Mewarvivek Project F

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited
SUMMITTED BY VIVEK SINGH MEWAR

2nd YEAR MBA
from Amrapali Institute,Haldwani(Nainital) Uttarakhand
Carried out during Summer Internship Programme At
POWER FINANCE CORPORATION LTD.,

URJANIDHI, 1, Barakhamba Lane, Connaught Place, NEW DELHI 110001
Under the guidance of
Mrs. Tabassum Asstt.Manager (Finance) Power Finance Corporation Ltd.

Start Date for Internship: 10th June 09 End Date for Internship: 10th August 09
Self Certification by the Interns
I hereby certify that I, Vivek Singh Mewar have successfully completed my internship with Power Finance Corporation. This is also to certify that this report is an original product and no unfair means like copying etc have been used for its completion.
Vivek Singh Mewar Signature: Date:
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Certificate From the Summer Internship Providing Organization
This is to certify that Mr.Vivek Singh Mewar has successfully completed his project on Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited during the period 10th June 2009 to 10th August 2009 for partial fulfillment of 2nd Year MBA in Amrapali Institute,Haldwani (Nainital) Uttarakhand. We wish him all the best for all his future endeavors.
Signature: Date:
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ACKNOWLEDGEMENT
I express my deep sense of gratitude to our external guide Mrs. Tasbassum, Asstt.Manager (Finance) Power Finance Corporation Ltd., for her valuable support and guidance given to me through out the project. I consider myself lucky to have worked under her.
This project provided me a platform to increase my knowledge and empowered me with a better understanding of concepts in the financial world scenario. And the most special thanks to Power Finance Corporation who accepted me in spite of my inexperience in the field and gave me the opportunity to work and learn with them.
Last but not the least I would like to thank my God and my ever loving and caring parents for their ever encouraging words during my days of distress.
Vivek Singh Mewar 2nd year MBA
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INDEX
I. Power finance corporation
1.1 Introduction 1.2 Vision 1.3 Mission 1.4 Objectives 1.5 Products & Services 1.6 Borrowers profile 1.7 Recent initiatives 1.8 Accomplishments 1.9 Future plans 1.10 Indian power sector 1.11 Performance high lights 1.12 Swot analysis 1.12.1 Strength 1.12.2 Weakness 1.12.3 Opportunities 1.12.4 Threats 1.13 PFC business strategy
II.
Structured debt instrument

2.1 Step-up bonds 2.2 Insured bonds 2.3 Revenue bonds 2.4 GARVEEs (Grant Anticipation Revenue Vehicles) 2.5 Capital indexes bonds 2.6 Range Notes 2.7 Modifying the coupon of a bond 2.8 Zero coupon bonds 2.9 Floating rate bonds 2.10 Inflation linked bonds 2.11 Subordinated bonds 2.12 Unsubordinated bonds 2.13 Other variation 2.14 Modifying the term to maturity of bond 2.14.1 Callable bonds 2.14.2 Puttable bonds
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2.14.3 Convertible bonds
III.
Resource Mobilization Unit

3.1 Introduction 3.2 Rupees resources(Domestic) Issue of bonds on Pvt. Placement basis Pre issue activities Post issue activities 3.3 Foreign currency resources (International) 3.4 PFCs Resource Mobilization
IV. V.
Commercial Paper Loans

5.1.1 Mibor Linked Loans 5.1.2 FCNR Bank Loans 5 .1.3 Short term loan (STL) &Medium term loan (MTL) 5.1.4 International Bonds
VI.
Indian Debt Markets: as profile

6.1 Primary corporate debt Market 6.2 Secondary corporate debt Market
VII.
Bench markets Reference Rate

7.1 LIBOR 7.2 EURIBOR 7.3 CCBOR 7.4 MIBOR
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VIII.
Quarter wise analysis of investor category in PFCs borrowings (Bonds) Year 2008 09
8.1 Quarter 1 8.2 Quarter 2 8.3 Quarter 3 8.4 Quarter 4
IX. X.
MIBBOR interest rate scenario External Commercial Borrowing

10.1 Introduction 10.2 External Commercial Borrowings (ECB) policy
XI. XII. XIII.
Suggestions & Recommendations Summary & conclusion References
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Chapter I POWER FINANCE CORPORATION (PFC)

1.1 INTRODUCTION
PFC was incorporated in 1986 as a Financial Institution (FI) dedicated to Power Sector financing and committed to the integrated development of the power and associated sectors. The Corporation was registered as a Non Banking Financial Company by RBI in 1997. PFC was declared as a Navratna PSE on 22nd June, 2007 by the Govt. of India, the highest honour and recognition that any PSE aspires for in the country.
1.2 VISION
To be the leading Institution in Financing for substantial development of Indian Power Sector and its linkages, with an eye on global operations.
1.3 MISSION
To become the most preferred Financial Institution in Power and Financial sector providing best products and services; promote efficient investments in Power Sector to enable availability of required quality power at minimum cost to consumers; reach out to global financial system for financing power development; act as a catalyst for reforming Indias Power Sector of tomorrow. o To provide financial resources and encourage the flow of investments in power and allied sectors o To work as a catalyst to bring about institutional improvement in streaming the functions of borrowers in the areas of financial, technical and managerial to ensure optimum utilization available resources. o To mobilize various types of resources viz. domestic and international o To strive for up gradation of skill in power sector for efficient and effective growth in power sector
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1.4 OBJECTIVES
To maximize the rate of return through efficient operations and introduction of innovative financial instruments and services in power sector. PFC was established with the sole objective of providing necessary funds in time at competitive rates for implementation of power projects vis--vis development of various power utilities and overall power sector. During the course of two decades of its journey, PFC has developed extensive power knowledge, skills and expertise to provide solutions to various problems faced by power utilities.
1.5 PRODUCT & SERVICES

PFC offers financial assistance through a range of products and services. Term loans, however, continues to be the principal product. Over the years, PFC has been broadening its
product range, both in the power sector and financial services. While the financial services include both fund based and non fund-based activities, the portfolio of power sector schemes has been expanded to cover Non-Conventional energy projects.
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PFC, through regular interactions with the borrowers, understands their specific requirements and develops suitable products. The new products/ services developed during the recent years include the following. Rupee Term Loans & Foreign Currency Loans/ Bridge Loans/ Short Term Loans ; Reform-Linked Transitional Loans ; Bill Discounting ; Equipment Leasing ; Buyers Line of Credit ; Loans to Equipment Manufacturers ; Line of Credit for the import of Coal ; Debt Refinancing ; Letters of Comfort ;Non-Fund Based Products Viz. , Deferred Payment Guarantees ; Consultancy and Advisory Services
CONSULTING AND ADVISORY SERVICES PFC is providing consulting and Advisory Services in the power and financial sectors to cater to State Power Utilities / Electricity Regulatory Commissions, which also includes Restructuring and Reform activities Financial Management of resources Project Management Selection of Developers through Tariff based competitive bidding guidelines HRD, MIS etc Ultra Mega Power Project (UMPP) The government of India mandated PFC as nodal agency to select the developer through competitive bidding Consultancy Services Unit is providing assistance to over 35 Clients spread across over 20 States. Some of the assignments are repeat orders which exhibit the Clients satisfaction with the services provided in the past. To augment the consultancy business, PFC separated its consultancy unit as subsidiary company under name PFC Consulting Pvt. Limited.
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1.6 BORROWERSS PROFILE

State Power Utilities State Power/ Electricity Departments Central Power Utilities Joint Sector Power Utilities Private Sector Power Utilities Co-operative Societies Municipal Bodies Power Equipment Manufacturers
1.7 Recent Initiatives:

Exploring possibilities of faster capacity addition through Special Purpose Vehicles. Made a foray into renewable energy sector. Extended tenor of loans up to 20 years for Hydro and 15 years for other schemes. Policy for short term financial assistance for import of coal introduced Expense limit increased for reforming GENCOS. Short-term loan extended to TRANSCOS against receivable from DISCOMS. Aims to capture a share of 20-25% of the total investment to be made in the Power Sector during the Xth and XIth Plan period.
1.8 Accomplishments
First Developmental Financial Institution to introduce Operational and Financial Action Plans to improve efficiency in the State Power Sector. Long term financial resources to the power sector from multilateral agencies channelized through PFC. Tapped international financial markets to raise ECBs, setting benchmark rates for Indian corporate.
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Complementing the efforts of Govt. of India, for its sponsored programmes Accelerated Generation & Supply Programme and Accelerated Power Development & Reform Programme. Introduced new tailor-made products and services like debt re-financing, interest restructuring, funding to equipment manufacturers, short term loans, buyers' line of credit and loans for asset acquisition.
1.9 Future Plans

Aims to capture a share of 20-25% of the total investment to be made in the Power Sector during the 10th and 11th Plan period. To consolidate and expand present business. To introduce new financial initiatives such as Universal Banking Services, Insurance, Equity Participation and Merchant Banking. To spread into allied sectors. To make a foray into global markets. Diversification in terms of forward or backward integration in the power sector (financing for fuel tie ups and laying down of gas pipelines).
1.10 Indian Power Sector

In the recent past, Indian economy has decisively moved to a higher growth trajectory marked by GDP growth of above 8% during the last 5 years. During the XI Plan Period (2007-2012) a growth target of 9% has been set by National Development Council, which requires commensurate infrastructure in power, roads, ports etc. PFC as the dominant player in the power sector, has a key role to play not only in the power sector but also in the associated infrastructure sector. We are all aware that the demand for power has consistently outstripped the supply. In order to bridge this demand supply gap, Govt. of Indias National Electricity Policy (NEP) stipulates Power For All by 2012 and aims to achieve a per capita consumption of 1,000 Kwh by the end of XIth Plan, by adding a capacity of over 1,00,000
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MW. This requires massive investment of over Rs.10,00,000 crore during this Plan period including establishment of requisite transmission and distribution system. The initiatives of the Govt. of India for adding the requisite capacity, have already started yielding the desired results. A testimony to this is the commissioning of over 9,250 MW capacity during the 1st year of the XIth Plan period, compared to about 21,000 MW commissioned during all the 5 years of Xth plan. In addition, over 66,000 MW is already under construction and will be supplemented by about 28,000 MW from renewable energy sources and captive power plants. The above capacity addition programme excludes capacity addition of 12,000 MW through UMPPs which has already been awarded and necessary work is under progress for their commissioning in a phased manner in the initial years of XII Plan. To provide thrust to investment in power sector, Govt. of India has announced setting up of a `National Fund for Transmission and Distribution Reform in the Budget for FY 2008-09. The proposed fund is expected to facilitate higher inflow of investment for strengthening and augmenting the T&D network commensurate with the capacity addition programme and also targets T&D loss reduction by providing grants on achievement of loss reduction, thus benefiting the ultimate consumer in terms of reliable and quality power.
1.11 PERFORMANCE HIGHLIGHTS

