Project management 401.

MIB

UNIT ONE: PROJECT MGT:

1. Project MGT:
Concept & categories of projects:
Why----
Who----
Where—
When--------
How---
Categories:
1, Based on type of activity—other than production/ mfg , healthcare,
pollution control, roads, irrigation, water supply etc. normally GOI/
state invests enjoyed by society , Difficult to quantify / value it in
terms of return.

2. Based on location of project— could be national / international

projects. May be jv/ subsidiary overseas/ by way of mergers/
acquisitions

3. Based on project completion time-------e.g. canal making must be

done before monsoon, food processing project must be done before
season starts e.g. green peas starts in oct.,

4. Based on ownerships—pvt/ govt sector or it sector. We have most

pvt sec., China has more Public sec, and India has both. We have
PSU owned by State Govt/ Central Govt.
PSu is created during initial planned phase in a country. P sector do
not invest in a poor/ developing economy, strategy sector can not be
given to Pvt Sec—e.g.—defense/aviation mfg/space/ atomic
research)
Now natural resource sector is also being open to PVT sec—e.g.-
coal, gas, oil, road, townships, mining etc.

5. Based on Size----small (Rs 1 crs), medium (Rs2- 99 crs) &

large( Rs 100 plus crs)------

6. Based on need---can be classified as below;

6 a) New project-----finding a gap in terms of needs for goods/
services & for filling the gap (demand exceed supply of products)

6b) Balancing projects--------o/p of few units are ii/p of other grp of

units( products)
Small no of units may produce steel frames, others may do welding,
yet another painting, yet another for making seats, finally a unit may
make complete assay of chairs/ folding cots.
One may think of a bigger co like cahndan stell works or Godrej –
who have all activities in one co. Yet the co may think of additional
projects to balance the large cap unutilized to balance same.
6c) Expansion projects-- a co making watches @ 50,000./M,decides
to manufacture or add capacity by either addition of project/ plant for
say 20,000/pm or to acquire another plant or buy from an Ancillary -
will be known as expansion project9 not new one).
6d) Modernisation plant: When new technology comes into operation/
becomes known , the existing technology may become obsolete---
meaning it will less productive or less cost efficient or profits/
productivity can be increased by new technology even if capital cost
is ammortised .
6e) Replacement project: Due to aging / wear & tear the existing
machines/ process plants—causing high cost of maintenance & lower
productivity/ lesser profits,
6f) Diversification---can be related or unrelated. Samtel wanted to
move from electron gun to monitors for computer which they did in
1998-99—its related industry/ product.
Havells diversified into hospitals in 2007 from being a major in
electrical industry—its un related.
6g) backward integration—If a co decide to integrate its RM also its
own production process – SAMTEL example
6h) Forward integration --- If a co decided to add its DFg also its own
RM , e.g. FLEX decided to add making polythene bag also including
printing packing from existing polythene tubes & machine making
business.

Project formulation/ Preparation:

Its four stages:
1. Prefeasibility stages:

Feasibility Analysis—
Pre feasibility study reports_-it’s done to estimate
followings:
• Selection of product—is it right?
• Details analysis for accepting project
• Investors friendly
• Any speciall aspects
Pre feasibility study will bring about:
• Market / demand potentials
• Plant cap
• Resources
• Location
• Technology avl/ to be imported?
• Organization structure
• Fin analysis project engg/ scheduling
• Any special issue

Project feasibility study report (PFSR)

Data required for this study---

• Macro eco scene govt policy/tax/ for the industry
• Govt policy / initiatives
• Industry scene of production/ marketing/
competition
• Marketing scenario
• Study of capital mkt
• Social variables

Guidelines for PFSR:

The aspects are:
1. gen info – must deal with eco scenes, industry stats,
priority
2. Analysis of alternatives data to have no of similar
industry in mkt, tech level, location adv, profitability.
3. Description of project—details of projects – size/ i/p,
o/p, resources, personnel, organization & structure.
4. marketing aspects – data on demand projections/
identifications/ selection of market segments
 5. fin analysis--- the analysis to include various costs,
ratios, ror , projection on P & L a/c etc.
6. Socio economic analysis- on envrt.,, Fin earnings to
govt/ public/ society

