A SUMMER PROJECT REPORT

ON

Debt restructuring options

& Indian port sector.

FOR

ADANI PORTS LTD.

Submitted to:

MR. RAJESH TULSIANI

MANAGER (FINANCE)

ADANI PORTS LTD

Submitted by:

AGARWAL YASH K.

MBA (1ST YEAR)

                                       NRIBM, AHMEDABAD

In Partial fulfillment for 2 year fulltime MBA course at Gujarat University.

ACKNOWLEDGEMENT

A project report of such a comprehensive coverage wouldn’t have been materialized without the guidance and cooperation of Mr. Rajesh Tulsiani (Manager Finance) who was also a constant source of inspiration and took keen interest in checking the various details of the report and helped a lot during the training program and the research. I am highly indebted to him and I feel honored to thank the following persons .

  • Mr. Gautam Adani ( Managing Director, GAPL)

  • Mr. Asit Parikh ( Textiles Division, Adani Exports)

  • Mr. K. Rajshekaran(Director Academics , AMA)

and rest of the staff of Adani Exports Ltd and GAPL.

I am thankful to Prof. Khandelwal, Director NRIBM and Prof. Neeraj Amarnai, placement coordinator who who gave me the opportunity to work with Adani Ports Ltd. I respect the precious knowledge obtained from my Professors at NRIBM which helped in practical applications during my training program.  

I am highly obliged to all those who have helped us directly or indirectly in successful completion of this project.

  1. Yash K. Agarwal

CONTENTS

        

  1.        EXECUTIVE SUMMARY

  2.        OBJECTIVE

  3.        INFRASTRUCTURE DEVELOPMENT AND FINANACING IN INDIA

  4.          INTRODUCTION TO INDIAN PORT SECTOR

  5.          GUJARAT ADANI PORTS LIMITED

  6.          CORPORATE BOND

  7.          SECURITISATION

  8.          PRIVATE INSURANCE SECTOR FUNDING

  9.          MEZZANINE FINANCE

10.          CREDIT RATING PROCEDURE

11.          CONCLUSION

12.          BIBLIOGRAPHY


1.EXECUTIVE SUMMARY

Name of the student                :Yash Krishnakumar Agarwal

Name of the institution        :          NRIBM, Ahmedabad

Name of the reporting officer:          Mr. Rajesh Tulsiani

Name of the organization        :         Adani Ports Ltd.

                                                      Ahmedabad

Purpose of the Project        :        Study of Indian Port sector and Options                                          for its Debt restructuring

Objectives        :         To study the Indian port sector with emphasis on Gujarat Adani Ports ltd

 To study the different aspects of the infrastructure financing in India

To study and analyze different            instruments for debt restructuring.

 To study the procedure for Credit Rating in India

 Steps to be taken which are in best interest of the company.

        

Methodology                        :        The project is a blend of the                  

                                                         primary as well as the secondary

                                                                    data. The data were collected from the

                                                         company’s past record ,.various

                                               websites, publications and other          

          projects.

Conclusion                         :        The project has been completed              

successfully and the objectives were              

met.

2.OBJECTIVES OF PROJECT

  • To study the Indian Infrastructure financing market.

 

  • To study the Indian port sector .

  • Understand the working and operations of  GAPL

  • To analyze different ways of substituting costly loans for other cheap debt instruments.

  • To study the process of credit rating.

3.INFRASTRUCTURE DEVELOPMENT FINANCING

Introduction

The availability of adequate infrastructure facilities is imperative for the overall economic development of the country. Infrastructure adequacy helps determine success in diversifying production, expanding trade, coping with population growth, reducing poverty and improving environmental conditions. Today, it is necessary to broaden one's concern from increasing the quantity of infrastructure stocks to improving the quality of infrastructure services. In recent years, there has been a revolution in thinking about that should be responsible for providing infrastructure stocks and services, and how these services should be delivered to the users.

One of the bottlenecks in infrastructure development in India is the conflict arising out of the confusion over the government's role in being licensers for infrastructure development, an infrastructure developer and operator, and finally a regulator. A clear separation of these roles would be essential. To further aid this process, the financial, insurance and legal sectors would have to play a significant role.