With a glorious history of over two-decades, underscored by tangible accomplishments in Indian power sector, PFC has firmly entrenched itself as a leading Financial Institution through its knowledge, skills and expertise by providing innovative solutions to power utilities. PFCs catalytic role in growth of the sector has catapulted it to the centre stage. This has paved the way for its active involvement in a host of Government-sponsored initiatives which include: Ultra Mega Power Projects for economies of scale and deployment of Super Critical Technology Accelerated Power Development & Reform Programme (APDRP) for reduction of AT&C losses Merchant Power Plants to achieve the targeted capacity addition Assisting State Power Utilities in preparation of CDM projects for R&M of old - 13 -
Thermal and Hydro generation plants to enhance their life at rated capacity, Delivery through Decentralised Management (DDM) to showcase model of excellence in distribution primarily in rural areas, Distribution, Reform, Upgrades & Management (DRUM) for commercially viable distribution system for reliable and quality power etc. Company had sanctioned Rs.1,86,419 crore and disbursed Rs.92,065 crore, by the end of FY2007-08. It had supported a capacity addition of over 70,000 MW and about 33,000 MW capacity has already been commissioned which is about 23% of the total installed capacity in the country.
The Corporation witnessed yet another year of sterling performance and established new benchmarks in various areas of its operation. The loans sanctioned for various projects reached a figure of Rs. 69,498 crores, an increase of 123% over last year which shall pave the way for higher disbursements in the years to come. The disbursement made during the year reached a level of Rs. 16,211 crore, an increase of 15% over previous year. The Total Income rose to Rs. 5,040 crore compared with Rs. 3,928 crore during the previous year representing an increase of 28%. The Net Profit is up by 22% at Rs. 1,207 crore from Rs. 986 of previous year. The Recovery Rate stood at 99.11% in respect of principal amount due and the net NPAs have reduced to a record low of 0.01% of Net Loan Assets as on 31.3.2008. PFC has been supporting reforms for overall improvement in the performance of State Power Utilities. The Utilities are categorized based on the reform status, operational and financial performance parameters which enable PFC to determine its credit exposure and differential loan pricing mechanism. Quarterly Performance Research Report and the Annual Report on Performance of State Power Utilities published by PFC is acknowledged as authoritative source of information by various stakeholders in the Power Sector and also by State Power Utilities who take corrective measures on the key issues flagged in the report to improve their performance. The fact that PFC is a dominant player is amply substantiated by its market share of over 20% in Indian Power Sector in terms of investment in the X Five Year Plan. The Corporation is poised to take full advantage of the emerging opportunities in the power sector.
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RECENT POLICY INITIATIVES In order to keep pace with the emerging market requirements, the Company has taken several new initiatives during the year under review. Some of the key policies introduced during the year relate to financing of initial project development expenditure including land acquisition, financing of grid-connected solar PV power generation projects, funding of energy saving projects. In addition to this, policy and guidelines pertaining to lease finance scheme for wind power projects, extent of funding for T&D projects, and payments terms for short-term loans, were revised during the year.
1.12 SWOT ANALYSIS

1.12.1 STRENGTHS
o Indias leading power finance company catering to diverse needs of the high growth power sector o Govt. of India undertaking o Good quality management o Well established, Long standing relations in the power industry o Implementing agency for Government schemes like AG &SP and APDRP o Highest credit rating for domestic debt and capped by the sovereign rating for long-term foreign debt o High collection efficiency with implementation of Operational and Financial Action Plan to ensure SEB discipline o Strong financials with high net margins.
1.12.2 WEAKNESSES
o Poor asset quality with most of the lending to SEBs, whose loan repayment capabilities in the long run is doubtful o Concentration risk attributed to lending in single sector
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o Significant shortages in the supply of crude oil, natural gas or coal could adversely affect the Indian economy and the power sector projects to which PFC has exposure, which could adversely affect PFC
1.12.3 OPPORTUNITIES
Power sector presents significant investment opportunities Sector expertise for consultancy and providing investment gateways for domestic and external financial agencies New business opportunities to cover the entire range of activities in the Power sector
1.12.4 THREATS
o REC has also been allowed to disburse funds to whole power sector whose operations were, hitherto before, were restricted to rural areas. It diluted PFCs competitive edge. o With increasing exposure to SEBs, their weak balance sheet may affect PFCs creditworthiness o Currently, borrowers of PFC are unable to attract other sources of funding. If the reform program is successful, and these entities become creditworthy, PFCs ability to lend against quality assets would be weakened.
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1.13 PFC BUSINESS STRATEGY
Figure 2-2 PFC BUSINESS STRATEGY
IMPLEMENTATION OF GOVERNMENT POLICIES AND PROGRAMMES
PFC, a Government Company, occupies a key position in government plans for the growth and development of the Indian power sector. PFC had played and will continue to play a key role in the implementation of government policies and programmers. PFC is acting as a nodal agency to implement various policies and programmers of the GoI such as Accelerated Power Development & Reform Program (ARDRP), Accelerated Generation & Supply Programmers (AG&SP), Distribution Reform, Upgrades and Management (DRUM), Delivery through Decentralized Management (DDM), Rural Electrification Initiative. PFC had also provided value to its clients by improving their operational and managerial capabilities and also by assisting them in their reform and restructuring programmes.
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PROMOTING REFORM & RESTRUCTURING OF STATE POWER UTILITIES BY PFC
State Entity Action Plans - Reform Operational and Financial Action Plans (R-OFAP) are formulated in consultation with utility concerned for developing a scheme for improvement of the entities technical and financial performance; preparing a financial package where funding is linked to the entity reaching specified targets and goals, it also focuses on self-sustainability of the sector in the long run. Initiative towards Reforms and Restructuring - PFC has been acting as a catalyst and promoting reforms for over all improvement in the financial and technical performance of the State Power Utilities. It brings out a research report containing key operational and financial performance parameters, reform status, implementation of Electricity Act 2003, areas of concern and conditions for improvements on quarterly basis and is sent to the stakeholders flagging the key issues for review and corrective measures.
GROWTH STRATEGIES
State Sector financing to continue to be mainstay with focus on enhanced funding of Private Sector Loan Syndication for Large projects Expansion of borrowers portfolio to cover various fuel suppliers for power generation like coal, lignite, oil & gas companies etc To focus on non-Conventional Energy Sources like Wind Power, Biomass etc and Energy Conversation and Energy Efficiency projects.
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Chapter II STRUCTURED DEBT INSTRUMENTS

Debt instruments represent contracts whereby one party lends money to another on predetermined terms with regard to rate of interest to be paid by the borrower to the lender, the periodicity of such interest payments, and the repayment of the principal amount borrowed. The terms of lending can be varied to arrive at innovative debt instruments to attract wider investor base.
2.1 Step-up Bonds

In this kind of bonds the coupon rate increases over time. The bond structure could be so designed where in the coupon rate would be x % for first few years and then x + y % for the next few years and so on. It provides incentive to the investors to hold on to the bond for a longer duration. (Ex: IDBI Growing Interest Bond (1999-2000)).
2.2 Insured Bonds

In this kind of instrument principal and coupon interest is insured by an insurance company. The deal is so worked out that the bond holder is paid by the insurance company in case of default or delay in payment.
2.3 Revenue Bonds

These kinds of bonds are issued for enterprise financing that is secured by the revenues generated by the completed projects themselves. These bonds can be typically linked to each most secured project/proposal available.
2.4 GARVEEs (Grant Anticipation Revenue Vehicles)
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These bonds are issued by large transportation/infrastructure projects where cost of debt is lesser than cost of delay.
2.5 Capital Indexed Bonds

These kinds of bonds have two components of Coupon Rate. First is the base coupon rate and latter part is linked to some benchmark rate, which could be rate of inflation. This benchmark could be anything inflation, crude oil prices etc. Typical advantage of this kind of bonds is that they reduced the uncertainty related to the benchmark rate. Ex: RBI issued first ever 5 yr Capital Indexed Bonds on Dec 29, 1997 for Rs. 704.52 Cr having a base coupon of 6%..
2.6 Range Notes

These are those securities which have floating rate bound within a specific range. If the reference rate crosses a particular range the coupon rate becomes zero. (Reference rate is LIBOR).
2.7 Modifying the Coupon of a Bond

In a plain vanilla bond, coupon is paid at a pre-determined rate, as a percentage of the par value of the bond. Several modifications to the manner in which coupons/ interest on a bond is paid are possible.
2.8 Zero Coupon Bond

In such a bond, no coupons are paid. The bond is instead issued at discount to its face value, at which it will be redeemed. There are no intermittent payments of interest. When such a bond is issued for a very long tenor, the issue price is at a steep discount to the redemption value. Such a zero coupon bond is also called a deep discount bond.
2.9 Floating Rate Bonds

Instead of a pre-determined rate at which coupons are paid, it is possible to structure bonds, where the rate of interest is re-set periodically, based on a benchmark rate. Such bonds whose coupon rate is not fixed, but reset with reference to a benchmark rate, are called floating rate bonds. Some floating rate bonds are also have caps and floors, which represent the upper and lower limit within which the floating rates can vary. A ceiling or a cap represents the maximum
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interest that the borrower will pay, should the benchmark rate move above such a level. Most corporate bonds linked to the call rates, have such a ceiling to cap the interest obligation of the borrower, in the event of the benchmark call rates rising very steeply. Floating rate bonds, whose coupon rates are bound by both a cap and floor, are called as range notes, because the coupon rates vary within a certain range.
2.10 Inflation linked Bonds

In these bonds the principal amount is indexed to inflation. The interest rate is lower than for fixed rate bonds with a comparable maturity. However, as the principal amount grows, the payments increase with inflation. The government of the United Kingdom was the first to issue inflation linked Gilts in the 1980's. Treasury Inflation-Protected Securities (TIPS) and I-bonds are examples of inflation linked bonds issued by the U.S. Government.
2.11 Subordinated Bonds

These have a lower priority than other bonds of the issuer in case of liquidation. In case of bankruptcy, there is a hierarchy of creditors. First the liquidator is paid, then government taxes, etc. The first bond holders in line to be paid are those holding what is called senior bonds. After they have been paid, the subordinated bond holders are paid. As the expectation that you get paid back is lower, the risk is higher. Therefore, subordinated bonds have a lower credit rating then senior bonds. The main examples of subordinated bonds can be found in bonds issued by banks, and asset-backed securities. The latter are often issued in tranches. The senior tranches get paid back first, the subordinated tranches later
2.12 Unsubordinated Bonds

In addition to the credit quality of the issuer, the priority of the bond is a determiner of the probability that the issuer will pay you back your money. The priority indicates your place in line should the company default on payments. If you hold an unsubordinated security and the company defaults, you will be first in line to receive payment from the liquidation of its assets.
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2.13 Other Variations

The structures that enable the borrowers to defer the payment of coupons can also be created. Some of the more popular structures were : (a) deferred interest bonds, where the borrower could defer the payment of coupons in the initial 3 to 7 year period; (b) extendible reset bond, in which investment bankers reset the rates, not on the basis of a benchmark, but after renegotiating a new rate, which in the opinion of the lender and borrower, represented the rate of the bond after taking into account the new circumstances at the time of reset.
2.14 Modifying the Term to Maturity of a Bond

2.14.1 Callable Bonds
Bonds that allow the issuer to alter the tenor of a bond, by redeeming it prior to the original maturity date, are called callable bonds. The inclusion of this feature in the bonds structure provides the issuer the right to fully or partially retire the bond, and is therefore in the nature of call option on the bond. Since these options are not separated from the original bond issue, they are also called embedded options. A call option can be an European option, where the issuer specifies the date on which the option could be exercised. Alternatively, the issuer can embed an American option in the bond, providing him the right to call the bond on or anytime before a pre-specified dated.
2.14.2 Puttable Bonds