Contents of PFSR:
1. General info.
2. Project description
3. Mkt studies/ potential
4. capital cost & source of fin
5. WC reqts
6. Fin analysis & other aspects
7. Eco & social variables
8. Project implementations
PFSR appraisal—helps---
• Select alternative
• Objective assessment
• Evaluation viability- investment/ credit worthy
ness
• Finalise tech & fin parameters
• Modify scope of projects- improve ratios
•
2. Functional study/ Support studies:
May be done in one/ more of followings:
2a)Mkt Study—
2b) RM/ input study—
2c) Project location study---
2d) plant size study--------
2e) Eqpt selection study----

3. Functional/.. Functional studies (Support fns):

We have to do following for feasibility study of project in hand:

Economic analysis--- must focus on improving followings

• o/p
 • services
• earnings
• std of living
• national income
• income distribution
• employment
• govt revenues

Marketing— focus on improving

• potential
• customer seg
• demand forecast
• market strategies
• cost /price

Financials: to improve/ focus

• capital reqt/ time- various Ms
• WC- period/ time
• Capacity utilizations
• Fin analysis, ratios, BEA, fin parameters

& Technical: should focus on/ improve:

• Land/ location
• Avalbility of all Ms, power/ water..
• Facilities Mgt
• Compliance of stuatory/ govt / legal/local

4. D P R( detail project report):

1. Location, products, RM, promoters’ details, cost of project

2. Grp COs , products, financial perf . of 4 yrs,

3. List of directors, address, age, qualifications, exp., and

other activities
4. Fin arrangements, share issues, div records
 5. tech assistance, nature of arrangements, agreements of
technology transfer
6. Land, bld, plant/ m/c,all Ms
7. evrt/ social factors
8. Marketing plans/ dealerships, competitor
9. P & L, cash flow projections- 3 cyrs
10. Growth opportunity

Social Cost Benefit Analysis (SCBA):

National cost benefit analysis differs from commercial cost
benefit analysis.
a) Its benefit will always be at current prices which
will be lower/ higher than that would have been if
commercial benefits are reckoned.
b) As cost take consideration of direct cost &
direct benefits for commercial profitability
analysis, the SCBA takes into considerations
indirect cost & indirect benefits to nation. ---
Though difficult to assess. A pharma drug co
making life saving medicine for hear patient, will
give accrual to financial benefit out margin of
profit but indirect social benefit to society many
times by saving life of millions.
E.g. a bridge on river will have direct cost, indirect
benefits: roads, transportation, less time for
commuting, while indirect cost could be for
acquiring land, , removal of agri/ industrial/
commercial activities – disturbance of eco balance.

Objectives of SCBA:
• Contribution to GDP
• To poorer secretion to reduce social
imbalance
• Justification of scarce resources
• Justification in improving/ retaining envrntal
conditions
SCBA has two approaches:

1. UNIDO approach ---

 • Arriving at profitability based on mkt
price
• Using shadow price for resources for
net profit at economic price
• Adjustment of net profit for impact on
savings/ investment
• Adjustment of net profit on project’s
impact on income distribution
• Adjustment of net benefit for goods
produced whose social values differ
from their economic values
The PSU’s/ GOVT project’s impact is seen
same as pvt sector in terms of profitability
but also adjusted to reflect social
implications.

Shadow Price: for SCBA the mkt price i/p

& o/p of projects are required to be
corrected suitably if they do not represent
correct price of i/p & o/p. Such corrected
price of i/p & o/p is known as shadow price.

2. Little Mirrlees approach----developed in 1968

for OECD—present uncommited social
income measured in terms of convertible FE
of constant of constant purchasing power.

UNIT 2:
Project Financing/ Devtt Banks
-Institutions:Objectives/ Functions/ roles:
Fixed capital; long term loans for shares/ deb/pub
deposits/machines/ building/ fixed assets-------- banks
are: ICICI,SFC, NSIC, SSIC, SIDC, COMMERCIAL
BANKS
Working capital: --- production plans, for trade credit
from vendors—banks are:------ commercial banks,
 cooperative banks, private banks, State fin & State
Industrial & Investment corporations

1. IFCI(industrial fin corp of India)- assist in Rs,

Subscribe to Shares/ Deb,underwriting shares, pur
of m/c, equipments, fin to lease/ hire pur co,above
Rs 3cr fin less than this by IDBI/SFC, as
gauranteer for loans taken from commercial
banks, gauranteer for deffered payments due
from Industry/ firm for capital expenses,
Gauranteer for FE loans from abroad with
approval from GOI
2. IDBI—
3. ICICI--- infra/establishments/modernizations,
deferred credit, lease credit, venture capital
,Gauranteer of loans, underwriting of shares/deb/
bonds

