary establishment precedes the project appraisal proposed to be achieved through implementation of a project. The appraisal of an investment proposal needs to examine the following aspects: 54

 Demand and supply analysis to determine the gap and whether product specifications, market plan and delivery system are soundly conceived, for preferably through market surveys and/or other reliable forecasts of demand and supply of products/services proposed to be produced by project under consideration. In the case of an export oriented pr4oject export potential of products/services would need to be assessed.  Technical analysis to determine whether the specifications of technical parameters chosen realistic and optimal.  Organisational and managerial aspects to determine whether the Organisation has the managerial capability to implement and operate the project, the preparedness to execute the project including implementation plans, “PERT/CPM” chart/activity taking in to account the projects that are already being implemented by the concerned agency and resources required for implementing the project.  Environmental aspects to ensure that the environment related issues such as protective measures, rehabilitation, resettlement etc as may be required as per environmental guidelines have been fully covered in the project cost estimates.  Financial analysis to determine whether financial costs are properly estimated, funding is assure and the project is financially viable.  Economic analysis to determine whether the project is worthwhile from the point of view of the economy as a whole.  Sensitivity / Risk analysis to assess the impact of different variables of input and output on the viability of the project is carried out which can suggest potential management activity to reduce overall project risk.

Capital investment decisions are a firm’s decisions to acquire long term assets. They involve large capital expenditure, and have considerable effect on the firm’s


growth and profitability. The firm’s investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets.

The three steps involved in the evaluation of an investment or project. 1. Estimation of cash flows. 2. Estimation of required rate of return. 3. Application of a decision rule for making the choice. An analysis of cash flows is useful for short run planning firm needs sufficient cash to pay debts maturing in the near future, to pay interest and other expenses and to pay dividends to shareholders. The firm can make projections of cash inflows and outflows for the near future to determine the availability of cash. This balance can be matched with the firm’s need for cash during the period and accordingly arrangements can be made to meet the deficit or invest the surplus cash. The investment decision rules may be referred to as ‘capital budgeting techniques’ or ‘investment criteria’. A sound appraisal technique should be used to measure the economic worth of an investment project. The essential property of a sound technique is that it should maximise the shareholder’s wealth. The following other characteristics should also be possessed by a sound investment evaluation criterion. ♦It should consider all cash flows to determine the time profitability of the project. ♦It should provide for an objective and unambiguous way of separating good projects from bad projects. ♦It should help ranking of projects according to their time profitability. ♦It should recognize the fact that bigger cash flows are preferable to smaller and early cash flow.


♦It should help to choose among mutually exclusive projects, those projects that maximise the shareholder’s wealth. ♦It should be a criterion, which is applicable to any conceivable investment project independent of others. Familiarity with the capital budgeting techniques will facilitate an easier understanding of costs and benefits risk analysis and cost of capital. Economists, Accountants, and others have suggested more than thirty criteria to judge the worthwhileness of the capital project. Some techniques are general and applicable to wide range of projects and some are specialized and suitable for certain types of investments and industries. The investment criteria or techniques are classified into two broad categories1.Discounting criteria a. Net present value β b. Internal rate of return c. Profitability index d. Net operating benefits per unit of investment method 2.Non discounting criteria a. pay back period b. Accounting rate of return c. Debt-service coverage ratio d. Cost effectiveness analysis 1. NET PRESENT VALUE: N.P.V is a modern method of evaluating investment proposals. This method takes into account the time value of money and calculates the return on investment by introducing the factor of time element, i.e. NPV recognizes the fact that a rupee earned today is worth more than a rupee tomorrow. The net 57

present value criterion has a sound rationale underlying in it, it represents the net benefit over and above compensation for time and risk. The NPV of a project is the sum of the present values of all the cash flows, which is either positive or negative that are expected to occur over the life of the project. n NPV of a project = ∑

Ct --------t=1 (1+r)

Here, Ct = cash flow at the end of year t n = life of the project t = discount rate 2. INTERNAL RATE OF RETURN: Internal rate of return is also a method that uses the concept of time value of money. The internal rate of return of a project is the discounted rate, which makes It’s NPV equal to zero. IRR equates the present value of future cash flows with the initial investment. IRR is also known as time adjusted return, trail & error yield method. In the NPV calculation we assume that the discount rate is known and determine the NPV, but in the case of IRR we set the NPV equal to zero and determine the discount rate that satisfies this condition.

n Ct IRR = ∑ ---------- = 0. t=1 (1+r)t This can also be calculated by knowing the initial investment, cash outflow,

C1 - C0 58



Here, C0 is the initial investment and C1 is the cash outflow, R is the rate of return. A project is accepted if IRR is greater than the cost of capital and is rejected if thee IRR is less than the cost of capital.


Profitability index method is used to evaluate the investment proposal. It is the ratio of the present value of cash inflows, at the required rate of return, to the initial cash outflows of the investment.

n PI


∑ t=1

Ct ----------(1+k)t



NPV/IRR methods are quite useful when project resource are unlimited. When resource constraint that time Net Operating Benefit Method will use.

PV/K =

N Bt N OCt ∑ ---------- - ∑ -------------t=1 (1+k)t t=1 (1+k)t -----------------------------------------------------N





Bt = Benefits in year t OCt = Operating costs in year t It

= Investment in year t

5. BENEFIT COST RATIO: It is of paramount importance for the finance manager to access the benefits that the firm will accrue by taking up a certain project and the costs that are involved. If the benefits are much more than the costs then the projects are desirable and if the costs are very large with the benefits meager, the projects become undesirable.

PVB 60

Benefit cost ratio =


Where, PVB is the present value of the benefits. It is the initial investment.

6. PAYBACK PERIOD: The payback period is the length of the time required to recover the initial cash outlay on the project. According to the payback criterion, the shorter the period of payback, more is the desirability of the project. Firms using this criterion specify the maximum acceptable payback period. If ‘n’ is the number of years that is fixed by the firm, the payback period less than ‘n’ is desirable and the projects with payback period exceeding ‘n’ is undesirable.

The payback period does not take in to consideration the time value of money, so this conventional technique is modified as ‘Discounted Payback Period’, which converts the cash flows in to the present values. The Payback period is a popular method in practice as it is simple helps to tackle risk and focuses on liquidity. The payback period however suffers serious drawbacks, ��� It does not recognize the time value of money. It gives equal weight to the cash flows occurring over different periods of time. • It is not a measure of profitability. It does not consider all cash flows of the project. 61

• It can be misleading since it ignores cash flows after the payback period. Between two projects, it will accept the project with a shorter period, even if the excluded project generates larger cash flows after the payback period.