Bonds that provide the investor with the right to seek redemption from the issuer, prior to the maturity date, are called puttable bonds. The put options embedded in the bond provides the investor the right to partially or fully sell the bonds back to the issuer, either on or before prespecified dates. The actual terms of the put option are stipulated in the original bond indenture.
2.14.3 Convertible Bonds

A convertible bond provides the investor the option to convert the value of the outstanding bond into equity of the borrowing firm, on pre-specified terms. Exercising this option leads to redemption of the bond prior to maturity, and its replacement with equity. At the time of the bonds issue, the indenture clearly specifies the conversion ratio and conversion price.
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Chapter III Resource Mobilization Unit

3.1 Introduction
Resource Mobilization Unit (RMU) is responsible for raising fund resources both in domestic for further disbursement as financial assistance to its customers. RMU also undertakes various activities like appointment for various agencies like RTA, Trustees, IPA, Collecting and Paying Banker for coordinating the resource mobilizing process. It is also responsible for listing for various debt instruments on NSE. The main objective of the RM department is to mobilize resources/raise funds at the minimum cost and the easiest terms and conditions keeping in mind the requirements, objectives and the financial position of the company. The fund requirement for carrying out disbursement varies from year to year. In 2000-2001, the disbursement was amounting to Rs. 3230 Crores. In the year 2005-2006 PFC achieved a disbursement level of as high as 9870 Crores, a three-fold increase. Thus, in order to keep pace with the increasing level of disbursement needs, the RMU has to keep itself occupied and vigilant to tap the markets for smooth operations of the company. It generally funds assets, comprising loans to the power sector, with borrowings of various maturities in the international and domestic market. Market borrowings include bonds, short term loans, medium term loans, long term loans, and commercial papers. Since 1999, all funds raised, both domestic and international, have been raised on an unsecured basis and we have no outstanding secured loans as on March 31, 2008 The following table sets forth debtfunding operations for total indebtedness classified by rupee denominated and foreign currency source at March 31, 2002, 2003, 2004, 2005,2006,2007 and 2008. The Rupee equivalents of foreign currency debts are based on the bank- selling rate at the end of each fiscal year.
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The company segments the market into two: Domestic and International
3.2 Rupee resources (Domestic)

In terms of the domestic resource, a significant proportion of Rupee funds are raised through privately placed bond issues in the domestic market and term loans. It has a diverse investor base of banks, financial institutions, mutual funds, insurance companies, provident fund trusts and superannuation trusts. The bonds issued are unsecured, redeemable, non-convertible, non-cumulative and taxable and are listed on the wholesale debt market segment of the NSE. The bonds are rated LAAA by ICRA and AAA by CRISIL, the highest safety domestic ratings. In fiscal 1988, the ministry of finance authorized public sector issuers that were infrastructure oriented to issue tax-exempt bounds. The corporation historically has been given a large share of this annual allocation and a large portion of the funds were raised through tax-exempt bounds. From fiscal 2001 onwards, it became part of governments overall policy to reduce funding support to companies that had became financially independent and that could raise resource at competitive rates at their own. After this time, direct support from the Government of India for raising debt reduced. As on march 31, 2007, corporation had Rs.2,800 million in tax-exempt bonds outstanding. In addition as on march 31, 2007, corporation had Rs. 1015000 million in non-exempt bounds and Rs. 350000 million in term loans from Indian banks and financial institutions. In fiscal 2006, PFC issued Rs. 1,340 million worth of infrastructure bounds, on a private placement basis, which were issued with tax benefit under section 88 of the income tax Act, 1961. These tax benefits made the bonds attractive to individuals and Hindu Undivided Familys.
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Portfolio during 07-08

During the Financial year 07-08 the RMU was able to mobilize enough funds to meet the disbursement targets. However it raised lesser amount of funds as compared to the amount of funds which were estimated in the borrowing plan for the financial year due to the revised disbursement targets. The majority of the funds in the financial were raised by the bonds (unsecured, non-convertible). The RMU was also able to mobilize around 50% of the funds requirement by the way loans having maturities ranging from 6 months to 5 years.
Borrowings during FY 2008-09 (in %age)
Commercial Paper 10% Short Term Loan 6%
Commercial Paper Short Term Loan Long Term Loan Bonds
Bonds 59%
Long Term Loan 25%
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Issues of bonds on private placement basis.
a) Pre issue activity
Statutory Guidances in r/o issue of bonds on Private placement basis
A. B. C. D. E.
Registrar and Transfer Agent Trustees Collection Bankers Merchant Bankers Issuing & Paying agent
Preparation of information Memorandum presentation of financial and market data Forward looking statements Risk factors
Board approval and uploading on NSE Web site on WDM Segments
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b) Post Issue Activities Borrowing Plan/ Fund Requirement from TMU
Analysis of liquidity and market scenario
Assessment of AL&RM position for fixation of tenure
Decision on type of Bond Issue
Tenor
Coupon Rate
Fixed/ Floating
With/ Without Arranger
Plain Vanilla /Swap
Launch of Bond Issue
Receipt of Funds/ Application Forms
Closure of issue
Allotment of Bonds
Fig 2.3: Post Issue Activities
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3.3 Foreign currency resources (International)

PFC began accessing foreign currency loans from multilateral, bilateral and export credit agencies in fiscal 1991 when it obtained funds from the French government, which were guaranteed by the government of India. Subsequently, it obtained a complementary financing loan from the Asian Development Bank in fiscal 1991, which was denominated in US Dollars and Japanese Yen. Traditionally, major foreign currency borrowing has been from multilateral institutions such as the World Bank and the ADB. These funds were routed through government of India, were the foreign exchange risk was borne by government of India. PFC first accessed commercial foreign currency borrowings that were not guaranteed by the Government of India in January 1997 with the establishment of a syndicated loan facility. Since then, corporation has borrowed funds in the international commercial markets in the form of syndicated loans as well as fixed and floating rate note/bonds issues. This has enabled PFC to diversify the investor base. At present the corporation is borrowing directly from these agencies, where foreign exchange risk is borne by the corporation. PFC has a US$50 million line of credit facility with the ADB that has a 20 year tenure. This line of credit facility is guaranteed by the government of India. Projects in the states of west Bengal and Maharashtra for strengthening the transmission and distribution systems of state Power utilities and for the renovation and modernization of thermal power plant are being funded this line of credit facility.
The 3 main decisions taken by Resource Mobilization department are:
i. ii. iii.
When to raise Funds and for what tenure. Instruments to be used for raising these funds. Pricing of the debt raised.
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i ) When to raise funds The RM Unit has to decide when will it be most conducive to raise funds for the company so as to ensure there is: a. Timely availability of funds. b. Lowest Cost at which funds can be raised. c. Least pressure for obligations. The amount of funds to be raised is normally decided by the Treasury Management Unit. The RM Unit prepares a Liquidity Statement to find out the time for raising funds when there is least pressure for obligations for the company. Liquidity Statement shows the funds inflows and outflows of the company. The following factors are taken into consideration while preparing it: Amount of Disbursement that has to be made. Interest Payments. Repayment of loan taken by the company. Taxes, Dividends, etc.
Funding Sources: PFC generally fund their assets, comprising loans to the power sector, with borrowings of various maturities in the international and domestic markets. Their market borrowings include bonds, short term loans, medium term loans, long term loans, and commercial papers.
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Sources of Funds Debt Domestic Long Term to Medium Term Taxable & Non Taxable Bonds FCNR (B) (Fixed & LIBOR Linked) Short Term International ECB Multilateral Loans ECAs Equity
Commercial Paper FCNR (B) Loan ICD
Loans Fixed Rate MIBOR Linked
ii) Instruments to be used for raising funds:
Debt instruments are obligations undertaken by the issuer of the instrument as regards certain future cash flows representing interest and principal, which the issuer would pay to the legal owner of the instrument. Debt instruments are of various types. They are:
a. Money Market Instruments: The term money market refers to the market for short-term requirements and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year. The most active part of the money market is the market for overnight and term money between banks and institution (called call money) and the market for repo transactions. The main traded instruments are commercial papers (CPs), certificate of deposits (CDs) and
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treasury bills (T-Bills). All of these are discounted instruments i.e. they are issued at a discount to their maturity value and the difference between the issuing price and the maturity/face value is the implicit interest. These are also completely unsecured instruments. One of the most important features of money market instruments is their high liquidity and tradability. A key reason for this is that these instruments are transferred by endorsement and delivery and there is no stamp duty or any other fee levied when the instrument changes hands. Also there is no tax deducted at source from the interest component. b. Long term Debt Instruments: These are the instruments having a maturity exceeding one year. The main instruments are Government of India securities (GOISEC), State Government securities (state loans), Public Sector bonds (PSU bonds), corporate debentures, etc. Most of these are coupon bearing instruments i.e. interest payments (called coupon) are payable at pre specified dates called coupon dates. At any given point of time, any such instrument has a certain amount of accrued with it i.e. interest which has accrued (but is not yet due) calculated at the coupon rate from the date of the last coupon payment. E.g. if 30 days have elapsed from the last coupon payment of a 14% coupon debenture with a face value of Rs.100, the accrued interest will be 100*0.14*30/365 =1.15 Whenever coupon-bearing securities are traded, by convention, they are traded at a base price with the accrued interest separate. In other words, the total price would be equal to the summation of the base price and the accrued interest. iii) Pricing of the Issue: The unit has to keep a number of factors into consideration to decide upon the price of the instruments and loan facilities it wish to avail.
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The factors considered by the company normally are:
Liquidity Position of the company Present Benchmark Rates Primary / Secondary Market Conditions Timing of issue or raising Quantum of funds to be raised Liquidity in the debt market Other Economic and market consideration
3.4 PFCs Resource Mobilization

PFC has initially made forays into the debt market to raise long-term funds through Tax-free Bonds / SLR Bonds / Taxable Bonds. With the gradual withdrawal of budgetary support from Govt of India and to keep up the high growth rates of disbursement, PFC diversified and looked at the other long term sources like Rupee Term Loans from Term Lending Institutions/Banks/ Other Financial Intermediaries and Vanilla / Structured Taxable Bond Issuances. The preferred mode of issuance has been private placement. As the resource requirement for PFC is growing to keep up its disbursement growth rate it needs to penetrate into the market by diversifying its investor base and also issuing innovative debt Instruments to attract wider investor base. Some of the alternatives to diversify investor base and debt instruments, PFC can look at the following strategies: -
Investor Base
The typical Investors in PFCs Paper have been the investors as detailed below. PFC can look at penetrating into these segments more exhaustively and comprehensively Banks FIs - 32 -
Mutual Funds Provident Funds Insurance Companies PFC can also look at the other potential Investors as detailed below to diversify and add to its investor base. Regional Rural Banks State Co-operative Banks & Scheduled Urban Co-operative Banks State Financial Corporations State Industrial Development Corporations State Small Industries Development Corporations Housing Finance Corporations NBFCs FIIs Charitable Institutions, Trusts and Societies Autonomous Bodies/Local Authorities Primary Dealers Corporates High Net worth Individuals
PFC has already written letters to most of the untapped investor base mentioned above to indicate their interest in investing in PFC. Further, to build relations with Investors we are in touch with them to handle any queries if any and have been sending information about PFC like annual reports, intermediate financial results etc.
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Chapter IV
COMMERCIAL PAPER (CPs)

