A Major Project Report On

Project Appraisal in Rajasthan Financial Corporation

Submitted for partial fulfillment of requirement for the award of degree Of Master of Business Administration Of Faculty of management studies, MLSU Udaipur

Session 2012-2013

Supervision By DR. Anil Kothari Co-ordinator MBA-FSM

Submitted by Ankita Soni MBA FSM (IV sem.)

Acknowledgement I take this opportunity to express my profound gratitude and deep regards to my guide Dr. Anil Kothari for his exemplary guidance, monitoring and constant encouragement throughout the course of this thesis. The blessing, help and guidance given by him time to time shall carry me a long way in the journey of life on which I am about to embark.

I also take this opportunity to express a deep sense of gratitude to Mr. S.S. Agarwal and Mr. Rajesh Shrivastav of training department, for their cordial support, valuable information and guidance, which helped me in completing this task through various stages.

I am obliged to all the department of RFC, for their valuable information provided by them in their respective fields. I am grateful for their cooperation during the period of my assignment.

Lastly, I thank almighty, my parents, brother and friends for their constant encouragement without which this assignment would not be possible.

Financial Institution in India

Finance has been called the science of money. It studies the principals and methods of obtaining the control of money from those who have saved it and of administering it by those into whose control it passes. Finance is the process of conversion of accumulated funds to productive use. Finance is an essence of industrial system, as well as finance factor is the circulatory system of economy development as it directs the flow of economy and facilitates smooth functioning. The financial institutions are created with the objective of smoothing and enhancing the process of economic development. Therefore, they have been given specific objectives such as: To insure availability of finance in backward areas for equitable economic growth. For social upliftment and non-profit maximization as they have been constituted as public corporations under special act or parliament. To help rehabilitate and revive sick industries modernize and expand the existing ones. To keep a close liaison with other government agencies to help in the growth of priority sector.

The first term lending institution was industrial financial corporation (IFC), established 1948, jointly owned by government of India, RBI and Financial Institutions.

The aim was to make long term credit available to public limited companies and industrial cooperatives. The establishment of FIs and state level was started by Tamiladu government as Tamilnadu Industrial Investment Corporation in 1949. The GOI enacted the State Industrial Corporation Act, 1951 which came into effect in 1952. They were supposed to supplement the working of IFC which specifically met the financial requirement or the public limited company and co-operative societies.

State Financial Corporation A single corporation cannot be expected to meet the varied the financial requirements of diversified small and medium scale industries. The union parliament passed the SFC act on September 28, 1951 empowering the state government to establish financial corporations for their respective regions. The state government, RBI, IDBI through mutual consultations shapes

the overall policy and functioning of these corporations. On feb.16, 1976 the entire holdings on SFCs shares were transferred and vested in IDBI. As the volume of business enlarged, SFCs source of finance become issue of bonds in market and reference from IDBI. SFCs provide financial assistance of following types: Granting loss of advances or subscribing to debentures of industrial concerns. Guaranteeing loans raised by industrial concerns on such terms and conditions as may be mutually agreed upon. Underwriting stock, share, bonds and debentures.

With rapid growth of SFCs operation their reliance on IDBI for financial support has increased significantly. Therefore a brief introduction of IDBI become necessary here, industrial development bank of India (IDBI) was set up as the apex development bank of the country. Main objective was the coordinate the activities of the other financial institutions including banks, providing terms finance to industry as well as to provide direct financial assistance to industrial units to bridge gap between the supply of and demand for medium and long term finance. IDBI was made as an autonomous corporation fully owned by government of India on Feb. 16, 1976. The operation of IDBI falls into two categories: Assistance to other financial institutions. Direct assistance to industrial concerns either on its own or in participation with other institutions. Along with this, the bank can undertake promotional activities such as marketing and investment research and survey as well as techno-economic studies.