7. ACCOUNTING RATE OF RETURN The accounting rate of return or average rate of return on investment, is a measure of profitability, which relates income to investment both measured in accounting terms. ARR is calculated on the basis of average income over the life of the project. If the ARR is calculated for each year using the expected net income the following generalizations can be made: 1. The accounting rate of return tends to understate the internal rate of return for earlier years and over state for the later years. 2. The ARR and the IRR can be the same if the depreciation schedule is equal to the economic depreciation schedule. 3. Inflation and creative accounting tend to create a discrepancy between the accounting rate of return and internal rate of return. Average income after tax ARR


--------------------------------Initial investment

In this method a project is accepted if the ARR is higher than the minimum rate established by the management and reject those projects which have ARR less than the minimum rate. This method would rank a project as number


one if it has highest ARR and lowest rank would be assigned to the project with lowest ARR. The ARR can be readily calculated from the accounting data and this rule incorporates the entire stream of income in calculating the project’s profitability.

8. DEBT SERVICE COVERAGE RATIO (DSCR) Projects are generally financed in a certain debt and equity ratio. The equity is contributed by the promoters of the project and /or by the public if the Organisation is government owned. While the debt is financed by various financial institutes and banks. The various evaluation techniques like NPV, IRR, Payback etc do not give adequate ranking of the project in case it is debt financed. “DSCR is the annual net project cash flow after tax divide by the annual principal plus interest charges”. The banks/financial institutions would finance the debt portion of the project cost, if this ratio exceeds 1.5 on the average for the duration of debt repayment. If the ratio exceeds 3 to 4, the project would be attractive and it would be financed by venture capitalist

Cost Effective Analysis In the cost effectiveness analysis the project selection or technological choice, only the costs of two or more alternative choices are considered treating the benefits as identical. This approach is used when the question of how to minimize the costs for undertaking an activity at a given discount rates.


In case the benefits and operating costs are given, one can minimize the capital cost to obtain a given discount.

Project Selection The selection of a project involves a large number of techniques that judge whether the project is worthwhile or not. The discounting techniques like NPV, Internal rate of return and cost benefit ratio are considered. The non-discounting techniques like payback period and accounting rate of return are also considered. The management fixes the cut-off values. The Visakhapatnam Steel Plant has two alternatives in selecting the project. 1. To establish the expansion plant i.e up gradation to 6.3 MT 2. To continue with existing production capacity. Proper project appraisal to be done for expansion projects otherwise it leads to problems. In order to accomplish its vision and mission statements and to meet aspirations of the stake holders, VSP has to go for expansion plans subsequently. VSP will enhance the volume of production in long products segment in view of brand image. In order to diversify the product mix and help reduce the dependence on import of pipes in oil and gas sector, a seamless pipe mill is envisaged.



Project financing is considered right from the time of the conception of the project. The proposal of the project progresses working capital. So, in general a project is considered as a ‘mini firm’ which is a part and parcel of the Organisation. Sources of project financing

Equity capital

debt capital

Equity share capital

Term loans

Preference share capital


Internal accruals

W.C advances Misc.sources

EQUITY SHARE CAPITAL:Equity shareholders are the real owners of the company whose ownership is limited only to their capital contributions unlike partnership firms and sole-trading concerns. They bear the risks of ownership and enjoy rewards accordingly. Equity share capital may be Authorized, Issued, Subscribed,Called up & paid up capital. The amount of capital that a company can issue as per its Memorandum of Association is called “Authorized capital”. The amount of share capital being offered by the company to investors (public private or both) is called “Issued capital”. It may be to the full extent of or part of the Authorized capital. That part of the Subscribed capital for which the company has given a call to the investors for the payment of the share money is called “Call-up capital”. That part of the Issued capital which has been subscribed by the investors is called 66

“Subscribed capital”. That part of the call up capital which has been paid up by the investors actually is called “Paid up capital”. The terminology used in the context of share capital is par value, issue price, book value & market value. Par value is the price of a share mentioned in the Memorandum of Association and written on the share scrip. Issue price is the price at which the share are issued. It may be equal to par or Face value or Higher than premium or lower than discount the part value. The book value of a share(Equity)is equal to Paid up equity share capital + Reserves – intangible assets Number of Outstanding equity shares Rights of Equity shareholders  Right to Income  Right to control  Pre-emptive Right  Right in liquidation Advantages of Equity capital: 1. No compulsion to pay dividends to the Equity shareholders. 2. No obligations on part of the company to redeem as equity shares have no maturity date. 3. Other things being constant, higher the equity base of the company, higher is its credit-worthiness. Disadvantages of Equity capital : 1. Public issue and private placement leads to the dilution of control of existing Equity shareholders.


2. Cost of Equity share capital is higher than that of other investors since Equity shareholders bear the highest risk. The higher the risk, the larger the return they expect. 3. Cost of issuing Equity shares which includes brokerage, underwriting commission etc.., is higher than that involve in issuing the securities. PREFERENCES SHARE CAPITAL: Preference shareholders get preference in the form of priority given to them while making dividend is fixed and the preference shareholders do not enjoy the voting rights on any resolution places before the company. In any year if the company is unable to pay preference dividends, The arrears will be carried forward to the next year. In the next year, cumulative preference dividend is paid. It is clear that unless the company pays the cumulative preference dividends along with the arrears the company cannot declare equity dividends. Normally preference shares are redeemed after 10 to 15 years. Advantages: 1. Company can skip preference dividend and pay in the next year. 2. Preference capital enhance the credit worthiness of the company. 3. No dilutions of control as preference shareholders do not carry any voting rights. 4. No collateral pledge in favour of preference shareholders. Disadvantages: 1. It is costlier sources of financing when compared to debt capital because unlike interest payments, preference dividends are not deductible. 2. As there is skipping of dividends in one year, it can be adversely affect the reputation of the company. If the company skips the dividends for three year. it has to give voting right to the preference shareholders.