Commercial paper (CP) is an unsecured debt instrument of up to 365 days' maturity issued by investment-grade corporations. CPs are issued by corporations/banks to finance their short-term credit needs such as account receivables and inventories, to provide bridge financing in connection with various transactions, and for day-to-day cash management. Despite this active new-issue market, secondary trading is thin, consisting primarily of trades between the major dealers and investors who wish to liquidate their holdings. In addition to having limited liquidity, commercial paper is subject to default. Hence, the difference in expected returns between a longterm position in commercial paper and a strategy of rolling over shorter-term paper will reflect not only the usual premia that compensate investors for interest-rate risk, but also premia to compensate for default risk.
Chapter V 5.1 LOANS

5.1.1 MIBOR LINKED Loans
The benchmark index incase of these kinds of short terms instruments is Mumbai Inter-bank Offer Rate (MIBOR). This instrument typical involves linking of interest rates to MIBORX basis points. These kind of loans are one of the most cheapest source of finance
5.1.2 FCNR Bank Loans

FCNR (B) loans are a low cost, short-term funding source available to Indian Corporates. Banks have been permitted to provide foreign currency denominated loans to their customers from the resources mobilised under the FCNR (B) scheme. RBI granted this permission to help banks to deploy their FCNR funds in a more commercially viable manner and make available a better avenue of credit at cheaper interest rates to resident borrowers. No special permission is required from the regulatory authorities for availing
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FCNR (B) loans and the existing rupee credit limits can be converted into a foreign currency loan. The interest rates and the tenor of the loans are left free to be decided by negotiation between banks and borrowers. They are generally granted for periods Upto three years. Normally, loans under this scheme are not given for an amount less than USD 100,000. Loans are generally denominated in the four currencies in which FCNR deposits are accepted viz. US Dollar, Euro, Japanese Yen and Pound Sterling, the US Dollar being the most popular currency of choice. In recent times, FCNR (B) loans have been the preferred route for many Corporates especially with regard to their working capital requirements. Even though Commercial Paper (CP) can be used to raise low cost funding, it is not possible for all corporates to issue CPs due to the requirement of an acceptable credit rating for the purpose. While the introduction of the scheme has placed a low cost funding option at the disposal of Indian corporates, they have to deal with two types of risks when they avail such loans. Foreign exchange risk - risk of rupee depreciation against the currency of loan as the principal and the interest have to be repaid in the foreign currency in which the loan is denominated. Interest rate risk - risk of the benchmark interest rate (LIBOR) being reset higher e.g. one year loan with interest rate fixing (reset) every three months). Therefore, the borrower has to take note of the fact that the loan is an advantage only when the overall cost of borrowing (cost of forward forex cover + interest cost) in foreign currency is less than the rupee cost of funds.
5.1.3 SHORT TERMS LOANS (STL) & MEDIUM TERM LOANS (MTL)
STLs & MTLs are loans which are available from banks. These kinds of loans normally carry a prepayment clause but are hardly ever exercised. Typical advantage of STLs & MTLs is that it can be drawn in tranches and according to requirement and constitutes no carrying costs. These loans are to be repaid on a monthly basis and annualized cost is slightly higher than the indicative cost of the Term Loan.
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Apart from the above sources of finance PFC can look into tapping the funds from other sources such as Mutual funds, Insurance firms etc. In this regard process has been initiated with Life Insurance Corporation (LIC) of India Limited for tapping their funds.
4.1.4 INTERNATIONAL BONDS a) Euro bonds b) Foreign bonds
a)
Euro Bonds
Euro bond refers to the bonds issued and sold outside the home country of the currency of issue. For e.g. a dollar bond issued in Europe is called euro dollar bond. Euro bonds are simultaneously sold in many countries other than the country of currency in which the issue is denominated. These bonds are issued in international market and denominated in hard currency i.e. dollar, yen, pound, euro. Euro bonds in particular are bearer securities, the names of the bearer are not registered anywhere. Euro bonds generally unsecured debt securities maturing atleast a year after launch. Euro bonds are long-term loans usually having a maturity period between 5 years to 30 years. Nowadays euro bonds have a maximum maturity period of 10 years. The euro bonds may be fixed or floating rate bonds. Eurobonds are suitable sources of finance for operations, which require: Large capital sums of money for long period Borrowing not subject to domestic regulations especially exchange controls, which may limit their ability to export capital gains.
b) Foreign Bond
A bond issued in a particular country by a foreign borrower (or) a bond sold by a foreign borrower, denominated in the currency of country in which it is sold and is underwritten & syndicated by national underwriting syndicate in the lending country .Foreign bonds are floated in the domestic capital markets (and are in the domestic currency of those markets) by
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non-resident entities. These bonds are different from Euro bonds in the sense that they are governed by the regulations of the country in which they are issued whereas Euro bonds are not. The bonds are generally named on the basis of the\ capital markets in which they are floated. Some of the well-known foreign bonds are as follows:
Yankee Bonds: Yankee bond is a dollar denominated bond issued in U.S by a nonU.S. borrower in the U.S. market. The advantages of Yankee bonds are that the longer maturities of bonds place them outside the ECB ceiling. Yankee bond markets are extremely deep and liquid market and funds are available at low interest rates for long maturity periods. The US markets are not bound by rigid syndicates and fee structures. Samurai bond: Samurai bonds are yen denominated bonds issued in Japan by a non-Japanese borrower. Bulldog bonds: Bulldog bonds are pound denominated bonds issued in U.K. domestic market by a non U.K. borrower.
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Chapter VI
Indian Debt Markets: A Profile

Indian debt markets, in the early nineties, were characterized by controls on pricing of assets, segmentation of markets and barriers to entry, low levels of liquidity, limited number of players, near lack of transparency, and high transactions cost. Financial reforms have significantly changed the Indian debt markets for the better. Most debt instruments are now priced freely on the markets; trading mechanisms have been altered to provide for higher levels of transparency, higher liquidity, and lower transactions costs; new participants have entered the markets, broad basing the types of players in the markets; methods of security issuance, and innovation in the structure of instruments have taken place; and there has been a significant improvement in the dissemination of market information.
Regulator's
SEBI,RBI,DCA ISSUER
Central Govt.
MARKET SEGMENT
INSTRUMENT
GOI dated security, T-Bill, State Govt. Security, Index Bond, Zero Coupon Bond Govt. Guaranteed Bonds/ Debentures PSU Bonds, Debenture, CP CD, Bonds, Debenture PCDs, Bonds, Debenture, CP, SPN, Floating Rate Notes CD, Bonds, Debenture,CP
INVESTOR
RBI DFI
SOVERIGN ISSUE
State Govt. Govt. Agencies & Stat. Bodies
BANK PENSION FUND FIIs CORPORATES INDIVIDUALS PROVIDENT FUND INSURANCE Co., TRUST, MUTUAL FUND
PUBLIC SECTOR
PSUs Comm Banks/ DFIs Corporates
PRIVATE SECTOR
Pvt. Sector Banks
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6.1 Primary Corporate Debt Market

Market structure consists of issuers, instruments, processes, investors, rating agencies and regulatory environment. A. Issuers - Indian Debt Market has almost all possible variety of issuers as is the case in many developed markets. It has large private sector corporate, public sector undertakings (union as well as state), financial institutions, banks and medium and small companies.
B. Instruments - Till recently Indian debt market was predominantly dominated by plain vanilla bonds. Over a period of time, many other instruments have been issued. They include partly convertible debentures (PCDs), fully convertible debentures (FCDs), deep discount bonds (DDBs), zero coupon bonds (ZCBs), bonds with warrants, floating rate notes (FRNs) / bonds and secured premium notes (SPNs).
C. Processes - There are several processes that are in vogue in India as well as in other markets. The more popular ones are public issue and private placement routes. The dominance of private placement in total issuances is attributable to the following factors Under private placement, the deals can be tailor made to suit requirements of both the issuer and the investor. The mandatory lengthy issuance procedure for public issues, in particular, the information disclosure requirements, was not applicable to private placement. It is observed that private placement route generally involves lower issuance costs.
D. Intermediaries - Two classes of intermediaries required for the proper development of debt market are broker and investment banker/ merchant banker. Most of the brokers as well as merchant bankers in India are inadequately capitalized and their professional knowledge also needs further improvement.
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E. Investors - For the development of Corporate Debt Market / Fixed Income Securities Market, it is necessary and sufficient to have a large as well as diverse number of sophisticated / institutional investors.
F. Rating agencies - India has a well developed Credit Rating Agency system and rating agencies are well experienced and regarded. By and large, their ratings do carry confidence in the market.
6.2 Secondary Corporate Debt Market

Appropriate micro-structure of secondary market is vital for trading, clearing and settlement. The present infrastructure has its own merits and demerits. Some of the micro structure features are discussed below:
A. Trading Platform Corporate debt instruments are traded either on bilateral agreement between two counterparties or on a stock exchange through brokers. Worldwide, the majority of transaction in corporate bonds is conducted in the over-the-counter (OTC) market by bilateral agreements. In India corporate bonds are traded (ANNEXURE 1), mostly, on WDM segment of NSE. The National Stock Exchange (NSE) introduced a transparent screen- based trading system in the whole sale debt market, including government securities in June 1994. The wholesale debt market (WDM) segment of NSE has been providing a platform for trading / reporting of a wide range of debt securities. The WDM trading system, known as NEAT (National Exchange for Automated Trading), is a fully automated screen based trading system, which enables members across the country to trade simultaneously with enormous ease and efficiency.
B. Clearing and Settlement Mechanism - Primary responsibility of settling trades concluded in the WDM segment rests directly with the participants and the exchange monitors the settlement. Mostly these trades are settled in Mumbai. Each transaction is settled individually and netting of transactions is not allowed.
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C. Investors in WDM - large investors and high average trade value characterize this segment. Till recently the market was purely an informal market with most of the trades directly negotiated and stuck between various participants. The commencement of this segment by NSE has bought transparency and efficiency to the debt market, along with effective monitoring an surveillance to the market.
D. Regulatory Environment - listed corporate debt is under the regulations of SEBI. SEBI is involved whenever there is any entity raising money from individual investors through public issue/private placement. It regulates the manner in which such money are raised and tries to ensure a fair play for the retail investor.
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Chapter VII Benchmarks Reference Rate