Industrial Environment of Rajasthan

Economic Base Rajasthan offers the most favored destination for industries in India. The vast mineral resource, livestock, tourism potential coupled with the commitment of the government offer a tremendous potential to the upcoming industries. The government of the state has targeted industrial growth rate of 12% by the year 2002. Great stress has been laid on development of quality and comprehensive infrastructure. The state has developed a strong industrial base where different type of industries such as agro based, textiles, tourism, ceramics, chemical, drug formulation, engineering, electronic, and IT sector have great potential. Thrust area and specialized trade zones: The thrust areas as well as the specialized purpose industries complexes developed by RIICO for the state are as under: Special purpose industrial complexes / popular industrial areas. Among the 244 industrial areas developed by RIICO in the state the prominent areas are: o o o o o Bhiwadi, Matsya, Shahjahanpur. Neemrana, Sitapura (EPIP), Bagru, Bassi, Heerawala. Malviya, Vishwakarma, Sanganer. Abu Road, Bhilwara. Udaipur, Jodhpur, Kota, Kishangarh.

Major Industrial Projects in Rajasthan: Rajasthan has been identified to be a potential center for growth of industries by various multinationals. Some of the important projects established in Rajasthan are as under: o Samcor Glass ltd. (corning, US and Samsung, Korea) o Ericsson telecom (LM Ericsson, Sweden) o Indian shaving products (Gillette, UK) o Bausch and Lomb (Bausch and Lomb, USA) o Sicpa ltd ( Sicpa, Switzerland) o Electro Lux India ltd. ( Electro Lux AB Sweden) o National Engg. Industries ltd. (NTN, Japan)

Project Appraisal Norms at RFC Project appraisal is basically an art. Though the basic constituents of appraisal are fairly well known a good appraisal officer can not only identify weakness in a project but can also play an important and constructive role by suggesting ways and means to improve the viability of project. Although the extent of indepthness of project depends very much on the size of the project as well as the extent of our assistance (so far as RFC concerned), the basic parameters of appraisal remain more or less the same. Appraisal officers are well aware of the techniques of appraisal. The idea here is to highlight the key parameters of consolidate important instructions having direct bearing on project appraisal. Part I - Prima Facie Eligibility To see that our time is not wasted unnecessarily on a case which ultimately may not be cleared, the appraisal officer is first required to segregate those cases which are prime-facie not eligible for financial assistance. The appraisal officer should first satisfy himself: Whether the applicant is an industrial concern as defined under section 2(c) of the SFCs act. Whether the applicant in any way attracts restrictive provisions of SFCs act. Whether industry is not to be encouraged within the frame work of corporations financing. Whether the project is eligible for refinance. Promoters are not black listed as per details given in schedule.

What is an industrial concern: Section 2(c) of SFCs act, 1951 (as amended by SFC act, 2000) which define industrial concern is reproduced below:Industrial Concern means any concern engaged or to be engaged in:o o o o o o The manufacturing, preservations or processing of goods. Mining or development of mines. The hotel industry. The transport of passengers or goods by road or by water (or by air, ropeway, lift.) The generation or distribution of electricity or any other form of power The maintenance, repair, testing or servicing of machinery of any description or vehicle or vessels or motor boats or trailers or tractors; public call office (telephone facility of STD/ISD/PCO/local calls) fax machine Assembling, repairing, or packing any article with the aid of machinery or power The setting up or development of an industrial area or estate Fishing or providing shore facility for fishing or maintenance thereof Providing weigh bridge facilities

o o o o

o Providing engineering, technical, financial, management, marketing, or other services or facilities for industry o Providing medical, health, or other allied services o Providing software or hardware services relating to information technology, telecommunications or electronics including satellite linkage and audio or visual cable communication o Setting up or development of tourism related facilities including amusement parks, convention centers restaurants, travel and transport (including those at airports), tourist service agencies and guidance and counseling services to the tourism. o Constructions o Development, maintenance and construction of roads o Providing commercial complex facilities and community centers including conferences halls o Floriculture o Tissue culture, fish culture, poultry farming, breeding and hatcheries o Service industry, such as altering, ornamenting, polishing finishing, oiling washing, cleaning or otherwise treating or adapting any article or substance with a view to its use, sale, transport, delivery or disposal o Research and development of any concept technology, design, process or product whether in relation to any of the matter aforesaid, including any activities approved by the small industries bank o Such other activity as may be approved by the small industry bank. Explanation: 1. The expression processing of goods includes any art or process for producing, preparing or making and article by subjecting any material to a manual, mechanical chemical, electrical or any other like operation 2. If any doubt arises as to whether a concern is an industrial concern or not, the same shall be referred to the (small industry bank) for its decision and the decision of the small industries bank thereon shall be final. The SIDBI has approved following activities as industrial activities in terms of section 2(c) (xxii) of SFC act: a. Financing of construction of commercial complexes, show rooms and sales outlets independent of hotel business. b. Financing of cost of establishment stores, shopping malls and tourist homes. The items / activities displayed or kept for sale in showrooms, sales outlets, departmental stores, shopping malls will not be permitted for financing unless they are industrial equipment. c. Setting up of vocational training centers for imparting technical knowledge to the entrepreneurs for setting up and running the units efficiently and produce quality goods.