INTERNAL ACCURALS: A part from equity share capital and preference share capital, internal accruals are also one form of long term sources of project financing. Internal accruals consist of depreciation charges and retained earnings. Since depreciation is a periodic write off of a capital expenditure of an asset in beginning, it is also a long term internal sources of financing a product. On the other hand, retained earnings are that portion of the profit after tax minus preference dividend which is ploughed back in the company. Retained earnings are also known as internal Equity. Generally in India, companies retain 30% to80% profit after tax less preference dividend. Advantages: 1. This source is readily available for which company need not consult either shareholders or lenders. 2. No need of any issue cost to be bleared 3. No dilution of control as there will not be any increase in the number of shareholders. Disadvantages: 1. Limitation on the funds available by the way of internal accruals. 2. If there is ploughing back of profits through retained earings,there is opportunity cost of capital by the way of dividends for the by equity share holders. TERM LOANS: Sources of long term project financing, are the long term loans given by financial institutions and banks to the companies to be repayable in less than 10 years. It is a form of debt financing. Term loans are generally used for financing fixed assets and long term working capital needs. They differ from short term bank loans which are employed for financing short term assets and short term working capital needs. Financial institutions grant Rupee term loans as well as foreign 69

currency term loans. Term loans are secured by first Equitable mortgage of all immovable properties or assets of the company. Normally in case of default of the interest and principal payments by the borrower, the borrower has to pay penalty in the form of additional interest of 2% p.a.for the period of default on the amount of principal in default. Term loans are subject to the levy of upfront fee of 1% on the loan amount sanctioned. DEBENTURES: Debentures are the debt financing instruments issued by large companies. These are the long term debt instruments having the similar features to those of ordinary debt. The company as to pay interest and principal instalment at the specified regular times without fail. Debentures offer greater flexibility with respect to date of maturity, rate of interest, repayment etc., when compared to term loans. In India, generally, debentures are secured by mortgage on the immovable asset and a floating charge on the other assets of the company. Debentures may be medium term having the maturity of 1 to 5 years or long term having the maturity period of 5 to 12 years. Debentures, sometimes, may have the “Call” or “put” options. As per the companies Act if the debentures are issued, a trustee, which may be a bank or financial institution or insurance company, is appointed to ensure that the company fulfils all the contractual obligations. Contemporary types of debentures:  Deep discount bonds  Convertible debentures  Floating rate bonds  Secured premium notes  Indexed bonds  Privately placed debentures Advantages: 70

1. Interest on debt is tax-deductible. 2. No dilution of control. 3. Cost of issuing debt is lower than that of equity capital. 4. Provides protection against high unanticipated inflation as the interest charges are once per all fixed in nominal terms. Disadvantages: 1. Increase financial leverage which in turn raises the cost of Equity as per CAPM model. 2. Debt imposes restrictions on limit of the company’s borrowings. 3. The real cost of debt will be greater than the expected value in case of low inflation. WORKING CAPITAL ADVANCES: These are the short term advances granted by commercial banks in three ways namely cash credit, loans, purchase/ discount of bills and letter of credit. Cash credit: Cash credit is the overdraft agreement made by a bank for the purpose of borrowing by the customer. The borrower can draw the amount as often as required provided the amount does not exceed cash credit limit. Interest is charged only on the running balance but not on the limit sanctioned. The borrower is very much interest in this type of loan as he can withdraw amount as and when he requires and pays interest only on the amount he has withdrawn. However for availing this facility, the borrower has to pay some minimum charges irrespective of the level of borrowing.

Loans: 71

Loans are the short term loans granted by the commercial banks and the interest is repayable on the whole loan amount sanctioned unlike cash credit agreement. They are disbursed either on demand or in periodical instalments. Purchase/discount of Bills: Discount of bills is the bill of exchange having the maturity period of 90 days. It may be clean bill or documentary bill. The seller of goods draws the bill and sends it to the purchaser for acceptance. Once it is accepted by the purchaser, it is to be received back by the seller. The seller, if he needs money before the maturity date encashes or discounts the bill with any commercial bank. Later on the purchaser pays the amount of bill to the bank on the due date. So here the commercial banks finance the bill to the seller on behalf of the purchaser. Letter of credit: Letter of credit is the form of advances granted by a bank in favour of his customer. Generally it is useful in case of foreign trade. On behalf of importer, the bank of the importer pays the due amount to the exporter and later on collects the amount from the customer. OTHER SOURCES: I) DEFERRED CREDIT: It is the credit provided by the supplier of materials to the buyer so that the latter can make the payment over a period of time.Generally,the supplier provides these facility if there is bank’s guarantee furnished by the buyer. The rate of interest charged by the supplier will be high. This type of finance is short term in nature normally.



It is a type of debt finance wherein two persons have the contractual agreement stating that one person gives the right to use his asset/machinery to another person for periodic rental payments. The person who grants the right is called “Lessor” and the person who uses the asset is called “Lessee”. The two types of lease are available namely finance lease and operating lease. III) HIRE PURCHASE: It is also a contractual agreement between to persons wherein one person purchase the asset and gives it on hire to the another person per some periodic payments of instalments. The instalments cover interest as well as principal. At the end of the payment of the last instalments to the hirer, the hirer gets the title of the ownership of the asset. For the calculation of installments,the hirer follows “the sum of the years digits method” so that the total interest is allocated over the years fairly. IV) COMMERCIAL PAPERS: These are the short term unsecured promissory notes issued by the highly credit rated companies having a very high financial strength, they are having the maturity period ranging from 90 to 270 days. They are usually issued at discount ,reflecting

prevailing interest rates in the market.

Commercial paper is not backed by any collateral security. Before issuing commercial papers ,the company need not register them with The Securities and Exchange Commission (SEC).These commercial papers can be issued for financing only current assets but not fixed assets without SEC’s permission. They are zero coupon debt instruments but have higher yields than other money market instruments.


It is the process of financing that of a companies arising from credit sales. The factor takes the responsibility on behalf the company of collection of outstanding amounts from the customers arising out of credit sales. It charges some commission of 1 to 2% of the face value of the debt for providing this service. Generally, factor advances around 70 to 80% of the book debt to the client company and charges a rate of interest which is typically higher than the lending rate of commercial banks. In case of recourse factoring, the client has to bear the loss in case of default by the customers. On the other hand, in case of non-recourse factoring, the risk is borne by the factor. In India recourse factoring is prevalent. Factoring is an useful short term sources of finance. BRIDGE FINANCE: This a temporary loan meant for tying up the cost of the project. The necessity for bridge finance arises in situations where finance from particular sources is being delayed. However, the availability of finance from that source is certain. SOURCES IN INTERNATIONAL MARKETS: Euro market: It is a market which is a collection of international banks that help company’s in different countries to rise capital in the global market. An Indian company can access Euromarkets to raise Eurocurrency or Eurobond or for issuing global depository receipts(GDRs).  Eurocurrency Loans  Eurobonds  Global Depository Receipts Foreign Domestic Markets: 74

Companies can also raise Finance by selling securities in the domestic capital markets of foreign countries. For example, if an American firm issues pound-sterling denominated equity stocks in the British capital market is the foreign domestic market for the U.S.In India, Reliance Industries limited issued dollar-denominated bonds in the U.S domestic capital market. Export Credit Schemes: Export credit schemes have been offering by export credit agencies like USEXIM,JEXIM etc‌These agencies are established by the central governments of major industrialized countries. These agencies follow some common guide lines for giving support for exports credit schemes are of two types namely Buyer’s credit and Suppliers credit. VENTURE CAPITAL: It is the capital provide by the institutional investors and high net worth individuals to the companies for Financing technology related innovative business ideas .Such ideas are untried before and have high risk opportunities. It is the long term Finance having the maturity period, the company redeems the capital to the investors along with some capital appreciation. So the investors interested in venture capital do not bother about the short term benefits on their investments like dividends. Interest etc.. They are very much interested in capital appreciation in the long term. Over the past 20 years, venture capital has become a very famous Financing option in most of the countries. Before Financing, venture capital firm appraises the innovation project of the company borrower is in different angles. Venture capital companies are subject to high degrees of risk and uncertainty.