A good benchmark reference rate provides the pulse and direction of the market for the day as it is collated in early market hours from important market participants who Weigh their options on various factors that would likely to drive their lending and borrowing business during the course of the day. The important factors include, among others, information on liquidity condition in the market, demand and supply condition, central banks likely support to the market, money flows in and out of the market, general rates prevailing in the short term markets, inflation rate updates, important policy directives, etc. A good benchmark rate should garner the respect of the market participants and used widely in. LIBOR (London Inter Bank Offer Rate) disseminated by British Banks Association is one of the most important and widely used benchmark reference rate in the world. Many central banks also disseminate reference rates like Repo/Reverse Repo rates. A dynamic benchmark reference rate is a very important infrastructural support to the market participants in financial markets. This is important as all derivative pricing is done on the basis of the reference benchmark rates. The benchmark reference rate is an interest rate closely followed by market participants in pricing their products and using the same while executing various other transactions. An ideal benchmark rate plays a useful role not only in the short term market but also helps in pricing of complex products like derivatives. Some of the most followed benchmark rates are 7.1LIBOR - The London Interbank Offered Rate is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market). LIBOR will be slightly higher than the London Interbank Bid Rate (LIBID), the rate at which banks are prepared to accept deposits. During 1984 it became apparent that an increasing number of banks were trading actively in a
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variety of relatively new market instruments, notably Interest Rate Swaps, Foreign Currency Options and Forward Rate Agreements. Whilst recognizing that such instruments brought more business and greater depth to the London Interbank market, it was felt that future growth could be inhibited unless a measure of uniformity was introduced. In October 1984 the British Bankers' Association working with other parties such as the Bank of England established various working parties, which eventually culminated in the production of the BBAIRS terms - the BBA standard for Interest Swap rates. Part of this standard included the fixing of BBA Interest Settlement rates, the predecessor of BBA LIBOR. From 2 September 1985 the BBAIRS terms became standard market practice. BBA LIBOR fixings did not commence officially before 1 January 1986, although before that some rates have been fixed for a trial period commencing in December 1984. LIBOR is published by the British Bankers' Association (BBA) after 11:00 am (and generally around 11:45 am) each day, London time, and is a filtered average of inter-bank deposit rates offered by designated contributor banks, for maturities ranging from overnight to one year. There are 16 such contributor banks and the reported interest is the mean of the 8 middle values. The shorter rates, i.e., up to 6 months, are usually quite reliable and tend to precisely reflect market conditions. The actual rate at which banks will lend to one another will, however, continue to vary throughout the day.
7.2EURIBOR - The Euro Interbank Offered Rate is a daily reference rate based on the averaged interest rates at which banks offer to lend unsecured funds to other banks in the euro wholesale money market (or interbank market). EURIBOR rates are used as a reference rate for euro-denominated forward rate agreements, short term interest rate futures contracts and interest rate swaps, in very much the same way as LIBOR rates are commonly used for Sterling and US dollar-denominated instruments. They thus provide the basis for some of the world's most liquid and active interest rate markets. Domestic reference rates, like Paris' PIBOR or Frankfurt's FIBOR merged into EURIBOR on EMU day on 1 January 1999. A representative panel of banks provide daily quotes of the rate, rounded to two decimal places, that each panel bank believes one prime bank is quoting to another prime bank for interbank term deposits within the Euro zone, for maturity ranging from one week to one year. Every Panel Bank is required to directly input its data no later than 10:45 a.m. (CET) on each day that the Trans-European Automated Real-Time Gross-Settlement Express Transfer system
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(TARGET) is open. At 11:00 a.m. (CET), Reuters will process the EURIBOR calculation and instantaneously publish the reference rate on Reuters pages 248-249, which will be made available to all its subscribers and to other data vendors. The published rate is a rounded, truncated mean of the quoted rates: the highest and lowest 15% of quotes are eliminated, the remainder are averaged and the result is rounded to 3 decimal places. EURIBOR rates are spot rates, i.e. for a start two working days after measurement day. Like US money-market rates, they are Actual/360, i.e. calculated with an exact day count over a 360-day year. EURIBOR was first published on 30 December 1998 for value 4 January 1999.
7.3CCBOR
CCIL
released
its
Collateralized
Benchmark
Reference
Rates
(CCBID/CCBOR) with effect from March06. The rates were derived out of orders placed in the Collateralized Borrowing and Lending Obligations (CBLO) market. CBLO segment has been in the forefront of the short term market for a long time and it leads the other short term markets like Repo and call in setting up the rates. It is the largest short term market in terms of volume. The CCBID/CCBOR rates are leased at 10.10AM on the basis of the orders received in CBLO market by 10.00AM.
7.4MIBOR - It is one of the most widely used benchmark reference rate, MIBOR (Mumbai
Inter Bank Offer Rate), is disseminated by National Stock Exchange since 1998 and has been most widely accepted benchmark rate. The MIBOR has been widely used in the IRS (Interest Rate Swaps) contracts. The same is popularly known as FIMMDA-NSE-MIBOR/MIBID. Many banks, finance companies and financial institutions have issued MIBOR-linked deposits/papers. NSE MIBOR has been designed to give the overnight clean reference rate and generally tracks the call market. The basic design behind the said rate is the polling methodology. Rates are polled from the traders over phone as to what rate they would quote to borrow or lend Rs.500 million in the overnight call money market. Thirty three banks and primary dealers are polled on daily basis at 9.30 AM for overnight rate and at 11.30 AM for term rates. The average rate with lowest standard deviation is taken as the reference rate for the market. However, a boot strapping is used if there are sufficient rates polled in order to derive multiple average rates with their respective standard deviations. However, the traders can wrongly quote the rate as there is no compulsion on the polled trader to correctly give a - 44 -
quote and do a deal on the said rate. NSEIL disseminates 4 MIBOR/MIBID rates daily: overnight, 14-day, 1-month and 3-month (ANNEXURE). However, only overnight benchmark is relevant and widely used while other rates are not relevant as most of the days, it receives very few rates from polled members.
Characteristics of MIBID/MIBOR
Unbiased -The function of forecasting is more meaningful as the information comes from a source, which is not only reliable but has no vested interest of its own in the market movements.
Market Representation - It is based on rates polled by NSE from a representative panel of 33 banks/ primary dealers.
Transparent - The reference rate is released to all the market participants simultaneously through various media, making it transparent with the aspiration of the market. Ensuing transparency helps the market participants to judge the market mood and the probable rate one is likely to encounter in the market.
Reliable - The high level of co-relation between actual deals and the reference rate gives an indication of its reliability. The bootstrapping technique guards against the possibility of cartelisation and of extreme observations influencing the mean.
Scientifically Computed - The methodology of "Polling" with "Bootstrapping" is scientific and the values are generated through a system that has been extensively tested. The technique involves generating multiple data sets based on the rates polled with a dynamically determined number of iterations, identification of outliers, trimming the data set of its extreme values and computation of the mean and its standard deviation.
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Elimination of Noise - The trimming procedure is vulnerable to market manipulation of the rates due to the amount of sampling noise. Excessive trimming may lead to loss of information whereas no trimming may lead to excessive influence of the extreme values. To derive a true representative benchmark for the market NSE ensures that after trimming at least 14 data points should remain in observation for the bid and for the ask rates.
Consistency - The Exchange ensures that everyday the FIMMDA-NSE MIBID MIBOR along with the respective standard deviations are disseminated.
Panel of Participants
Call Money Market

The major parties in the call money market are : RBI - It regulates the call money market by changing the various reserve requirements which has to be maintained by the banks and also by way of injecting and absorbing money from the market (Liquidity Adjustment Facility). Banks - These are the major players of the call money market. They borrow and lend money in this market to meet their money demands and park the excess funds. Primary Dealers - A primary dealer is a bank or securities broker-dealer that are appointed by Reserve Bank of India. They are required to make bids or offers when the RBI conducts open market operations. At present there are around 18 primary dealers appointed by RBI (ANNEXURE). NSE - It disseminates the benchmark reference rate which is the most widely used benchmark reference rate, MIBOR (Mumbai Inter Bank Offer Rate), is disseminated since 1998 and has been most widely accepted benchmark rate.
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CBLOs - CBLO segment has been in the forefront of the short term market for a long time and it leads the other short term markets like repo and call in setting up the rates. It is the largest short term market in terms of volume.
BANK
RBI CALL MONEY MARKET
NSE
PRIMARY DEALERS
CBLOs
Parties in Call Money Market
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Chapter VIII
Quarter wise analysis of investor category in PFCs borrowings (Bonds) Year 2008 09
8.1 Quarter I of Financial Year 2008 09
RBI has undertaken various measures, to curb the money supply and credit growth in the economy and in turn ease the demand side pressures on inflation. However, the measures didnt dampen the credit deployment activity. The various measures announced by RBI have only increased the cost of borrowing for banks. As regards the availability of funds/liquidity is concerned, there exists a cushion in form of the LAF Repo window. Under this window the RBI continues to provide liquidity to the market on a daily basis. The RBI has hiked CRR by 125bps since April 2008. This has roughly amounted to a total absorption of Rs 47,000 cr from the system. This roughly matches the amount infused in money markets through the LAF Repo window. It implies that measures undertaken by RBI, largely in form of CRR hikes, have only raised borrowing cost of banks and not reduced the availability of liquidity. The banks are funding their loan books by, borrowing under the LAF window at a higher cost and submitting securities from their existing portfolios as collateral. The
Any one of the measures considered above will no doubt increase the cost of borrowing substantially for all the market participants. It had the desired impact on banking system through rise in both deposit and lending rates and decline in availability of funds for credit. But at the same time, it had impacted the primary dealers severely, through rise in their cost of funding.
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Qtr 1 Distibution
Insurance Companies 25%
Limited Company 18% Mutual Fund 5% Co operative Bank 3%
Pension/Provid ent/Superannua tion/retirement Fund 28%
Bank 21%
During the said quarter PFC had enough liquidity to match the required liquidity. As PFC was not desperately need of funds and market looked uncertain about the interest rate PFC ventured in to the market with innovative structure which PFC which PFC had never tried before. PFC launched floating MIBOR based bonds for the limited period of 3 years. The MIBOR based bond was a huge success and PFC could mobilize good amount of funds. As PFC had a long borrowing programme during the FY 2008-09 PFC had launched a proper vanilla type bond issue in multiple segment of 3,5 and ten years at the market benchmark rate. The issue too was a great success. PFC had mobilized 17.19% of the total funds mobilized through bonds during FY 2008-09.
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8.2 Quarter II of Financial Year 2008 09

The second quarter of 2008-09 (July-September) commenced with easing of liquidity conditions mainly on account of a decline in the cash balances of the Central Government. Accordingly, the call rate declined sharply and moved within the informal corridor of reverse repo and repo rates in the first week of July 2008. Subsequently, the call rate edged above the repo rate on most of days of the month, reflecting the two-stage CRR hike of 25 basis points each (effective from the fortnights beginning July 5 and July 19, 2008, respectively) to 8.75 per cent. The average call rate was 8.76 per cent during July 2008. On a review of the macroeconomic and monetary conditions, the First Quarter Review of the Annual Statement on Monetary Policy for 2008-09 announced a 50 basis points hike in the repo rate (to 9.0 per cent) effective July 30, 2008 and 25 basis points hike in the CRR (to 9.0 per cent) effective the fortnight beginning August 30, 2008. The liquidity conditions mostly remained in a deficit mode during July-August 2008 and accordingly the call rate hovered around the repo rate. The average call rate was 9.10 per cent during August 2008.
During the second quarter of 2008-09 (up to September), scheduled commercial banks (SCBs) increased their deposit rates for various maturities by 25-150 basis points. Interest rates offered by public sector banks (PSBs) on deposits of maturity of one year to three years increased from the range of 8.25-9.50 per cent in June 2008 to the range of 8.75-10.25 per cent in September 2008. Interest rates of private sector banks on deposits of maturity of one year to three years increased from the range of 8.00-9.50 per cent to the range of 8.30-10.50 per cent, while the deposit rates of foreign banks on maturity of one year to three years increased from the range of 3.50-9.75 per cent to the range of 3.50-10.50 per cent during the same period
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Monetary
Qtr II Distibution
Insurance Companies 12%
Limited Company 14%
Pension/Provid ent/Superannua tion/retirement/ gratuity Fund 26%
Mutual Fund 11% Co operative Bank 3%
Bank 34%
In the second quarter, the primary business i.e. disbursement of loans to the lenders gained some momentum and more over the debt servicing requirement was huge hence, the need for the funds was felt by Corporation. PFC came up with multiple bond issues for period of 3,5,7 and 10 years tapping all segments. PFC had mobilized and amount of Rs 6206.60 Crs during the period which also includes the record issue maximum subscription received by any corporation in India. The subscription received under the bond issues mobilized during the period, Banks had topped the list subscribing 34% of the bond issues. Pension funds, gratuity funds superannuation fund retirement funds had also participated largely in the said issues. Corporation had mobilized around 48.46% of the total funds mobilized through bonds during the FY 2008-09.
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8.3 Quarter III of Financial Year 2008 09