Provision of quality infrastructure services at reasonable cost, is a necessary condition for achieving sustained economic growth. In fact, one of the major challenges being faced by the Indian economy, as we enter the new millennium is to enhance infrastructure investment and to improve the delivery system and quality of services. There is a huge critical importance of the infrastructure sector and high priority for development of various infrastructure services such as power, telecommunications, seaports, airports, railways, roads etc. is being given these days. Investments in these sectors involve high risk, low return, and lumpiness of huge investment, high incremental capital/output ratio, long payback periods, and superior technology. These prerequisites pose a constraint on the Government's efficient delivery of quality infrastructure services. While liberalizing the rules and procedures, the Government has created an environment conducive for private participation including foreign investment in infrastructure sector. A series of tax incentives and concessions have been announced, regulations and procedures have been simplified for enhancing competition in this sector.

What is Infrastructure?
As per India Infrastructure Report:

"Infrastructure is generally defined as the physical framework of facilities through which goods and services are provided to public. Its linkages to the economy are multiple and complex, because it affects production and consumption directly, creates negative and positive spillover effects (externalities) and involves large flow of expenditure.

Infrastructure contributes to economic development, both by increasing productivity and by providing amenities which enhance the quality of life. The services provided lead to growth in production in several ways:

  • Infrastructure services are intermediate inputs to production and any reduction in these input costs raises the profitability of production, thus pertaining higher levels of output, income and or employment.
  • These raise the productivity of other factors including labour and other capital. Infrastructure is thus often described as an "Unpaid Factor of Production", since its availability leads to higher obtainable from other capital and labour.

Why is Infrastructure Important?
As per India Infrastructure Report:

"The availability of adequate infrastructure facilities is imperative for the overall economic development of the country. Infrastructure adequacy helps determine reducing poverty and improving environmental conditions."

"Research indicates that total infrastructure stocks increase by 1% with each 1% increment in per capita GDP."

Key Issues in Infrastructure Development and Financing 
The Key issues in infrastructure development are: -

Privatization
The importance of privatization is because it brings along with it a) Additional resources and b) improved managerial efficiency in asset creation, asset utilization and customer service leading to better financial health, due to stake holding.

Unbundling and Project Structuring

Unbundling is a necessary condition before attracting private participation is unbundling the infrastructure into logical sub activities which can be privatized separately to enable private parties not to have to bite more than what they can chew.

To enable unbundling necessary acts shall have to be overhauled. Regulatory reform would also be essential to provide increased autonomy, especially for capital investment, even as a precursor to unbundling. Another reason for regulatory reform is to exercise controls over implicit monopoly situations.

Project Structuring is also a key issue as since projects have to be structured small enough to make them investment friendly, and at the same time "Commercial" viable.

Project Appraisal and Financing

The key issue here is one of appraising the project against future cash flows rather than an asset base or collaterals. Various forms of revenue, control over revenue and risk guarantees would also be related concerns. A vital banking infrastructure to complement all this would be essential.

Project Implementation

Speed of project implementation would be imperatives, in the context of environmental and other regulatory issues.

Classification of Infrastructure Sector 
Infrastructure is classified as: -
*Economic Infrastructure which includes transportation (Roadways, railways, airways and other water transportation); Power Generation, transmission and distribution; telecommunications; port handling facilities; water supply and sewage disposal; urban mass transportation systems and other urban infrastructure (housing, etc) and irrigation.

*Social Infrastructure which includes medical, educational and other primary services.

Features of Infrastructure Projects in India 
Characteristics of Infrastructure Projects:

1. Multiple level project Risks:

Infrastructure Financing involves risk participation at multiple levels and is complex to understand for individual investors. The nature of Project risk in various stages is volatile, it is the highest in the pre-commissioning stage and is sought to be mitigated through contractual framework which is concession driven or provides guaranteed returns. These guarantees and concessions are typically extended by Government and Quasi-government organization (Municipal Corporations, PSU, etc) and thus minimizing financial risk.

2. Unconventional Asset Cover:
Infrastructure Projects are typified by unconventional asset structure. As an illustration, the assets of an infrastructure project could comprise.
a. Roads or a bridge or Flyovers
b. Jetties, Container Terminals, Loading-Unloading Bay, Storage Tanks in the Port Infrastructure Projects
c. Oil well or a coal mine-drills, rigs, etc
d. Water Treatment Plant (ETP)

These assets are not amenable to resale or reapplication and hence are unacceptable as security cover to conventional lenders. Furthermore, the step-in rights to lenders are non-existent since such projects are awarded on basis of concession and are on a Build Operate and Transfer basis (BOT) with the "Ownership" of such assets rests with the State of Central Government or Quasi Government Organization.