Debt service coverage ratio: 75

Project is generally financed in a certain debt and equity ratio. The equity is contributed by the promoters of the project and for by the public if the organization is government owned. While is financed by various financial institutes and banks. The various evaluation techniques like net present value, internal rate of return payback etc. do not give adequate ranking of the project in case it is debt finance.

DSCR is the annual net project cash flow after-tax divide by the annual principal plus interest charges. The banks financial institutions would finance the debt portion of the project cost, if this ratio exceeds 1.5 on the overage for the duration of debt repayment. If the ratio exceeds 3 to 4 , the project would be attractive and it would be financed by ventures capitalists. The estimated completion cost of the project expansion is nearly 8,692 Crores according to the estimation made at the time of proposal of the project. In order to have a proper leverage it will be necessary that the funding should be in a mix of debt and equity capital. So for the financing pattern adopted in Rhastriya Ispat Nigam Ltd (RINL) was in the debt equity ration of 1:1 as per Government guide lines. However Government has now decided not to invest heavily in steel sector. So the Government has decided that respective plant units should meet their capital funds from their own resources or from market borrowings. Considering all the above facts the RINL assumed that the debt equity to be in the ratio of 70:30. 76

a) Equity Capital: 1.

Infusion of Government equity either from budgetary resources or from Steel Development Funds (SDF).


Induction of equity by agencies /companies who are setting up separate stand alone blast furnaces or blast furnace based steel plant complexes without captive coke oven plant.


Equity by overseas suppliers of coking coal.


Equity by overseas buyer of coke, whom may hedge initial capital invested and assured by buy-back arrangement for limited number of years.

b) Loan Capital: 1.

Loan capital from financial institutions like IDBI, IFCI, ICICI etc. Guaranteed by the central Government who is the owner of RINL.


Surplus credit by major supplier of plant & equipment.


Providing loan by agencies that enter into an assured buy-back arrangement at the terms and condition mutually agreed upon. When the proposal for COB-4 was made in 1999 the company was in

losses and the souring of funds was decided as debt and equity in the ratio 70:30. But now the financial position of RINL has changed. The company is in profits for the last 3 years. The accumulated profits upto 2005 march are approximately 4000 Crores. So the RINL has decided to meet the capital funds from their own resources.



VSP prefers ECB route


After the Centre's clearance to its expansion project at Visakhapatnam Steel Plant (VSP) has now launched an exercise to look for banks and financial institutions to increase its capacity from three million tonnes (MT) to 6.3 MT. The Cabinet Committee on Economic Affairs (CCEA) okayed VSP's Rs. 8,692 Crores project after a lot of lobbying. The funding requirement will be met on 50:50 basis through external commercial borrowings (ECBs) and internal accruals. The employees and the well-wishers of Rhastriya Ispat Nigam Limited — the corporate entity of VSP — view the clearance as the beginning of the good days for the country's first shore-based steel plant. As a prelude to expansion, VSP had received a good response from about 50 banks and financial institutions for loans/debentures through an expression of interest sought on its website. Privatization

HSBC, Deutche Bank, ABN Amro, Punjab National Bank, SBI Caps, ICICI, IDBI and other institutions had responded to the request with offers to fund the project on liberal terms mainly due to the brand image enjoyed by VSP and the bright prospects predicted for the steel industry. One of the highlights of the expansion is to rule out the option of going public. According to indications, ECB is considered as the best option to meet 50 per cent of fund requirement. Moreover, privatization mode is being preferred for augmentation of captive power plant (2x67 MW capacity with all necessary facilities) under build, own and operate (BOO) scheme. For expanding the air separation plant (2x1200 t/day oxygen), BOO mode will also be followed. It is envisaged to complete the first phase in 36 months and the second in less than four years. The management is confident of achieving its designed capacity of 10 million tonnes in the coming years as per the detailed report prepared by M.N. Dastur and Company.


Turning point

VSP, which was facing a rough weather due to slump in the industry and the threat of getting referred to Board of Industrial Finance and Reconstruction (BIFR) could make a spectacular turnaround during the tenure of B.N. Singh as the Chairman and Managing Director. Capital base of the company has already crossed the Rs. 8,000-crore mark and the accumulated loss of Rs. 2,194 reported in 2003-04 was narrowed down to below Rs.1,000 Crores in the next fiscal. With its impressive track record and the launching of expansion process, VSP is bound to make a significant dent in both domestic and overseas market.

The ECB route to raise funds With high GDP growth and progressive industrialization, the Indian market is preparing to be one of the stronger economies around the globe. Indian economy is the 4th largest in the world in terms of purchasing power parity and the tenth most industrialized. While foreign investment has helped in developing the industrial sector, the importance of external commercial borrowing cannot be overlooked. The increase in external commercial borrowing (ECB) reflects a strong investment demand domestically as well as favourable financing conditions overseas. In the industrial sector, there is a growing realization of productivity and efficiency gains. In the face of free access to imports and foreign direct investment (FDI), and liberalized external commercial borrowing policies, the Indian industry is increasingly becoming internationally competitive and is aggressively securing access to international markets on the strength of dynamic competitive advantage. The policy environment has also played an immense role in this resurgence of Indian industry. External Commercial Borrowing

External Commercial borrowing (ECB) is a term used to refer to commercial loans availed from non-resident lenders with a minimum average maturity of 3 years in the form of bank loans, buyers credit, suppliers credit, securitized instruments (e.g. floating rate notes and fixed rate bonds).A company is free to raise ECB from any internationally recognized source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity-holders, international capital markets etc. However, offers from unrecognized sources are not entertained. ECB can be accessed under two routes, Automatic Route and 79