This quarterly review is set in the context of a deteriorating global economic outlook and heightened uncertainty about the global financial sector. In fact, there has been a rapid and marked downturn in the global economic outlook since the Reserve Banks Mid-term Review in October 2008. The continued bad news from large international financial institutions on a regular basis renews concerns as to when the global financial sector might attain a semblance of stability. The initial hope that the crisis could be contained in the financial sector has been belied. With all the advanced economies the US, Europe and Japan firmly in recession, the crisis has fully transmitted from the financial sector to the real economy. The loss of confidence in the global financial markets has set off a chain of deleveraging, declining asset values, falling income, contracting demand and rising unemployment. Governments and central banks around the world are responding to the crisis with bold and unconventional initiatives. Even so, there is a contentious debate on whether these measures are adequate and appropriate, and when, if at all, they will begin to have an impact.
RBI MONETARY POLICY 2008-09 REMAIN UNCHANGED IN THIRD QUARTER
The Bank Rate has been kept unchanged at 6.0 per cent. The repo rate under the LAF has been kept unchanged at 5.5 per cent. The reverse repo rate under the LAF has been kept unchanged at 4.0 per cent. The Reserve Bank has the flexibility to conduct repo/reverse repo auctions at a fixed rate or at variable rates as circumstances warrant. The cash reserve ratio (CRR) of scheduled banks has been kept unchanged at 5.0 per cent of NDTL.
Liquidity Facilities
The Reserve Bank has allowed banks to avail liquidity support under the LAF for the purpose of meeting the funding requirements of mutual funds (MFs), non-banking financial companies (NBFCs) and housing finance companies (HFCs) through relaxation in the
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maintenance of SLR up to 1.5 per cent of their NDTL. Second, a special refinance facility for scheduled commercial banks (excluding RRBs) was provided by the Reserve Bank on November 1, 2008 under Section 17 (3B) of the RBI Act, 1934 up to 1.0 per cent of each banks NDTL as on October 24, 2008. Both these facilities are currently available up to June 30, 2009. In order to ensure that banks continue to have flexibility in their liquidity management operations in the current market conditions, it has been decided: To extend both the refinance facilities up to September 30, 2009.
The Government and the Reserve Bank also initiated a host of measures to increase capital inflows and improving liquidity conditions. On September 22, 2008, the limit for borrowers in the infrastructure sector for availing external commercial borrowing (ECB) was increased to US$ 500 million per financial year from the earlier limit of US$ 100 million per financial year for rupee expenditure for permissible end-uses under the approval route. The all-in-cost ceiling for ECBs over average maturity of seven years was increased by 50 basis points to 450 basis points over 6-month LIBOR. On October 8, 2008, ECB policy was further liberalised by including development of the mining, exploration and refinery sectors in the definition of Infrastructure sector.
On a review of the liquidity conditions, particularly in the context of the deterioration in the global financial environment, the Reserve Bank announced a reduction of the cash reserve ratio (CRR) by 250 basis points to 6.50 per cent with effect from the fortnight beginning October 11, 2008. The Reserve Bank decided to conduct 14-day repo under the LAF at 9.0 per cent per annum for a notified amount of Rs.20,000 crore on October 14, 2008 with a view to meet the liquidity requirements of mutual funds. It was also decided to conduct this repo every day until further notice to a cumulative amount of Rs.20,000 crore for the same purpose. Furthermore, the restriction on lending against certificates of deposits (CDs) and buy back of CDs was relaxed for a period of 15 days with effect from October 14, 2008, only in respect of CDs held by mutual funds.
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In view of the continuing global financial market uncertainties and their indirect impact on Indian financial markets, the Reserve Bank announced a host of measures on October 15, 2008. First, it was decided, purely as a temporary measure, that banks may avail of additional liquidity support exclusively for the purpose of meeting the liquidity requirements of mutual funds to the extent of up to 0.5 per cent of their net demand and time liabilities (NDTL). This additional liquidity support would terminate 14 days from the closure of the special term repo facility announced on October 14, 2008. This accommodation was made available in addition to the temporary measure announced on September 16, 2008 thereby permitting banks to avail of additional liquidity support to the extent of up to 1 per cent of their NDTL. Second, the Reserve Bank instituted a mechanism of Special Market Operations (SMO) for public sector oil marketing companies in June-July 2008 taking into account the then prevailing extraordinary situation in the money and foreign exchange markets. The Reserve Bank announced on October 15, 2008 that it would institute a similar facility when oil bonds become available. Third, the Reserve Bank, at the request of the Central Government, agreed to provide Rs.25,000 crore to the lending institutions immediately under the Agricultural Debt Waiver and Debt Relief Scheme, as the first instalment. Fourth, the interest rate ceiling on FCNR(B) deposits was increased by 50 basis points, i.e., to LIBOR/ Swap rates plus 25 basis points. Fifth, the interest rate ceiling on NR(E)RA deposits was increased by 50 basis points, i.e., to LIBOR/Swap rates plus 100 basis points. Sixth, banks were allowed to borrow funds from their overseas branches and correspondent banks up to a limit of 50 per cent of their unimpaired Tier I capital as at the close of the previous quarter or US$ 10 million, whichever is higher, as against the earlier limit of 25 per cent. Seventh, assurance was given for supply of foreign exchange to meet supply-demand gap in the market. Eighth, in order to alleviate the pressures of the indirect impact of the global liquidity constraint on domestic financial market reflected by some signs of strain in its credit markets in recent weeks, the Reserve Bank reduced the repo rate under the LAF by 100 basis points to 8.0 per cent on October 20, 2008. Government bond yields in major advanced economies declined in the third quarter of 2008, largely reflecting worsening growth expectations and improved near-term inflation outlook. The 10-year government bond yield in the US declined by 10 basis points between June 25, 2008 and October 15, 2008. During the same period, yields on 10-year government papers
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declined by 40 basis points in the UK, 46 basis points in the Euro area and 12 basis points in Japan.
Qtr III Distibution
Insurance Companies 2% Pension/Provid ent/Superannua tion/retirement/ gratuity Fund 7%
Limited Company 41%
Bank 35%
Co operative Bank 2%
Mutual Fund 13%
In the third Quarter, PFC came out with only one bond issue. This quarter has been marked as the turning point of financial world, financial market has witnessed the turn around in terms of interest rate and liquidity availability post September 09. This was also a period of most uncertainty. The market has witnessed the highest interest rates pre September 09. The interest rates were as high as 40% (rate at which ICICI bank borrowed to avoid run on bank) and with RBIs intervention and the policy rate cut resulting into liquidity infusion in the market, the interest rates have seen the downward journey. Banks were still uncertain about the future interest rates hence banks were unwilling to lend to customers at competitive rates as banks has borrowed through deposits from customers at a very high rates resulting in higher cost of borrowings.
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PFC has adopted a very cautious approach; PFC came up with only one Bond issue during the said quarter and mobilized 20.45% of total borrowing in bonds during the FY 2008-09. Banks and limited company together contributed around 75% of the total subscription received under the said bond issue.
8.4 Quarter IV of Financial Year 2008 09