Setting up technical institution such as schools, colleges etc. remain outside the purview of definition of industrial concern and hence are not permitted for financing by SFCs. d. Financing of vehicles is permitted only when the vehicles from part of the original cost of an industrial concern. The acquisition of vehicles by industrial concerns after the scheme has been implemented or by professionals like doctors, lawyers, engineers, architects for their personal use for discharging their services would continue to remain outside the purview of definition of industrial concern. Business which SFCs may transact (section 25): As per section 25(1) of SFCs Act, 1951 (as amended vide SFCs (amendment) Act, 2000) following kind of business can be carried out by SFC: a. Guaranteeing, on such terms and conditions as may be agreed upon, i. Loans raised by industrial concerns which are repayable within a period not exceeding twenty years, and are floated in the public market. ii. Loans raised by industrial concerns from scheduled banks or state cooperative banks or other institution. b. Guaranteeing, on such terms and conditions as may be agreed upon, deferred payments due from any industrial concerns in connection with its purchase of capital goods within India. c. Underwriting of the issue of stock, shares, bonds or debentures by industrial concerns, d. Transferring for consideration any instruments relating to loans and advances granted by it to industrial concerns. e. Acting as agent of central government or the state government or the development banks or the small industries bank or the IFCI limited formed and registered under the companies act, 1956, or any other financial institution notified in this behalf by the central government in respect of any matter connected with, or arising out of, the grants of loans or advances to an industrial concern or relating to the business of the development bank, small industries bank, IFCI limited or financial institution. f. Subscribing to, or purchasing of, the stock, shares, bonds or debentures of an industrial concern or any other concern. g. Retaining as part of its assets any stock, shares, bonds or debentures which it may acquire by subscription or in fulfillment of its underwriting liabilities and disposing of the stock, shares, bonds or debentures so acquired. h. Granting loand or advances to, or subscribing to debentures of, and industrial concern repayable within a period no exceeding 20 years from the date on which they are granted or subscribed to, as the case may be: i. Provided that the financial corporation may, with the prior approval of the small industries bank, exceeds the said limit of 20 years upto further period of 10 year:

ii. Provide further that nothing contained in this clause shall be deemed to preclude the financial corporation from granting loand or advances to, or subscribing to debentures of, and industrial concern to which may attached and option to convert such debentures or loans into stock or shares of the industrial concern; iii. Provide also that the financial corporation may, in the exercise of such option convert the amounts outstanding on such debentures or loans into stock or shares of the industrial concern if such concern increases its subscribed capital by the issue of further stock or shares in accordance with the subject to, the provisions of section 81 of the companies act, 1956 Explanation: In the clause, the expressions the amounts outstanding on such debentures or loans shall mean the principal interest and other charges payable on such debentures or loans as at the time when the amounts are sought to be converted into stock or shares; i. Accepting or discounting promissory notes and bills of exchange made, drawn, accepted or endorsed by industrial concerns or by any person selling capital goods manufactured by one industrial concern to another industrial concern. j. Undertaking research and surveys for evaluating or dealing with marketing or investment or undertaking and carrying on techno-economic studies or other activities in connection with the development of any industry. k. Providing technical and administration assistance to any industrial concern or any person for the promotion, management or expansion of any industry. l. Planning and assisting in the promotion and development of industries. m. providing consultancy and merchant banking services n. Acting as the trustee for the holders of debentures or other securities. o. Leasing, sub-leasing or giving on hire or hire purchase of industrial plant, equipment, machinery or any other asset. p. factoring q. providing export related credit and services r. undertaking money market related activities s. setting up of mutual funds and undertaking assets management activities t. promoting, forming or conducting or assisting in the promotion, formation, or conduct of companies, subsidiaries, societies, trusts or such other association of person as it may deem fit u. opening or confirming or endorsing letters of credit and negotiating or collecting bills and other documents drawn there under