4. IRBI( Industr reconstruction bank)—pricipal

agency for assisting small industries for credit &
reconstruction to revive sick industries.In process
of revival takes up consultancy, merchant
banking, equipment leasing.
5. LIC----housing, rural electrifications,water supply
6. UTI--- safeguard intt of small investors, retired
personnels,most of investments in UTI are meant
for corporates expansion, diversifications,
rehabilitation ,modernizations.
7. State Fin corporations- more than 25 SFCs in
states operating.—term loans for land, bldg, m/cs,
for SSIs/ entrepreneurs, modernizations,
mechnisations,rehabilitation of sick units, rural
industries, cottage industry, for transport ,
tourism,EDP/ seminars, QIP

Development of Development banks in India:

 Development banks and entrepreneurship promotion in India

By Pawan Kumar Sharma

Page vii

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Recent developments

To meet emerging challenges and to keep up with reforms in financial

sector, IDBI has taken steps to reshape its role from a development
finance institution to a commercial institution. With the Industrial
Development Bank (Transfer of Undertaking and Repeal) Act, 2003,
IDBI attained the status of a limited company viz. "Industrial
Development Bank of India Limited" (IDBIL). Subsequently, the
Reserve Bank of India (RBI) issued the requisite notification on 30
September 2004 incorporating IDBI as a 'scheduled bank' under the
RBI Act, 1934. Consequently, IDBI, formally entered the portals of
banking business as IDBIL from 1 October 2004.

The commercial banking arm, IDBI BANK, was merged into IDBI. In
March 2008, IDBI Bank entered into a joint venture with Federal Bank
and Fortis Insurance International to form IDBI Fortis Life Insurance,
of which IDBI Bank owns 48 percent. The company ended the year
with over 300 Cr in premiums as on 31 March 2009.

[edit] Overview of development banking in India

The concept of development banking rose only after Second World

War, after the Great Depression in 1930s. The demand for
reconstruction funds for the affected nations compelled in setting up a
worldwide institution for reconstruction. As a result the IBRD was set
up in 1945 as a worldwide institution for development and
reconstruction. This concept has been widened all over the world and
resulted in setting up of large number of banks around the world
which coordinating the developmental activities of different nations
with different objectives among the world. The Narashimam
committee had recommended to give up its direct financing functions
and to perform only the promotional and refinancing role. However,
the S.H.Khan committee, appointed by the RBI, recommended its
transformation into a universal bank.[4]
The course of development of financial institutions and markets
during the post-Independence period was largely guided by the
process of planned development pursued in India with emphasis on
mobilisation of savings and channeling investment to meet Plan
priorities. At the time of Independence in 1947, India had a fairly well-
developed banking system. The adoption of bank dominated financial
development strategy was aimed at meeting the sectoral credit
needs, particularly of agriculture and industry. Towards this end, the
Reserve Bank concentrated on regulating and developing
mechanisms for institution building. The commercial banking network
was expanded to cater to the requirements of general banking and for
meeting the short-term working capital requirements of industry and
agriculture. Specialised development financial institutions (DFIs) such
as the IDBI, NABARD, NHB and SIDBI, etc., with majority ownership
of the Reserve Bank were set up to meet the long-term financing
requirements of industry and agriculture. To facilitate the growth of
these institutions, a mechanism to provide concessional finance to
these institutions was also put in place by the Reserve Bank.

The first development bank In India incorporated immediately after

independence in 1948 under the Industrial Finance Corporation Act
as a statutory corporation to pioneer institutional credit to medium
and large-scale. Then after in regular intervals the government
started new and different development financial institutions to attain
the different objectives and helpful to five-year plans.

The early history of Indian banking and finance was marked by strong
governmental regulation and control. The roots of the national system
were in the State Bank of India Act of 1955, which nationalized the
former Imperial Bank of India and its seven associate banks. In the
early days, this national system operated alongside of a large private
banking system. Banks were limited in their operational flexibility by
the government’s desire to maintain employment in the banking
system and were often drawn into troublesome loans in order to
further the government’s social goals.

The financial institutions in India were set up under the strong control
of both central and state Governments, and the Government utilized
these institutions for the achievements in planning and development
of the nation as a whole. Thus all India financial institutions can be
classified under five heads according to their economic importance
that are:

• All-India Development Banks

• Specialized Financial Institutions
• Investment Institutions
• State-level institutions
• Other institutions..