While domestic financial markets continued to function in an orderly manner, Indias growth trajectory was impacted both by the global financial crisis and the follow-on global economic downturn. This impact turned out to be deeper and wider than earlier anticipated. Concurrently, because of fall in global commodity prices coupled with supply and demand management measures at
home, headline inflation was on the decline. Even as some public sector and private sector banks had cut lending rates in response to the Reserve Banks monetary policy stance, concerns over rising credit risk together with the slowing of economic activity appeared to have moderated credit growth. Accordingly, in order to stimulate growth, the Reserve Bank took the following further measures on January 2, 2009:
The repo rate under the LAFwas reduced by 100 basis points from 6.5 per cent to 5.5 per cent with effect from January 5, 2009. The reverse repo rate under the LAF was reduced by 100 basis pointsfrom 5.0 per cent to 4.0 per cent with effect from January 5, 2009. The CRR was reduced from 5.5 per cent to 5.0 per cent of NDTL effective from the fortnight beginning January 17, 2009.
The Government has announced the setting up of a special purpose vehicle (SPV) for addressing the temporary liquidity constraints of systemically important non-deposit taking non-banking financial companies (NBFCs-ND-SI). The mechanism would be as follows: The
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SPV would issue government guaranteed securities to the Reserve Bank. The SPV will, in turn, use the funds to acquire only investment grade commercial papers and non-convertible debentures of the NBFCs. During its appraisal, the SPV will ensure that the NBFCs use the money only for addressing liquidity constraints and not for business expansion. The total support from the Reserve Bank will be limited to Rs.20,000 crore with an option to raise it by a further Rs.5,000 crore. The facility will be available for a limited period to address current liquidity concerns of NBFCs.
Qtr IV Distibution
Insurance Companies 2% Pension/Provid ent/Superannua tion/retirement/ gratuity Fund 1% Limited Company 12%
Mutual Fund 25%
Bank 58% Co operative Bank 2%
The down ward journey of interest rate continued during the fourth and last quarter of the FY 2008-09. RBI and FED had reduced the policy rates three times during the period. RBI had also created special REPO window of Rs 25,000 Crore for infrastructure financing NBFCs like PFC. Hence in declining interest rate scenario PFC thought prudent to take a shorter term exposure in bonds. In the said quarter PFC came up with two bond issues for a shorter term i.e. 18 months and 5 years the amount mobilized by PFC was just 13.90% of total borrowing
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in bonds during the FY 2008-09. The major investors comprised of Banks mutual funds and limited company.
Usually as seen from the trend of previous 5 years, PFC had borrowed the major portion in bonds during the last quarter of any financial year, but the previous financial year can be marked as exception as only 47.14% of the total borrowings in the last quarter was through Bonds and balance through Term Loans availed from Banks under the special Repo window.
Year 2008 09
Category
Limited Company Mutual Fund Co operative Bank Bank Pension/Provident/Superannuation/retirement/ gratuity Fund Insurance Companies
Consolidated 19.82% 12.40% 2.52% 35.54% 18.71% 11.01%
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Consolidated Distibution for FY 2008-09
Insurance Companies 11% Pension/Provid ent/Superannua tion/retirement/ gratuity Fund 19%
Limited Company 20%
M utual Fund 12% Co operative Bank 3% Bank 35%
Analysis
Consolidated summary for year 2008-09
Category insurance companies limited companies mutual fund co-operative bank Bank pension/provident/super annuation/retirement fund
qtr 1 25% 18% 5% 3% 21% 28%
qtr2 12% 14% 11% 3% 34% 26%
qtr3 2% 41% 13% 2% 35% 7%
qtr4 2% 12% 25% 2% 58% 1%
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60% insurance companies 50% limited companies 40% mutual fund co-operative bank bank 20% pension/provident/super annuation/retirement fund pension/provident/super bank co-operative bank mutual fund limited companies insurance companies qtr 1 qtr2 qtr3 qtr4
30%
10%
0%
The above analysis shows PFCs raisings are showing an increasing trend from 1 st till the 4th quarter. Each quarter saw a different investor category holding the maximum percentage of subscription i.e. pension/provident/super annuation/retirement fund (28%)in first quarter; bank (34%)in 2nd quarter , limited companies (41%) in 3rd quarter and bank (58%) in 4th quarter. This trend is because of the liquidity position and the lending constraints of each of these investor categories in respective quarters.
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Chapter IX MIBOR INTEREST RATE SCENARIO
Date 1-Apr-08 2-Apr-08 3-Apr-08 4-Apr-08 5-Apr-08 6-Apr-08 7-Apr-08 8-Apr-08 9-Apr-08 10Apr08 11Apr08 12Apr08 13Apr08 14Apr08 15Apr08 16Apr08 17Apr08 18Apr08 19Apr08 20Apr08
MIBOR 9.16 7.53 6.29 6.08 6.10 6.10 6.05 5.82 5.66 6.04 6.05 7.54 7.54 7.54 6.10 6.13 6.33 6.33 7.24 7.24
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21Apr08 22Apr08 23Apr08 24Apr08 25Apr08 26Apr08 27Apr08 28Apr08 29Apr08 30Apr08 1-May08 2-May08 3-May08 4-May08 5-May08 6-May08 7-May08 8-May08 9-May08 10May08 11May08 12May08 13May08 14May08
6.34 6.05 6.13 6.09 6.07 7.25 7.25 6.12 6.28 6.26 6.26 6.12 6.14 6.14 6.10 6.08 6.05 6.06 6.06 7.02 7.02 6.50 6.50 6.52
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15May08 16May08 17May08 18May08 19May08 20May08 21May08 22May08 23May08 24May08 25May08 26May08 27May08 28May08 29May08 30May08 31May08 1-Jun-08 2-Jun-08 3-Jun-08 4-Jun-08 5-Jun-08 6-Jun-08 7-Jun-08
7.04 8.06 6.42 6.42 6.42 6.37 6.10 6.06 6.13 7.90 7.90 7.50 7.41 7.57 7.98 8.00 7.93 7.93 7.44 6.11 6.08 6.07 6.10 7.01
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8-Jun-08 9-Jun-08 10-Jun08 11-Jun08 12-Jun08 13-Jun08 14-Jun08 15-Jun08 16-Jun08 17-Jun08 18-Jun08 19-Jun08 20-Jun08 21-Jun08 22-Jun08 23-Jun08 24-Jun08 25-Jun08 26-Jun08 27-Jun08 28-Jun08 29-Jun08 30-Jun08 1-Jul-08
7.01 7.19 7.97 7.86 8.25 8.13 8.26 8.26 8.13 8.13 8.09 8.10 7.68 8.24 8.24 8.25 8.27 9.01 8.77 8.71 8.71 8.71 8.77 8.77
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2-Jul-08 3-Jul-08 4-Jul-08 5-Jul-08 6-Jul-08 7-Jul-08 8-Jul-08 9-Jul-08 10-Jul-08 11-Jul-08 12-Jul-08 13-Jul-08 14-Jul-08 15-Jul-08 16-Jul-08 17-Jul-08 18-Jul-08 19-Jul-08 20-Jul-08 21-Jul-08 22-Jul-08 23-Jul-08 24-Jul-08 25-Jul-08
7.73 6.40 6.21 9.05 9.05 9.00 9.03 9.07 9.05 9.06 8.97 8.97 8.96 9.00 9.00 9.00 9.01 9.54 9.54 9.52 9.59 9.71 9.49 9.18
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26-Jul-08 27-Jul-08 28-Jul-08 29-Jul-08 30-Jul-08 31-Jul-08 1-Aug08 2-Aug08 3-Aug08 4-Aug08 5-Aug08 6-Aug08 7-Aug08 8-Aug08 9-Aug08 10Aug08 11Aug08 12Aug08 13Aug08 14Aug08 15Aug08 16Aug08 17Aug08 18Aug08
9.16 9.16 8.88 8.63 9.20 8.51 6.31 9.46 9.46 9.34 9.30 9.21 9.21 9.20 9.18 9.18 9.17 9.27 9.33 9.33 9.33 9.39 9.39 9.48
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19Aug08 20Aug08 21Aug08 22Aug08 23Aug08 24Aug08 25Aug08 26Aug08 27Aug08 28Aug08 29Aug08 30Aug08 31Aug08 1-Sep-08 2-Sep-08 3-Sep-08 4-Sep-08 5-Sep-08 6-Sep-08 7-Sep-08 8-Sep-08 9-Sep-08 10-Sep08 11-Sep08
9.48 9.60 9.77 9.74 9.64 9.64 9.77 9.05 9.04 8.31 6.11 9.49 9.49 9.39 9.18 9.18 9.13 9.04 9.09 9.09 8.72 8.42 9.01 9.07
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12-Sep08 13-Sep08 14-Sep08 15-Sep08 16-Sep08 17-Sep08 18-Sep08 19-Sep08 20-Sep08 21-Sep08 22-Sep08 23-Sep08 24-Sep08 25-Sep08 26-Sep08 27-Sep08 28-Sep08 29-Sep08 30-Sep08 1-Oct-08 2-Oct08 3-Oct-08 4-Oct-08 6-Oct-08
6.13 9.88 9.88 10.49 13.05 10.00 10.47 14.44 12.00 12.00 14.71 12.36 11.97 10.04 11.22 11.55 11.55 14.57 14.57 17.20 17.20 15.75 11.06 11.30
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7-Oct-08 8-Oct-08 10-Oct08 11-Oct08 13-Oct08 14-Oct08 15-Oct08 16-Oct08 17-Oct08 18-Oct08 20-Oct08 22-Oct08 23-Oct08 24-Oct08 25-Oct08 27-Oct08 29-Oct08 31-Oct08 1-Nov08 3-Nov08 4-Nov08 5-Nov08 6-Nov08 7-Nov08
10.75 10.51 16.48 9.32 9.96 10.06 10.13 7.00 7.00 6.29 6.73 6.10 6.10 6.07 8.42 9.50 11.46 20.30 13.18 7.05 7.61 7.53 6.35 6.31
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8-Nov08 10Nov08 11Nov08 12Nov08 14Nov08 15Nov08 17Nov08 18Nov08 19Nov08 20Nov08 21Nov08 22Nov08 24Nov08 25Nov08 26Nov08 28Nov08 29Nov08 1-Dec-08 2-Dec-08 3-Dec-08 4-Dec-08 5-Dec-08 6-Dec-08 8-Dec-08
8.11 7.77 7.51 7.50 7.16 7.34 7.01 6.71 6.50 6.29 6.65 7.04 7.01 6.74 6.51 6.55 6.82 6.25 6.20 6.16 6.15 6.17 6.12 5.30
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10Dec08 11Dec08 12Dec08 13Dec08 15Dec08 16Dec08 17Dec08 18Dec08 19Dec08 20Dec08 22Dec08 23Dec08 24Dec08 26Dec08 27Dec08 29Dec08 30Dec08 31Dec08 1-Jan-09 2-Jan-09 3-Jan-09 5-Jan-09 6-Jan-09 7-Jan-09
5.30 5.44 5.55 5.70 6.38 6.57 6.62 6.61 6.62 6.62 6.48 6.27 6.19 5.84 5.73 5.67 5.30 5.27 5.37 5.15 4.68 4.74 4.29 4.28
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9-Jan-09 10-Jan09 12-Jan09 13-Jan09 14-Jan09 15-Jan09 16-Jan09 17-Jan09 19-Jan09 20-Jan09 21-Jan09 22-Jan09 23-Jan09 24-Jan09 27-Jan09 28-Jan09 29-Jan09 30-Jan09 31-Jan09 2-Feb-09 3-Feb-09 4-Feb-09 5-Feb-09 6-Feb-09
4.28 4.29 4.26 4.26 4.25 4.28 4.46 4.59 4.71 4.26 4.25 4.25 4.25 4.23 4.22 4.21 4.21 4.25 4.23 4.25 4.23 4.17 4.13 4.13
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7-Feb-09 9-Feb-09 10-Feb09 11-Feb09 12-Feb09 13-Feb09 14-Feb09 16-Feb09 17-Feb09 18-Feb09 19-Feb09 20-Feb09 21-Feb09 22-Feb09 23-Feb09 24-Feb09 25-Feb09 26-Feb09 27-Feb09 28-Feb09 1-Mar-09 2-Mar-09 3-Mar-09 4-Mar-09
4.13 4.15 4.15 4.14 4.13 4.13 4.20 4.13 4.15 4.16 4.34 4.34 4.49 4.49 4.49 4.14 4.12 4.10 4.10 4.16 4.16 4.10 4.10 4.10
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5-Mar-09 6-Mar-09 7-Mar-09 8-Mar-09 9-Mar-09 12Mar09 13Mar09 14Mar09 15Mar09 16Mar09 17Mar09 18Mar09 19Mar09 20Mar09 21Mar09 22Mar09 23Mar09 24Mar09 25Mar09 26Mar09 27Mar09 28Mar09 29Mar09 30Mar09
3.68 3.61 3.58 3.58 3.60 3.60 3.73 4.48 4.48 4.16 4.45 4.61 4.84 4.99 4.26 4.26 4.72 4.30 4.23 4.76 4.76 4.85 4.85 4.87
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31Mar09
5.02
MIBOR
1- 1-Jul-08
1-
1- 1-
1-
1- 1-
1- 1-
FY 2008-09
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1- 1-
20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00
Rate of Interest
MIBOR
Chapter X External Commercial Borrowing(ECB) 10.1 Introduction