Challenges in Infrastructure Financing

Infrastructure projects are typically:
1. Long tenure projects and involving
2. High capital outlay and back-ended returns. Therefore such projects require long tenure funds i.e. in excess of 10 years. In the Indian context the availability of such funds is restrictive since Indian Financial Institutions/Banks are often constrained by:
a. Preferred investment horizon of 7-10 years to avoid major asset/liability mismatches.
b. Exposure norms and risk weightage on exposures for projects

Fiscal Incentives for Investment in Infrastructure Projects

The Government of India has sought to alleviate some of these concerns/issues by providing certain fiscal incentives, concessions and policy reforms. Some of these reforms have been:
a. Income Tax exemptions under Section 10 (23)(g) for interest and capital gains income earned for infrastructure projects
b. Income Tax exemptions under Section 54 (EA/EB) for capital gains which can be reinvested in infrastructure project companies
c. Deduction under Section 88 for investment in infrastructure projects - Deduction available for individual investors.
d. Exemption from Minimum Alternative Tax
e. Concessional import duties and port charges for project-related imports.
f. Increased limits for External Commercial Borrowings.
g. Five year tax holiday to be claimed within 12 years of operation. For the balance years, a 30% exemption is available.

Characteristics of Infrastructure Projects

Infrastructure Projects are typified by unconventional asset structure
- Roads, Bridges, Jetties, Container Terminals, oil/mine drills, water treatment plant - investment not amenable to resale or reapplication - Unacceptable security cover
- Step- in rights to lenders inadequate - Lack of implementation expertise

Project risk in various stages of the project life cycle:
- Highest pre-commissioning stage - would involve higher cost of funds, partly offset by benefits of Section 10 (23)(g)
- Risk upon commissioning - diminished
From the Financiers' Perspective:
- Long tenure borrowing in the form of loan - lack of exit options
- Sponsor to carry risk till the end - Lender's risk partly mitigated

The use of Credit Derivative Structures can also be given a thought while structuring the transaction structure for financing the Infrastructure Projects.

Risk Assessment of Private Infrastructure Projects

Project Sponsor/Infrastructure Company bears considerable risks. The following are the major risks beared by the these companies:
1. Implementation Risk:
This is the risk in the pre-commissioning stage which covers Project Design, Project Configurations, Equipment Procurements and timely completion of the Project..

2. Operational Risk:
This is also one of the major risk beared by the Infrastructure Company / Project Sponsors. This covers Operation and Maintenance requiring Engineering / Logistics Expertise.

3. Financial Risk:
Financial risk takes place when Implementation Risk and Operational Risk are partly mitigated. The result of this risk makes the problems of Financial Closure of the Project Impossible. This risk is mitigated by achieving necessary financial closure of the Project in the Implementation Stage.
4. Revenue Risk:
Revenue Risk takes place when the project cash flows does not achieves the standards of worst possible case revenues. This is partly mitigated through Concession Agreement, Take or Pay, Guarantees.

4. INDIAN PORT SECTOR

India has 13 major ports and 139 intermediate and minor ports (at present, however, only 40 are active), and 30 cater to the Andaman and Nicobar and Lakshadeep and Minicoy Archipelagos along its 5560 km coastline. The Indian ports handled traffic of 368.96 million tones in fiscal 2000-01 and the total traffic handled at Indian ports has grown at a compounded annual growth rate of 9.03% p.a during the period 1991-92 to 2000-01. in fiscal  2001, the major 13 ports accounted for 280.96  million tones (76.15%) of the cargo, while the minor ports (primarily from Gujarat), accounted for the balance. The minor ports during the same period have shown a faster growth of around 24.95% p.a, primarily due to increased congestion at major ports, an increased development in shore-based industries and initiatives by state governments in developing the ports within their jurisdiction.

Indian ports suffer from low labour productivity and low equipment efficiency levels adversely affecting their operating performance. The main factors contributing to the low productivity of Indian ports are:

  • Operations constraints such as frequent breakdown of cargo handling equipment
  • Inadequate dredging and container handling facility
  • Inadequate and non-optimal deployment of port equipment
  • Lack of proper co-ordination in the entire logistics chain

The major operating parameters related to the port operations are

  • Turnaround Time: Time between a ship arriving at a port and sailing back.
  • Pre-berthing Time: Time between a ship arriving at a port and getting berthed.
  • Idle Time: Time during which the loading/unloading operations are not being performed on the ship when the ship is berthed.
  • Idle Time to Total Time at berth: The ratio of the total idle time of the ship and the total time for which it was on the berth.
  • Idle Time to Total Time at Port: The ratio of the total idle time of the ship and the total time for which it was on port.
  • Average Output per ship berth day: The ratio between total output from the ship and the total number of days of occupation of a berth by the ship.

