The presentation covers project financing, capital structure, key factors in determining debt equity ratio, menu of financing, sources of capital, internal accruals, equity capital, preference capital, debenture or bonds, methods of offering, term loan, working capital advances, project financing structures,

1. Financing Projects
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2. Financing Projects
▪ What is appropriate capital Structure?
▪ Which financing instrument?
▪ Pros and cons on public and private sources of funds
▪ Dependence on domestic /International capital market
▪ Long term/ short term financing sources
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3. Capital Structure
Equity
▪ Equity share holders have residual claim on
income and wealth
▪ Dividend paid to equity shareholders is not
tax deductible
▪ Equity has indefinite life
▪ Equity holders can control the affairs of firm
Debt
▪ Creditors have fixed claim in form of
interest and principle payment
▪ Interest paid is tax deductible
▪ Debt has fixed maturity
▪ Debt investors play passive role (can
impose conditions on firms)
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4. Key factors in determining Debt-Equity ratio
o Cost:
• Lenders require lower rate of return than equity share holders.
• Also Debt interest is tax deductible while equity dividend is not
o Nature of assets : For tangible assets (more liquidity) more debt financing
(ex. Steel plants use more debt while software companies have more
equity)
o Business Risk: Variability of earning power (PBT, taxes, assets)
• Demand variability
• Price variability
• Input Cost variability
• Proportion of fixed operating cost
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5. Key factors in determining Debt-Equity ratio
o Norms of Lenders:
• Normally FI’s allow 1:1 debt equity ratio
• For highly capital intensive projects FI’s allow high debt equity ratio (for ex. In
power plants 2.33 : 1 debt equity ratio
o Control Considerations:
• Equity share that promoters wants is a key factor
Ex. In a project costing 10000 crore , promotors plans to invest 2500 crore and wants 50 %
equity so total equity can be 5000 crore, rest has to be debt ( debt-equity ratio is 1:1)
o Market Conditions: In a buoyant equity market, equity can be obtained at high
premium so low debt-equity ratio and vice versa
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6. Menu of financing
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Sources of Finance
Equity
• Equity shares
• Preferential shares
• Internal accurals
Debt
• Bonds
• Term loans
• Working capital advances
• Misc. sources
Sources of Finance
Internal
accruals
Working capital
advancesTerm Loans
Securities
• Equity
• Preference
• Bonds
Misc. sources

7. Public and Private sources of capital
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Public sources:
Capital from public through an offer document . These securities can be traded
on stock exchanges (NSE, BSE etc.)
Private sources:
In the form of loans given by banks and FI’s
or
In form of securities equity shares, preferential shares, debentures which are
placed by small, group of investors like private equity fund, venture capital
firms, FI’s, insurance companies, mutual funds and inviduals.

8. Internal Accruals
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Internal accruals of a firm consist of depreciation charges and retained
earnings.
• Depreciation represent a periodic write-off of a capital cost incurred in the
beginning. It is a non cash charge. Hence it is considered an internal source
of finance.
• Retained earnings are that portion of equity earnings (PAT less preference
dividends), which are ploughed back in the firm.
( normally 30-80 % earnings are retained)
• Important source of long term financing

9. Equity Capital
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Authorised, Issued, Subscribed and Paid-up capital
• Amount of capital that a company may issue is authorised capital
• The capital offered by company to investors is issued capital
• The part of issued capital which has been subscribed by investors is
subscribed capital
• The actual amount paid by investors is paid-up capital (including premium)
Par value, Issue price, Book value and market value
• Share value written on memorandum and written on the scrip is par value
or face value (Rs 10/-, Rs 5/-, Rs 2/-, Rs 1/-)
• The price at which share is issued is issue price (Face value + premium)
• 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 = 𝑝𝑎𝑖𝑑 𝑢𝑝 𝑒𝑞𝑢𝑖𝑡𝑦 𝑐𝑎𝑝𝑖𝑡𝑎𝑙+𝑅𝑒𝑠𝑒𝑟𝑣𝑒𝑠 𝑎𝑛𝑑 𝑠𝑢𝑟𝑝𝑙𝑢𝑠𝑒𝑠
𝑁𝑜.𝑜𝑓 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠
• Market value of an equity is the price at which it is traded.

10. Preference Capital
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Hybrid form of financing: some characteristics of equity and some of debentures
Preference capital resembles to equity
• Preference dividend out of distributable profit (not a obligatory payment)
• Preference dividend is not a tax deductible payment
Preference capital resembles to debt
• Dividend rate of preferential shares are usually fixed.
• Claim of preferential shareholder is prior to claim of equity shareholders.
• Preferential shareholder do not enjoy right to vote.

11. Debentures or Bonds
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• A variable alternative of term loans.
• An instrument of debt finance.
• More flexible than term loans
Features of debentures
• Debenture issue is sold to investor through trust deed. Trustee is usually
banks, FI’s or insurance company.
• Debentures are typically secured through mortgages
• Debentures issues (publicly) of more than 18 months has to be credit rated.
• Debentures are redeemable in nature
• Debentures may have a fixed (usually) or floating rate of interest.
• Debentures have normally a recall feature i.e. company may redeem at a
certain price before maturity

12. Method of Offering
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Public offering
• Initial Public Offering (IPO): First public offering to the public
• Secondary Equity offering
• Bond offering
• Rights issue: additional equity has to be offered to existing shareholders in
the first instance
Private Placement
Offering to select group of persons/ entities not more than 49.

13. Term Loan
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• Generally repayable in less than 10 years
• Typically employed in acquisition of capital assets and working capital
Features of term loan
• Currency :
rupee of other currency term loan
• Security :
Secured borrowing by mortgage / hypothecation
• Interest payment and principal repayment
• Restrictive covenants:
may refrain from new investment/ additional borrowing without prior approval
of lender. May ask to repay existing loan.

14. Working Capital Advances
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Working capital advances are provided by commercial banks
• Cash credits / Overdrafts
• Loans:
interest charged on full amount irrespective of how much is used.
• Purchase / discount of bills
the bill may be payable on demand or after a usance period.
• Letter of credit

15. Miscellaneous Sources
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• Deferred Credit: credit against letter of credit or bank guarantee
• Lease finance and hire purchase:
Lease of use of asset (capital or fixed) against a fixed periodic payment.
Two types of lease finance
• Finance or capital lease: a non cancellable in primary lease period
• Operating lease (lessor provides operating know how and maintenance,
cancellable as per lessee wishes)
• Unsecured loans and deposits
• Subsidies, tax deferments and exemptions
• Securitization: packaging a pool of assets and issuing securities

16. Project Financing Structures
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Full recourse structure
• The borrowings are fully secured by a first charge on all existing and future assets of
the company by way of mortgage and hypothecation.
• In case of expansion existing and new lenders acquire the rights (on mortgage/
hypothecation) in proportion to amounts of finance
• Project promotors may be asked to provide personal or corporate guarantee to
lenders along with cash flows.
Limited recourse structure
• Mostly used for infrastructure finance
• A separate project company called SPV (Special purpose vehicle)
• The private sector promoter takes a substantial share in project company.
• The cash flows are handled by independent agent (on behalf of sponsors'). After all
payment obligations residual revenue is made available to SPV.

17. Thank You
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Contact
Email: naimkidwai@gmail.com
https://nrkidwai.wordpress.com/