Approval Route. Under the Automatic Route, the approval of Reserve Bank of India (RBI) or the Governments approval are not required. However, in case of doubt regarding eligibility under the Automatic Route, applicants may take recourse to the Approval Route. The maximum amount of ECB that can be raised by an eligible borrower under the Automatic Route during one financial year is USD 500 million. NGOs engaged in micro finance activities have been permitted to raise ECB up to USD 5 million during a financial year for permitted end-use. Benefits The ECBs route provides an Indian company with the foreign currency funds that may not be available in India; the cost of funds at times works out to be cheaper as compared to the cost of rupee funds and the availability of the funds from the International market is huge compared to the domestic market. Moreover corporate can raise a large amount of funds depending on the risk perception of the International market. Corporate (registered under the Companies Act except financial intermediaries (such as banks, financial institutions (FIs), housing finance companies and NBFCs) are eligible to raise ECB under the automatic route. However Individuals, Trusts and Non-Profit making Organizations are not eligible to raise ECB. The success of India’s debt management policy is reflected in a perceptible improvement in various external debt indicators. The external debt to GDP ratio which is an indicator of an economy’s debt servicing capability, showed a steady improvement, dropping to 17.4 per cent in March 2005 as compared to 38.7 per cent in end-March, 1992.It is noteworthy to mention that debt owed to the International Monetary Fund (IMF) was fully extinguished by 2000-01.ECBs can be used as a borrowing means for any purpose (rupee-related expenditure as well as imports) except for investment in stock market and speculation in real estate. ECB is a source of finance for Indian corporate, small and medium enterprise, Multi-state cooperative societies and non-governmental organizations for expansion of existing capacity as well as for fresh investment. External Commercial Borrowing can be raised only for investments such as import of capital goods (as classified by DGFT in the Foreign Trade Policy), new projects, modernization/expansion of existing production units in the industrial sector including small and medium enterprises and infrastructure sector - in India. Infrastructure sector is defined as power, telecommunication, railways, road including bridges, sea port and airport industrial parks and urban infrastructure (water supply, sanitation and sewage projects). ECB proceeds can also be utilized for overseas direct investment in Joint Ventures / Wholly Owned overseas subsidiaries subject to the existing guidelines on Indian Direct Investment. 80

Utilization of ECB proceeds is permitted in the first stage acquisition of shares in the disinvestments process. Small and medium enterprises (SMEs) are increasingly opting for the external commercial borrowings (ECB) route to raise funds, a growing trend, given the current rising interest scenario. Those SMEs that are export-oriented find it economically more viable to raise funds overseas. Also with a view to provide Non-Governmental Organizations (NGOs) an additional channel of resource mobilization and in order to give impetus to the micro-finance movement, the Government has permitted NGOs to raise ECB up to US $ 5 million during a financial year. Recent Trends The department of Economic Affairs, Ministry of Finance, and Government of India monitors and regulates Indian firms' access to global capital markets. From time to time, they announce guidelines on policies and procedures for ECB.The important aspect of ECB policy is to provide flexibility in borrowings by Indian corporate, at the same time maintaining prudent limits for total external borrowings. The guiding principles for ECB Policy are to keep maturities long, costs low, and encourage infrastructure and export sector financing which are crucial for overall growth of the economy. The ECB policy focuses on three aspects: eligibility criteria for accessing external markets, the total volume of borrowings to be raised and their maturity structure as well as the end use of the funds raised. Over the years the RBI and the Indian government have monitored ECBs in accordance with the needs of the Indian economy and laid down various policies and guidelines. It is interesting to note that the trend of how ECB has evolved and played a greater role in the Indian economy under the surveillance of RBI and the Indian government. In its initial stages, the Government had operationalised the automatic route for fresh ECB approvals up to USD 50 million and for all refinancing of existing ECBs with effect from September 1, 2000. However, at present the maximum amount of ECB that can be raised by an eligible borrower under the Automatic Route during one financial year is USD 500 million. Further, with a view to enable the Indian corporate to become a global player by facilitating their overseas direct investment, permitted end-use for ECB was enlarged to include overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS). This would facilitate corporate to undertake fresh investment or expansion of existing JV/WOS including mergers and acquisitions abroad by harnessing resources at globally competitive rates. ECB for overseas 81

direct investment should also be in conformity with other parameters of the ECB guidelines. Other important aspects being that housing finance companies, with approval from the Reserve Bank of India, would be allowed to issue foreign currency convertible bonds. The government also relaxed rules for external commercial borrowings, allowing non-banking finance companies to raise overseas loans. It is pertinent to note, that though external commercial borrowing has been an aid to the Indian economy, the government has continued to regulate the creation of debt from overseas. For instance on September 16, 2003, Overseas Corporate Bodies (OCBs) were derecognized as an eligible 'class of investor' under various routes / schemes available under the extant Foreign Exchange Management Regulations. It was also, reiterated that OCBs not being recognized as investors cannot be recognized lenders. ECB policies have been modified as recently as on 21st May 2007 regarding the end-use of ECBs. As per the extant ECB policy, utilisation of ECB proceeds is not permitted in real estate. Earlier, the term real estate excluded development of integrated township as defined by Press Note 3 (2002 Series) dated January 4, 2002. However at present, the exemption accorded to the 'development of integrated township' as a permissible end-use of ECB has been withdrawn. In accordance with the recent master circular on foreign policy, utilization of ECB proceeds is not permissible in real estate, without any exemption. ECB has indeed found its place in the Indian market and the flexibility in managing the borrowings have been facilitated by the RBI. Indian companies have been granted general permission for conversion of External Commercial Borrowings (ECB) into shares/ preference shares, subject to the following conditions and reporting requirements. Firstly, the activity of the company is covered under the Automatic Route for FDI or the company has obtained Government approval for foreign equity in the company. Secondly, the foreign equity after conversion of ECB into equity is within the sectoral cap, if any. Thirdly, pricing of shares is as per SEBI regulations /erstwhile CCI guidelines/ in the case of listed/unlisted companies as the case may be. Finally, the need for compliance with the requirements prescribed under any other statute and regulation in force. Conclusion From April to December 2006, ECB flows were USD 9 billion: a billion dollars a month and from January to March 2007, ECB flows have been close to USD 13 billion, this reflects the rise in commercial borrowing by corporate and other institutions and the liberalized policy of the Government towards borrowing from 82

overseas source. The corporate world has begun to rely on ECB as a source for raising funds and although the government needs to check arbitrage opportunities for borrowing from overseas yet it has to facilitate commercial borrowing for the growth of Indian economy.