[edit] Industrial Development Bank of India (IDBI)

The Industrial Development Bank of India (IDBI) was established on 1

July 1964 under an Act of Parliament as a wholly owned subsidiary of
the Reserve Bank of India. In 16 February 1976, the ownership of
IDBI was transferred to the Government of India and it was made the
principal financial institution for coordinating the activities of
institutions engaged in financing, promoting and developing industry
in the country. Although Government shareholding in the Bank came
down below 100% following IDBI’s public issue in July 1995, the
former continues to be the major shareholder (current shareholding:
52.3%). During the four decades of its existence, IDBI has been
instrumental not only in establishing a well-developed, diversified and
efficient industrial and institutional structure but also adding a
qualitative dimension to the process of industrial development in the
country. IDBI has played a pioneering role in fulfilling its mission of
promoting industrial growth through financing of medium and long-
term projects, in consonance with national plans and priorities. Over
the years, IDBI has enlarged its basket of products and services,
covering almost the entire spectrum of industrial activities, including
manufacturing and services. IDBI provides financial assistance, both
in rupee and foreign currencies, for green-field projects as also for
expansion, modernisation and diversification purposes. In the wake of
financial sector reforms unveiled by the government since 1992, IDBI
evolved an array of fund and fee-based services with a view to
providing an integrated solution to meet the entire demand of
financial and corporate advisory requirements of its clients. IDBI also
provides indirect financial assistance by way of refinancing of loans
extended by State-level financial institutions and banks and by way of
rediscounting of bills of exchange arising out of sale of indigenous
machinery on deferred payment terms.
IDBI has played a pioneering role, particularly in the pre-reform era
(1964–91),in catalyzing broad based industrial development in the
country in keeping with its Government-ordained ‘development
banking’ charter. In pursuance of this mandate, IDBI’s activities
transcended the confines of pure long-term lending to industry and
encompassed, among others, balanced industrial growth through
development of backward areas, modernisation of specific industries,
employment generation, entrepreneurship development along with
support services for creating a deep and vibrant domestic capital
market, including development of apposite institutional framework.

Narasimam committee[5] recommends that IDBI should give up its

direct financing functions and concentrate only in promotional and
refinancing role. But this recommendation was rejected by the
government. Later RBI constituted a committee under the
chairmanship of S.H.Khan to examine the concept of development
financing in the changed global challenges. This committee is the first
to recommend the concept of universal banking. The committee
wanted the development financial institution to diversify its activity. It
recommended to harmonise the role of development financing and
banking activities by getting away from the conventional distinction
between commercial banking and developmental banking.

In September 2003, IDBI diversified its business domain further by

acquiring the entire shareholding of Tata Finance Limited in Tata
Home finance Ltd., signaling IDBI’s foray into the retail finance sector.
The fully-owned housing finance subsidiary has since been renamed
‘IDBI Home finance Limited’. In view of the signal changes in the
operating environment, following initiation of reforms since the early
nineties, Government of India has decided to transform IDBI into a
commercial bank without eschewing its secular development finance
obligations. The migration to the new business model of commercial
banking, with its gateway to low-cost current, savings bank deposits,
would help overcome most of the limitations of the current business
model of development finance while simultaneously enabling it to
diversify its client/ asset base. Towards this end, the IDB (Transfer of
Undertaking and Repeal) Act 2003 was passed by Parliament in
December 2003. The Act provides for repeal of IDBI Act,
corporatisation of IDBI (with majority Government holding; current
share: 58.47%) and transformation into a commercial bank. The
provisions of the Act have come into force from 2 July 2004 in terms
of a Government Notification to this effect. The Notification facilitated
formation, incorporation and registration of Industrial Development
Bank of India Ltd. as a company under the Companies Act, 1956 and
a deemed Banking Company under the Banking Regulation Act 1949
[6]
and helped in obtaining requisite regulatory and statutory
clearances, including those from RBI. IDBI would commence banking
business in accordance with the provisions of the new Act in addition
to the business being transacted under IDBI Act, 1964 from 1
October 2004, the ‘Appointed Date’ notified by the Central
Government. IDBI has firmed up the infrastructure, technology
platform and reorientation of its human capital to achieve a smooth
transition.

IDBI Bank, with which the parent IDBI was merged, was a vibrant
new generation Bank. The Pvt Bank was the fastest growing banking
company in India. The bank was pioneer in adapting to policy of first
mover in tier 2 cities. The Bank also had the least NPA and the
highest productivity per employee in the banking industry.