v. doing such other business as the small industries bank may authorize, and or generally the doing of such acts and things as may be incidental to or consequential upon, the exercise of its powers or the discharge of its duties under this act

Restrictive Provisions of SFCs Act:

SFCs act lays down following restrictions with regard to grant of financial assistance: 1) Assistance (existing outstanding and proposed) under following arrangement should not exceed Rs. 500 lacs in the case of companies and Rs. 200 lacs in the case of other concern. This is however subject to the approval of IDBI/SIDBI from time to time: a. Loans advances; (25)(1)(h) b. Deferred payment guarantee; (25)(1)(b) c. seed capital assistance d. under-writing arrangement; (25)(1)(c) e. loans guaranteed (25)(1)(q) 2) Grant of loans or advances on security of shares of RFC. ((28(1)(c) ) 3) Grant any form of assistance to any industrial concern of which the aggregate of the paidup share capital and free reserves exceeds ten crores of rupees or such higher amount not exceeding thirty crore .

Part II Detailed Appraisal Once it has been decided that prima facie the project is eligible for consideration of financial assistance from RFC, detailed appraisal should be taken up. The procedures to be observed in appraising the case are discussed in the following paras:While different authorities may adopt different terminology and sequences for formulating appraisal criteria; the following constitutes the main aspect to be looked into in any case to complete the appraisal: Management and organizational set-up Technical feasibility Cost of project Sources of finance Market and scope Cost of Production and Profitability Social economic viability

The methodology to be followed/adopted in and importance of each of above aspect are therefore outlined below:Management and organizational set-up Man makes a project and he operates it. The success of a project, therefore, depends largely on the man behind it. A bad project cannot be made good but a good project can be badly managed. Therefore, while processing the project one should lay considerable stress on the entrepreneurial and managerial aspects of the project. Usually following methods are employed in assessment of managerial attributes:1. Personal interview/discussions with promoters = Personal interview/discussions with promoters give adequate material to assess the resourcefulness, the managerial capability, integrity and above all the extent of interest of the promoter in project. His outlook, his attitude towards risk taking, his temperament initiative drive and adaptability, his knowledge and experience and his personality also would throw light on his successfully implementing the project. The form of IPC/PCC should, therefore, be extensively used in assessing this aspect. The promoters should be associated during detailed discussions on the project also. 2. Record of their past performance :i. in the case of promoters already engaged in trade and industry, The record of their past performance as indicated in their financial statements of accounts provide a reasonable guide. With this end in view, it has been prescribed to collect the following documents from the entrepreneurs:a. Balance sheet and profit & lose account of the concern if already in existence. b. balance sheet and profit & lose account of the concern in which promoters are interested as proprietor/partner/directors (for atleast three years) c. Income tax assessment orders of the promoters and persons who propose to contribute to the capital. d. Details of networth of the promoters in the prescribed format. e. Affidavit on the financial assistance obtained by the promoters form other financial institution. f. Details of immovable properties acquired by the promoters along with the copies of legally admissible documents of the title on the basis of which ownership has been claimed. ii. the analysis of balance sheets of sister concern should be made in prescribed form while examining the balance sheet in turnover, profits, cash accruals, formation of capital and reserves, withdrawals of funds loans and advances should be looked into with care, depending upon the interest of the promoters in the concern. the promoters deemed to the responsible for sickness of existing unit should not have

any involvement directly or indirectly in supporting/assisting other unit promoted by the same promoter except in special circumstances.

3. Confidential report on the past dealings 4. Organizational set up