VSP expansion plan attracts foreign banks

The Rs 8,250-crore expansion project of the Visakhapatnam Steel Plant (VSP) is attracting foreign banks such as Citibank, HSBC, France’s Calyon Bank and a few others. The company has decided to expand its capacity to 6.3 million tonne by 2007-08 from 3 million tonne and these banks have evinced interest in financing the project. Of the total project cost, close to Rs 5,750 Crores would be met from internal accruals. This includes about Rs 3,000 Crores that VSP has invested in fixed deposits with various public banks. The company proposes to raise the remaining Rs 2,500 Crores through debt, both in Indian rupees and foreign currency. The proposed tenure of the debt is likely to be five years. “To raise Rs 2,500 crore, we have invited banks, financial institutions and other agencies to either lend or arrange the amount on their own or by way of a consortium,” G N Murty, assistant general manager (finance), VSP, said. The company needs foreign currency of about Rs 1,500 crore to import machinery, he added. Many Indian and foreign banks have shown interest in financing the entire Rs 2,500 crore on their own without any consortium, he said. “We have been getting a lot of enquiries from several foreign banks. Citibank, HSBC, Calyon Bank, State Bank of India, Canara Bank, Bank of Baroda and ICICI Bank have already submitted their proposals,” he said. Due to overwhelming response, VSP expects the funds to come at 5-7 per cent interest.



PROJECT IMPLEMENTATION The group of activities starting from the techno economic feasibility report approval or project decision and ending with the commencement of stabilized production and maintenance would come under implementation. They include: Design engineering procurement contacting constrictions start up and establishment of operation and maintenance.

Each of these major activities 85

should be scheduled in a time frame with perfect integration showing dependencies of activities and sub activities with starting and finishing dates for each. When the scheduling of activities is complete by translating it into cost, budget should be prepared. Before you are able to prepare the schedule and budget you have to decide the method of implementation, The size and composition of your project team, prepare and estimate the total cost on various components of the project. With the achievable accuracy and ascertain the probable dates of clearances necessary for starting and proceeding with the project execution, discussion with prospective manufactures and suppliers of equipment and material are central to an achievable schedule. Equally important is the indication about the financial sanction and disbursement. In case of an equity issue for financing the project early discussions with the merchant bank broker and underwriter are necessary for ensuring implementation. Funds shortage does not upset the schedule. For preparing the project implementation schedule the following information is needed. List of all possible activities from project planning to commencement of production. The sequence in which various activities have to b e performed. The time required for performing various activities. The resources normally required for performing the various activities. The implications of putting more resources or less resource thus are normally required. The Government has approved the decision of Visakhapatnam Steel Plant to install the Coke Oven Battery 4 and expansion plans. A project implementation schedule has been prepared and it is workout as the following consideration. 86

1. The approval of project implementation will be considered as zero date for the project. 2. The work as detailed survey, basic engineering followed by preparation of technical specification will start from zero date. Construction and erection of various plant units, civil, engineering work structural engineering work, earthwork, road and yard construction etc., constitute the various facets of project implementation programme. The implementation work of COB-4 has been given to two companies. The civil contract is given to Bridge & Roof (B&R). The structural work is given to Hindustan Steel & Construction Limited (HSCL). Both these companies are also public sector units. The construction is expected to be completed in 36 months. The Bridge & Roof which has taken civil engineering work will cover designing, preparation of drawing and construction of foundation for Battery proper, Coke Dray Cooling Plant , different equipment and buildings etc., The civil engineering design will be based as the norms laid down in relevant specification of Bureau of Indian Standard and National building code.

All the works will be as per

technological scheme. The structural work taken up by the HSCL includes steel structural designs to meet the technological requirements and general conditions of the project.

Project Review & Control Once the project is launched, control becomes the dominant concern of the Project Manager. Project control involves a regular comparison of performance against targets, a search for the causes of deviation and a commitment to check advance variances. It serves two major facts: (i)

It ensures regular monitoring of performance.


It motivates project personnel to strive for achieving project objectives. 87

Human Aspects of Project Management A satisfactory Human relations system is essential for the successful execution of a project without such a system. The other systems of project management are not likely to work well.

To achieve satisfactory human relations in the project

selling. The project manager must successfully handle problems and challenges relating to 1. Authority. 2. Orientation. 3. Motivation. 4. Group Functioning. Pre-Requisites for successful project implementing. Time and cost over runs of projects are common in the project implementation. To these cost over runs.

Projects become uneconomical resources are not

available to support other projects and economic development is adversely affected. To minimize these time and cost over runs the following precautions have to be taken. 1. Adequate formulation. 2. Sound project Organisation. 3. Advance action. 4. Timely availability of funds. 5. Proper implementation planning. 6. Judicious equipment tendering and procurement.



6(1) 2005-VSP dated 28th October 2005

2. Commencement date:

28th October 2005

3. Main units in expansion  Raw material handling plant  One sinter plant (1x 1400 sq.m.)

3.25 Mt / year sinter

 One blast furnace (BF- 3800 CUM)

2.50Mt / year hot metal

 Calcining and material plant (CRMP)

2X500 t / day

 One steel melt shop (SMS) Rolling mills  Wire rod mill

2.60Mt /year liquid steel 600,000 t / year 89

 Seamless tube plant

300,000 t / year

 Special bar mill ( in stage II )

750,000 t/ year

 Light structural mill (LSM-IN STAGE II)

700,000 t/year

 Augmentation of existing TPP

1x 67.5 MW Turbo-generator with TB

 Power plant (BOO basis)

2x 67.5 MW capacity with all necessary Facilities.

 Air separation plant ( BOO basis)  Captive mines

2x1200 t /day oxygen

augmentation of capacities at madharam, jaggayyapeta and Garbham mines.


All the above facilities including BOO ( build , own and operate)basis units i.e. power plant and air separation plant (ASP) Will be commissioned in stage-1, except the special bar mill and structural mill which are required to be commissioned in stage-II. i. For stage –I : 36 months ii.

For stage –II : Special bar mill—45 months structural mill----48 months

5. Capacities of production units after expansion: The combined capacity of various production units is given below: Unit Blast furnace Steel Melt Shop(liquid steel) Wire rods

Present capacity 4 3.7 1.05

Expansion 2.5 2.6 0.6

total 6.5 6.3 1.65


Structural products Special bar mill Seamless tube mill Semis for sale Saleable steel

1.05 0.9 0.34 0.34

0.7 0.75 0.3 0.027 2.377

1.75 1.65 0.3 0.367 5.717

6. Product Mix:VSP will continue to produce long products in Phase -1 in view of Brand image and to meet the envisaged demand for long products. The following is the Product Mix Proposed Wire Rods (Plain)

5.5mm to 20mm in coils –medium and high carbon, case hardening, and


heading quality electrode.