Gujarat Port Sector

Gujarat, situated on the west coast of India, is a principal maritime state endowed with several strategic port locations. The state has a 1600 km long coastline (which is a third of the total Indian coastline) and has a large potential cargo market comprising the northern, western and central Indian states. Of the 41 ports in Gujarat, Kandla is the only major port. The 11 intermediate and 29 minor ports fall within the jurisdiction of GMB(Gujarat Maritime Board). GMB has been proactive in terms of encouraging private sector participation in port developments. Out of the 10 identified probable site locations by GMB, port with private sector participation have commenced operations at Mundra and Pipavav.

  1. BOOT Guidelines

Under the port policy, GoG announced the Build-Own-Operate-Transfer (BOOT) Guidelines in July 1997 to serve as framework for involvement of private sector in the construction and operation of the 10 identified green field projects, including the Mundra port. Under the BOOT principles, the ports are to be developed as commercially viable entities capable of operating without government support and the responsibility of financing the port will rest with the developer. The government will grant license/concession to the private developer to Build-Own-Operate and manage the port facilities for a specific period and permit the developer to create mortgage/hypothecation of the real estate as security for lenders to the project to be limited to the BOOT period. The ownership of the land and waterfront will vest with the government. The acquisition of land for the project will be the responsibility of the GoG/GMB. The land will be allotted on lease to the developer for a term concurrent with the term of the concession agreement. In order to facilitate the development of the port, the government intends initiating concomitant development of road and rail corridors and industrial parks. The road and rail linkages from the port to the nearest highway/railhead will be structured as separate BOT packages and the port developer will have the first preference of undertaking such development. The ownership rights of developer would include the right to mortgage, hypothecate or to execute such covenants as may be required for effectively vesting a charge on the port assets in favor of a lender to the project and the right to sell, convey or transfer to another party, the right title and interest and concession vested in the developer, on the request of lender to the project, subject to contractual agreements. The lender in consultation with GMB will select the new developer and if necessary the terms and conditions of the concession agreement may be re-negotiated. The developer may operate the port as a full service or as landlord port. The GoG/GMB will permit subleasing of facilities or subcontracting of services provided the developer continues to remain responsible to the GoG for due performance under the contracted terms and conditions. The duration of the BOOT package would be 30 years and can be considered for period greater than 30 years for projects will entail sizeable capital investment on account of site-specific marine conditions and back-up infrastructure such as road/rail linkages.

Private sector can be involved in several ways including extending of resources, providing state-of-the-art technology at project management and maintenance levels. Besides, public-private partnership can be developed on models like build-operate-transfer (BOT), build-operate-own-transfer (BOOT), build-operate-lease-transfer (BOLT) and design-build-finance- operate-transfer (DBFOT) models. The country is yet to adopt full-fledged private sector participation models.

5. GUJARAT ADANI PORTS LTD.

  1. Introduction

Gujarat Adani Port Ltd (GAPL), a company promoted by Adani Port Ltd (APL) in the joint sector with the Gujarat Port Infrastructure and Development Company Limited (GPIDCL), is undertaking the development of Mundra Port located at Navinal Island, Village Mundra, dist Kachch.

  1. Promoters

Gujarat Adani Port Ltd (GAPL) is a company incorporated on 26th May 1998 and promoted by Ahmedabad based Adani Group and Government of Gujarat through Gujarat Port Infrastructure Development Company Ltd (GPIDCL) for the development of Mundra port as per the port policy and BOOT guidelines of the GoG.

Board of Directors:

Business Development

With a view to giving a focused thrust to the overall development of the port, an exercises has been carried out by GAPL to identify bulk customers who would like to have an alternative port. GAPL has developed and is in the process of developing the services and facilities in tune with the requirements of bulk users of the port facilities.

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  1. Observations

  1. Mundra port has handled more than 700 vessels till 15th September,2002, carrying about 9.5 million tones of cargo. The connectivity of railway(in November, 2001) further boosted the strategic importance of Mundra. The deep draft and the connectivity of the port to the hinterland has culminated in attracting HPCL and IOCL to establish crude oil handling facilities on the port. In addition, the port has encouraged creation of other industrial activities like largest single location edible oil refinery in the country viz. Adani Wilmar Ltd at Mundra.

  1. GAPL is contemplating enhancing the business ...

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