An Indian enterprise borrowing in foreign exchange has to comply with the external commercial borrowings (ECB) policy announced by the regulator, the Reserve Bank of India (RBI). ECBs encompass commercial bank loans, buyers credit, suppliers credit, securitised instruments such as floating rate notes and fixed rate bonds, credit from official export credit agencies, foreign currency convertible bonds and commercial borrowings from the private sector lending arms of multilateral financial institutionsfor instance, the International Finance Corporation and the Asian Development Bank. The ECB policy is monitored and updated by RBI on a regular basis, according to the macroeconomic conditions and foreign exchange liquidity situation. The Indian economy has seen phenomenal growth over the last few years. The economic boom was initiated by the information technology sector and followed by the resurgence in the manufacturing and services industries. While the boom was accompanied by substantial foreign direct investment, Indian enterprises have also accessed significant amounts of foreign debt. The cost of borrowing being higher in India compared with the international market, Indian companies started using the ECB route frequently. As an anti-inflationary measure, RBI amended the ECB policy, making it more restrictive. Over the course of last year, the subprime crisis in the US has snowballed into an international economic crisis. As the impact of this crisis was gradually felt across the globe, it has also affected India. Bankers globally have adopted a far more cautious approach to lending. The cost of funds has risen globally as more and more financial institutions are grappling with losses and write-offs. Lenders globally have complained that the standard benchmark rates, for example the London Interbank Offered Rate, do not represent the actual cost of funds. In order to address this, lenders have explored the possibility of invoking terms in the loan agreement that allow the interest rate to be increased to reflect the actual cost of funds. Such a change in the interest rate can be initiated using a market disruption event clause. While this is a common clause in the standard Loan Market Association standard loan - 76 -
agreements, a market disruption event would typically be invoked when there is an actual disaster, such as a critical breakdown of computer systems, natural disasters, and so on. This clause appears to be the only comfort to many troubled lenders across the globe. A market disruption event would allow the lender to calculate the rate of interest for a specific loan that represents its actual cost of funds. ECBs have suffered in view of the adverse economic conditions coupled with the regulatory hurdles; a quick look at statistics shows that the quantum of ECBs accessed through the automatic route (that is, without prior RBI approval) fell drastically, from $1.104 billion (Rs5,508.96 crore) in October 2007 to $321 million in October 2008. RBI has tried to address the problems faced in the realm of ECBs by announcing a number of steps to liberalize the policy. These steps include increasing the all-in-cost ceiling (the all-in-cost ceiling is the total amount including interest, fees and expenses, except certain specified fees and expenses, per loan) allowing rupee expenditure from ECB proceeds, and so on. The all-in-cost ceiling can now also be dispensed with altogether, with specific RBI approval. The scheme with regard to foreign currency convertible bonds (FCCBs), a type of ECB, has also been liberalized and prepayment has been allowed for FCCBs without RBI approval upon fulfilment of specified conditions. While RBI officials have tried to stimulate the ECB market to provide the required foreign exchange liquidity at affordable rates, lenders globally have been either increasing rates of interest or demanding prepayment of existing loans. The ECB policy makes any prepayment (repayment prior to the maturity of the loan) subject to prior RBI approval. This applies to on-demand prepayments as well, regardless of the terms of the loan agreement. The RBI approval is not a mere formality and there have been cases where such approval has not been granted, specifically in cases where a default by the borrower cannot be demonstrated. However, if there is a material default on the part of the borrower, RBI may be inclined to take a more favourable view. RBI does not normally grant approval for on-demand prepayment in advance. While the borrower consenting to such prepayment is not an essential precondition, such consent may be helpful if default cannot be demonstrated. Keeping in mind the aggressive overseas expansion undertaken by Indian companies recently, a significant portion of which has been funded by ECBs, this global economic crisis could not have come at a worse juncture. Indian companies have sought to identify methods
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of refinancing existing foreign currency debt, especially loans coming up for repayment. A suggestion has been floated that Indian banks and RBI set up a fund to lend to borrowers who have to prepay or repay existing ECBs. Admittedly, the global financial situation continues to be uncertain even today. The US, UK, European countries and Japan have all officially recognized the recession and the increase in the downside risks to the global economy. Simultaneously, the policy initiatives in these economies have been geared towards managing the recession and defusing potentially deflationary trends. The International Monetary Fund has also recently revised downward world growth rate to levels of 1.5% the lowest since World War II (Indias growth rate is predicted to fall to 5% in 2009 from 7.3% in 2008 and 9.3% in 2007) and has urged a global policy response. The challenge for India lies in the regulatorRBIensuring that the ECB policy remains proactive and reflects the economic reality. Simultaneously, banks and financial institutions should endeavour to continue lending to reputed firms that have a good credit history. 10.2 External Commercial Borrowings (ECB) policy The External Commercial Borrowing (ECB) policy has been reviewed to keep it in tune with the evolving macroeconomic situation, changing market conditions, sectoral requirements, the external sector and lessons of experience. Consequent upon such a review, it has been decided to modify some aspects of the ECB policy as indicated below: All-in-cost ceilings on ECB: As per extant ECB policy, the all-in-cost ceilings for ECBs, in respect of both automatic as well as approval routes, for average maturity period of 3-5 years and more than years are 6 month Libor+300 bps and 6 month Libor+500 bps respectively. Keeping in view the credit conditions in the international and domestic financial markets, it has been decided to dispense with the requirement of all-in-cost ceilings on ECB until June 30, 2009. Eligible borrowers proposing to avail of ECB beyond the permissible all-in-cost ceilings may approach the Reserve Bank of India under the approval route. This relaxation in all-in-cost ceiling will be reviewed in June 2009.
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ECBs for NBFC: As per the extant policy guidelines on ECB, NBFCs are permitted to avail of ECB for a minimum maturity period of five years to finance import of infrastructure equipments for leasing to infrastructure projects in India. It has now been decided to allow NBFCs, which are exclusively involved in financing of the infrastructure sector, to avail of ECBs from multilateral/regional financial institutions and government owned development financial institutions under the approval route. While considering the applications, RBI will take into account the aggregate commitment of these lenders directly to infrastructure projects in India. The direct lending portfolio of the above lenders vis--vis their total ECB lending to NBFCs, at any point of time should not be less than 3:1. This facility will be reviewed in June 2009.
Limit for FIIs' investment in corporate debt:

Currently, FIIs have been permitted to invest up to USD 6 billion in corporate debt. It has now been decided to enhance the limit to USD 15 billion. All other aspects of ECB policy such as USD 500 million limit per company per year under the Automatic Route, eligible borrower, recognised lender, end-use, average maturity period, prepayment, refinancing of existing ECB and reporting arrangements remain unchanged. The above amendments in ECB policy will come into force on the date of Notification of Regulations/ directions issued by the Reserve Bank in this regard under the Foreign Exchange Management Act, 1999.
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
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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 favorable 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. ECB 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 corporates can raise a large amount of funds depending on the risk perception of the International market. Corporates (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 Indias 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 economys 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 200001.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 - 80 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. 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,
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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 corporates 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 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 - 82 -
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.
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Chapter XI SUGGESTIONS & RECOMMENDATIONS

After the analysis of different debt instruments used by PFC for fundraising, I found that PFC has very less exposure to ECB. As the ASIA has the potential to give higher growth than western countries. India and China are still favourite choice for big international investors. Indian government commitment for power sector reforms and huge demand in this sector, makes power sector of India a good investment for foreign investors. So PFC has opportunity to get low interest rate loans through ECB easily. Although current subprime meltdown makes foreign investor more cautious about lending the money. Indian power sector is not much affected by it. The Indian power sector projects are not price sensitive, because the life of the power project extends to 25-40 yrs, so it makes good investment opportunity for long term foreign investors. Following are main benefits by using the ECB No dilution in ownership Considerably large funds can be raised as per requirements of borrower Usually only a fixed rate of interest is to be paid Easy Availability of funds because ECB is more appealing to Investors
Using international or national consulting firm for improving credit rating of company will be useful for borrowing low interest rate debt through ECB PFC has to improve its effort for global presence to tap low interest rate debt available in the international market. PFC can go for joint venture with foreign power financial firm. This step will increase the PFC visibility in international market. PFC should show its interest in clean and renewable energy for attracting foreign investors. Many developed countries are encouraging investors to invest in these companies. In future clean and renewable energy projects can be very good investments for investors as the different governments can declare tax benefits, low interest debt etc. However ECB tightly monitored by RBI. PFC can raise only some maximum approved amount by the RBI by approval route. Automatic route for ECB raising give limited debt access. It may be tough for PFC to raise the fund by ECB easily as global financial system is still under recession as liquidity is still major concern of investors.
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RECOMMENDATIONS
Encourage clean and renewable energy projects. Marketing Indian power sector as very profitable investment international market. Using new technologies to improve efficiency of power projects. in
There is a need to boost: Energy audits reports by energy managers consumption of >1MVA Commercial buildings to use only energy efficient lighting and equipment. Energy efficient equipment manufacture incentives. TOD tariff Buildings with natural ventilation and lighting Passive Houses Penalty for power factor Evaluate the major facilities for interruptible load opportunities.
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Summary & Conclusion

PFC FY'09 net profit up 64 pc at Rs 1,979.69 cr . Net profit increased by 64% from Rs.1,207cr. to Rs.1,980cr. Operating profit to average assets increased by 8bps from 3.54% to 3.62%. Total income increased by 31% from Rs.5,040cr. to Rs.6,583cr. Net interest income increased by 25% from Rs.1,807cr. to Rs.2,252cr. Disbursements increased by 30% from Rs.16,211cr. to Rs.21,054cr. Loan assets increased by 25% from Rs.51,568cr. to Rs.64,429cr. Networth increased by 11% from Rs.8,688cr. to Rs.9,605cr.
Strong growth opportunities in Indian power sector, depends on the rise in commercial borrowing by corporate and other institutions and the liberalized policy of the Government towards borrowing from 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 power sector. As the world leaders encouraging corporate on clean and renewable energy resources PFC have to focus on such projects and should provide financial help to such projects.
REFERENCES
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1) www.google.com 2) www.pfcindia.com 3) www.powermin.nic.in 4) www.rbi.org 5) www.wikipedia.com 6) Annual report of PFC 2008-2009 7) Economic Times 8) Financial Express
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Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

SUMMITTED BY VIVEK SINGH MEWAR

Carried out during Summer Internship Programme At

POWER FINANCE CORPORATION LTD.,

Under the guidance of

Mrs. Tabassum Asstt.Manager (Finance) Power Finance Corporation Ltd.

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

Self Certification by the Interns

Vivek Singh Mewar Signature: Date:

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

Certificate From the Summer Internship Providing Organization

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

Vivek Singh Mewar 2nd year MBA

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

Structured debt instrument

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

2.14.3 Convertible bonds

Resource Mobilization Unit

Commercial Paper Loans

Indian Debt Markets: as profile

Bench markets Reference Rate

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

MIBBOR interest rate scenario External Commercial Borrowing

XI. XII. XIII.

Suggestions & Recommendations Summary & conclusion References

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

Chapter I POWER FINANCE CORPORATION (PFC)

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

1.5 PRODUCT & SERVICES

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

1.6 BORROWERSS PROFILE

1.7 Recent Initiatives:

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

1.9 Future Plans

1.10 Indian Power Sector

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

1.11 PERFORMANCE HIGHLIGHTS

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

1.12 SWOT ANALYSIS

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

1.13 PFC BUSINESS STRATEGY

Figure 2-2 PFC BUSINESS STRATEGY

IMPLEMENTATION OF GOVERNMENT POLICIES AND PROGRAMMES

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

PROMOTING REFORM & RESTRUCTURING OF STATE POWER UTILITIES BY PFC

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

Chapter II STRUCTURED DEBT INSTRUMENTS

2.1 Step-up Bonds

2.2 Insured Bonds

2.3 Revenue Bonds

2.4 GARVEEs (Grant Anticipation Revenue Vehicles)

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

2.5 Capital Indexed Bonds

2.6 Range Notes

2.7 Modifying the Coupon of a Bond

2.8 Zero Coupon Bond

2.9 Floating Rate Bonds

Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

2.10 Inflation linked Bonds