Special Bars(plain)

16mm to 40mm- in coils and straight lengths –medium and high carbon,


hardening , cold heading quality , electrode quality ,spring steel,

bearing steel,

free cutting steel etc.,


plain and round rebar’s, structural and semis depending on the market

demand. Seamless pipes

139 mm to 366mm dia pipes- in various grades like casing pipes, coupling


Liner pipes, Boiler tubes.



7. Capital Cost:Approved Cost


Rs.8692 Crores (base: JUN’05)

Debt Component


Rs.4346 Crores.

FE Component


Rs.1477 Crores

Pay back Period


5 Years 2 months.




Project Cost (Net of Cenvat)

Rs.8000 Crores.

8. Financial Peaks:Details

Rs. Crores


 Turnover



 Gross Margin



 PAT(Profit After Tax)




 Retained Reserves


2022-23 Up to the Year

 Total Income Tax Payments(approx)



 Total Excise Duty Payments(Approx)



 Total Sales Tax payments



 Total Dividend Payments to Govt



PROJECT APPRAISAL INTRODUCTION: Project counselling and preparation of pre-investment studies, feasibility studies and project reports are undertaken by merchant bankers and private consultants. Preparation of project report and appraisal are intimately tied up. At the time of preparation of project report itself, the merchant banker or consultant has to satisfy himself that the project is viable and meets the requirements of term lending institutions in case project cost is to be partly financed by borrowing from term lending institutions. This is to support merchant banker’s statement to SEBI , that he has exercised due diligence in regard to claims about the viability of the project in the prospectus for issue of securities. At the outset, the regulatory frame work that governs the selection of industries may be noted.

REGULATORY FRAME WORK: The industrial policy of India has shifted from promoting a regulatory and protective regime to a free and market oriented environment. the new policy to regulate the industrial economy was announced on 24-7-1991.the new industrial policy has deregulated substantially the economy. If an appraisal of the project for the purpose of public issue is made by a financial institution, a bank or one of the lead managers, the same may be relied upon to make adequate disclosures in the offer documents according to the clarification issued by SEBI on 11-10-1993.key provisions of the policy are stated here.

Dereservation of industries for public sector


Since 1956, seventeen industries which were in the nature of core industries were reserved for investment technology. the seventeen industries included were iron and steel, electricity, air transport ,ship building, heavy machinery industries and telecommunications cables.

• Abolition of industrial licensing New industrial policy 1991, has abolished all industrial licensing, irrespective of the level of involvement, expect for certain industries related to security and strategic concerns, social reasons, concerns related to safety, overriding environmental issues and manufacture of products of hazardous nature. Along with the abolition of industrial licensing for new units, existing industries have been allowed to expand capacity according to their market needs without obtaining prior expansion of capacity clearance from the government of india.existing manufacturers are now free to diversify and to manufacture any article in response to market demand.

• Removal of investment controls on large business houses Earlier large firms with assets of above rs 100 Crores, classified under monopolies and restrictive trade practices act 1969(MRTP ACT) had to obtain approval for their investment proposals in addition to industrial license. Now the threshold limit of assets (rs 100 Crores) has been abolished and large firms are on par with others. They do not require prior approval from the government for investment in the delicensed industries.

• Foreign investment and technology Foreign technology agreements relating to high technology and high investment in priority industries framed within certain guidelines are now automatically approved. The automatic approval is accorded to industries if payment is made without resort to free exchange resources. Firms are free to hire technicians and get their indigenously developed technology tested abroad. Foreign investment in the form of equity up to 51% is automatically approved in the high priority industries. the facility is available to industries which are able to finance capital equipment imports through foreign equity. 93

The new industrial policy 1991 has eliminated entry restrictions, licensing requirements and controls on industry.

PROJECT IDENTIFICATION A Project is a proposal for capital investment to develop facilities to provide goods and services. The investment proposal may be for setting up a new unit, expansion or improvement of existing facilities. a project is a specific , finite task to be accomplished in order to generate cash flows. project idea can be conceived either from input or output side. The former are material based while the latter demand oriented. Input based projects are identified on the basis of information about agricultural raw materials, forest products, animal husbandry, fishing products, mineral resources, human skills and new technical process evolved in the country or else where. Out based projects are identified on the basis of needs of population as revealed by family budget studies or industrial units as found by market studies and statistics relating to imports and exports. Project identification is a continual process. With the opening up of economy, demand for sophisticated inputs is continuously rising. The quest for new combinations of factors for optimizing output and improving productivity to strengthen the competitive position of Indian industry in the international market place is an ongoing process. Further , the growing demand for complex, sophisticated, customized goods and services in international markets has added a new dimension to project concept.

The stages of project selection The identification of project ideas is followed by a preliminary selection stage on the basis of their technical, economic and financial soundness. The objective at this stage is to decide whether a project idea should be studied in detail and to determine the scope of further studies. The findings at this stage are embodied in a prefeasibility study or opportunity study. for the purpose of screening and priority fixation, project ideas are developed in to prefeasibility studies. Prefeasibility studies give output of plant of economic size , raw material requirements, sales realization, total cost of production, capital input /output ratio, labour requirement, power and infrastructure facilities. The project selection exercise should also ensure that it confirms to overall economic policy of the government.

FEASIBILITY STUDY After ensuring that a project idea is suitable for implementation, a detailed feasibility study giving additional information on financing, break down of cost of 94

capital and cash flow is prepared. Feasibility study is the final document in the formulation of project proposal. Feasibility study can be prepared by the entrepreneur or consultants or experts. The cost of feasibility study can be debited to project cost and can be counted as part of promoter’s contribution. The feasibility study should contain all technical and economic data that are essential for the evaluation of the project. Before dealing with any specific aspect, feasibility should examine public policy with respect to industry. after that, it should specify out put and alternative techniques of production in terms of process choice and ecology friendliness, choice of raw material and choice of plant size .the feasibility study after listing and describing alternative locations, should specify a site after necessary investigation. the study should include a lay out plan along with a list of buildings, structures and yard facilities by type , size and cost. the study has to identify supply sources and present estimates, costs for transportation, services, water supply, and power. the quality and dependence of raw materials and their source of supply have to be investigated and presented in the feasibility report .before presentation of the financial data, market analysis has to be covered to help in establishing and determining economic levels of output and plant size. Financial data should cover preliminary estimates of sales revenue, capital costs and operating costs for different alternatives along with their profitability. Feasibility study should present estimates of working capital requirement to operate the unit at a viable level. an essential part of the feasibility study is the schedule of implementation and estimates of expenditure during construction . The feasibility study is followed by project report firming up all the technical aspects such as location, factory lay out specification and process techniques design. In a way , a project report is a detailed plan of follow-up of project through various stages of implementation.