On 29 July 2004, the Board of Directors of IDBI and IDBI Bank

accorded in principle approval to the merger of IDBI Bank with the
Industrial Development Bank of India Ltd. to be formed incorporated
under the Companies Act, 1956 pursuant to the IDB (Transfer of
Undertaking and Repeal) Act, 2003 (53 of 2003), subject to the
approval of shareholders and other regulatory and statutory
approvals. A mutually gainful proposition with positive implications for
all stakeholders and clients, the merger process is expected to be
completed during the current financial year ending 31 March 2005.

The immediate fall out of the merger of IDBI and idbi bank was the
exit of employees of idbi bank. The cultures in the two organizations
have taken its toll. The IDBI BANK now is in a growing fold. With its
retail banking arm expanding further after the merger of United
western Bank.

IDBI would continue to provide the extant products and services as

part of its development finance role even after its conversion into a
banking company. In addition, the new entity would also provide an
array of wholesale and retail banking products, designed to suit the
specific needs cash flow requirements of corporates and individuals.
In particular, IDBI would leverage the strong corporate relationships
built up over the years to offer customised and total financial solutions
for all corporate business needs, single-window appraisal for term
loans and working capital finance, strategic advisory and “hand-
holding” support at the implementation phase of projects, among
others.

IDBI’s transformation into a commercial bank would provide a

gateway to low-cost deposits like Current and Savings Bank
Deposits. This would have a positive impact on the Bank’s overall
cost of funds and facilitate lending at more competitive rates to its
clients. The new entity would offer various retail products, leveraging
upon its existing relationship with retail investors under its existing
Suvidha Flexi-bond schemes. In the emerging scenario, the new IDBI
hopes to realize its mission of positioning itself as a one stop super-
shop and most preferred brand for providing total financial and
banking solutions to corporates and individuals, capitalising on its
intimate knowledge of the Indian industry and client requirements and
large retail base on the liability side.

IDBI upholds the highest standards of corporate governance in its

operations. The responsibility for maintaining these high standards of
governance lies with its Board of Directors. Two Committees of the
Board viz. the Executive Committee and the Audit Committee are
adequately empowered to monitor implementation of good corporate
governance practices and making necessary disclosures within the
framework of legal provisions and banking conventions.

[edit] Industrial Investment Bank of India Ltd.

The industrial investment bank of India is one of oldest banks in India.

[7]
The Industrial Reconstruction Corporation of India Ltd., set up in
1971 for rehabilitation of sick industrial companies, was reconstituted
as Industrial Reconstruction Bank of India in 1985 under the IRBI Act,
1984. With a view to converting the institution into a full-fledged
development financial institution, IRBI was incorporated under the
Companies Act, 1956, as Industrial Investment Bank of India Ltd.
(IIBI) in March 1997. IIBI offers a wide range of products and
services, including term loan assistance for project finance, short
duration non-project asset-backed financing, working capital/ other
short-term loans to companies, equity subscription, asset credit,
equipment finance as also investments in capital market and money
market instruments.

In view of certain structural and financial problems adversely

impacting its long-term viability, IIBI submitted a financial
restructuring proposal to the Government of India on 25 July 2003.
IIBI has since received certain directives from the Government of
India, which, inter alias, include restricting fresh lending to existing
clients approved cases rated corporates, restrictions on fresh
borrowings, an action plan to reduce the overhead expenditure,
disposal of fixed assets and a time-bound plan for asset
recovery/reconstruction. The Government of India had also given its
approval for the merger of IIBI with IDBI and the latter had already
started the due diligence process.[8]

But on 17 December 2005 the IDBI rejected any such merger.[9]

[edit] Acquisition of United Western Bank

In 2006, IDBI Bank acquired United Western Bank in a rescue.[10]

Annasaheb Chirmule, who worked for the cause of Swadeshi
movement, founded Satara Swadeshi Commercial Bank in 1907,
and some three decades later founded United Western Bank. The
bank was incorporated in 1936, and commenced operations the next
year, with its head office in Satara, in Maharashtra State. It became a
Scheduled Bank in 1951. In 1956 it merged with Union Bank of
Kolhapur, and in 1961 with Satara Swadeshi Commercial Bank.[11]
At the time of the merger with IDBI, United Western had some 230
branches spread over 47 districts in 9 states, controlled by five Zonal
Offices at Mumbai, Pune, Kolhapur, Jalgaon and Nagpur.