MARKET APPRAISAL Analysis of demand for the product proposed to be manufactured requires collection of data and preparation of estimates. Market appraisal requires a description of the product, its major uses, scope of the market, possible competition from substitutes, special features of the product proposed to be manufactured in regard to quality and price which would result in consumer preference for the product in relation to competitive products. Estimates have to be made about existing and future demand and supply of the products proposed to be manufactured. It is also necessary to identify principal customers and state particulars of any firm arrangements entered in to with them. Selling arrangements contemplated in terms of direct sales or through distributors or dealers have to be classified.


After collection of data , the existing position has to be assessed to ascertain whether unsatisfied demand exists. Since cash flow projections are to be made, possible future changes in the volume and pattern of supply and demand have to be estimated. This would help in assessing the long term prospects of the unit. Estimation of demand requires the determination of the total demand for a product and the share that can be captured by the unit through appropriate through marketing strategies. the commonly used methods of demand forecasting are trend, regression and end-use methods.

TECHNICAL APPRAISAL Technical appraisal is primarily concerned with the project concept covering technology, design, scope and content of the plan as well as inputs and infrastructure facilities envisaged for the project. Basically, the project should be able to deliver marketable product from the resources deployed, at a cost which would leave a margin adequate to service the investment and plough back a reasonable amount to enable the enterprise to consolidate its position. Technical appraisal has a bearing on the financial viability of the project as reflected by its ability to earn satisfactory return on the investment made and to service equity and debt. The technical review done by the financial institutions focuses mainly on the following aspects:  Product mix  Capacity  Process of manufacture  Engineering know how and technical collaboration  Raw materials and consumables  Location and site  Building  Plant and equipments  Man power requirements  Breakeven point


(The technical review is done by qualified and experienced personnel available in plant or outside experts where technologically sophisticated projects are involved).

FINANCIAL APPRAISAL Financial appraisal is concerned with assessing the feasibility of a new proposal for investment for setting up a new project or expansion of existing productive facilities. This involves an assessment of funds required to implement the project and the sources of the same. The other aspect of financial appraisal relates to estimation of operating costs and revenues, prospective liquidity and financial returns in the operating phase. in appraising a project, the project’s direct benefits and costs are estimated at the prevailing market prices. this analysis is used to appraise the viability of the project as well as to rank projects on the basis of their profitability. It may be noted that financial appraisal is concerned with the measurement of profitability of resources invested in the project with out reference to their source. For the purpose of appraisal it is necessary to make estimates relating to working results of existing concerns, cost of the project and means of financing. Financial projections for a ten year period have also to be made.

WORKING RESULTS OF EXISTING UNITS: In case of an existing unit, it is desirable to make an assessment of its latest financial position. for this, purpose its latest audited balance sheet and profit and loss statement as well as the balance sheets for the last 5 years have to be analysed. in case an audited balance sheet as on fairly recent date is not available, a proforma balance sheet and profit and loss statement certified by the management may be examined. ď ś The latest balance sheet and profit and loss account may be analyzed with a view to ascertaining, whether the concern is under/over capitalized, whether the borrowings raised are not out of proportion to its paid up capital and reserves, ď ś How the current liabilities stand in relation to current assets,


 Whether the gross block has been properly depreciated and has not been shown at an inflated value,  Whether there is any inter-locking of funds with associate companies  Whether the concern has been ploughing back of profits in to the business and building up reserves.

A balance has to be stuck between debt and equity. a debt equity ratio of 1:1 is considered ideal but it is relaxed up to 2:1 in suitable cases. Further relaxation in debt equity is made in the case of capital intensive projects.

All long term loans/ deferred credit are treated as debt while equity includes free reserves. Equity is arrived after deducting carried forward losses in the case of an existing unit.

The norm for promoter’s contribution in the project is 22.5% of project cost with a lower contribution for projects promoted by technical entrepreneurs . normally the promoters contribution should be brought in by way of equity capital. If unsecured loans from promoter’s / director’s form an integral part of of the means of finance, it should be assumed that they would not be withdrawn during the currency of the loan and do not carry interest higher than that payable on institutional loans.

The financial appraisal seeks to assess the following:

 Reasonableness of the estimate of capital cost  Reasonableness of the estimate of working results 98

Adequacy of rate of return: The general norms for financial desirability are as follows: 1. Internal rate of return :15% or 3-5% more than WACC 2. Return on investment: 20-25% profit after tax 3. Debt-service coverage ratio: 1.5 to 1.75 4. Debt –equity ratio: 1: 1 5. Contribution of project cost: 30-50% 6. Stock exchange listing requirements

ECONOMIC APPRAISAL The economic appraisal looks at the project from the larger social point of view. The methodology by firms for the purpose of economic appraisal is labeled as “PARTIAL LITTLE MIRRLEES” approach. In addition to the calculation of the economic rate of return as per this approach they also look at two other economic indicators: 1. Effective rate of protection 2. Domestic resource cost

MANAGERIAL APPRAISAL In order to judge the managerial capability of the promoters, the following questions are raised:  How resourceful are the promoters?  How sound is the understanding of the project by the promoters?  How committed are the promoters? CAPITAL PHASING FOR ONGOING EXPANSION PROJECT AT VSP:















313.00 313.00

1,499.00 1,499.00

1484.00 1484.00




YEAR 4 200809


17.07 %



YEA R6 201 0-11


1.78 %

8692 50% 50%

742.0 0 742.0 0

232.00 232.00 464.00


76.0 0 76.0 0

4346 4346 8692

152. 00


The Source of financing for the project expansion 6.3 MT is from external commercial borrowing and internal accruals i.e., the company has allotted funds from accumulated profits since 2003.

Total capital phasing for ongoing expansion project at VSP is 8,692 Crores.

Assumed time for completion of the project is 2010-2011. 100

It has been assured that the plant would operate at 90% capacity in 1 st year and 100% in 2nd year after the completion of the project.

Project appraisal for ongoing expansion plan to be done intellectually and effectively.


♦ ‘The Financial Management’ by I.M.Pandey ♦

‘Projects’ (preparation, appraisal, implementation) by Prasanna Chandra.

♦ Successful projects by O.P. Kharbanda & E.A.Stall Worthy. ♦ Project management by Dennis Lock. ♦ Project management by Harvey Maylor. ♦ Project planning and management by M.Shaghil & M. M. M.musterque ♦ Source of finance sharma&guptha ♦ Project management (Techniques appraisal managerial issues) by E.W.Davis. ♦ Total project management by P.K.Joy. 101

THE JOURNALS: ♦ Steel Times. ♦ SAIL News. ♦ Iron &Steel technology. ♦ Steel & Metallurgy.





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