POWERGRID CORPORATION

OF INDIA LTD.

ANALYSIS OF SOURCES OF FINANCE USED BY

POWER GRID TO RAISE CAPITAL
A SUMMER INTERN REPORT
Submitted by

RAJAT KUMAR
(Roll No. 1533670038)

in partial fulfillment of Summer Internship for the award of the degree

of

MASTER OF BUSINESS ADMINSTRATION

ROORKEE ENGINEERING AND MANAGEMENT TECHNOLOGY

DR.A.P.J.ABDUL KALAM UNIVERSITY, LUCKNOW

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2
 CERTIFICATE

This is to certify that Mr. Rajat Kumar, S/o Mr. Virendra Kumar Pursuing Master of Business
Administration from Roorkee Engineering & Management Technology, Dr.A.P.J.Abdul Kalam
University, Lucknow has successfully completed the Project Report in our organization on the
topic titled, Analysis of Sources of Finance used by Power Grid to Raise Capital from 13th
June, 2016 to 25th July 2016. During his project tenure in the organization, we found him
hardworking, sincere and diligent person and his behavior and conduct was good. We wish him all
the best for his future endeavors.

Signature

Mr. Sandeep Kumar Jain

DGM (F&A)

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 ACKNOWLEDGEMENT

The internship opportunity I had with Power Grid Corporation of India Limited was a great
chance for learning and professional development. Therefore, I consider myself as a very lucky
individual as I was provided with an opportunity to be a part of it. I am also grateful for having a
chance to meet so many wonderful people and professionals who led me though this internship
period.

I express my deepest thanks to Mr. Sandeep Kumar Jain, DGM (F&A) for taking part in useful
decision & giving necessary advices and guidance and arranged all facilities to make life easier. I
choose this moment to acknowledge his contribution gratefully.

It is my radiant sentiment to place on record my best regards, deepest sense of gratitude to Mr.
Rajeev Gupta Chief Manager (Finance),Senior Asst. Officer (Accounts) Mr.Yogesh Jajoriya and
Mr. Nikhilesh Kumar for their careful and precious guidance which were extremely valuable for
my study both theoretically and practically.

I perceive as this opportunity as a big milestone in my career development. I will strive to use
gained skills and knowledge in the best possible way, and I will continue to work on their
improvement, in order to attain desired career objectives. Hope to continue cooperation with all of
you in the future.

Yours Sincerely,

Rajat Kumar

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 CONTENTS
Chapter Topic Page
No.
1. Executive Summary 6
2. Introduction 7
2.1 Company History 8
2.2 Mission ,Vision and Objectives of the Company 14
2.3 Company Profile 15
2.4 Business Areas 21
2.5 Business Overview 22
2.6 Company at a Glance 23
2.7 Corporate Social Responsibility(CSR) 25
2.8 Joint venture and Subsidiaries 27
2.9 Board of Directors(BOD) 28
3. Issue of Bonds 29
3.1 Fund Raising 30
3.2 Procedure of Fund Raising 31
3.3 Fund Raising Through Bonds 33
3.4 Regulators of Government Securities and Debenture 35
Market
3.5 Costs in issuing Bonds 35
3.6 Fund Raising Through Bonds in Power Grid 36
3.7 Guidelines to issue Bonds for A PSU 39
3.8 Hierarchy of Functioning 43
3.9 Strategy of the Bond Issue 44
4. Cost of Bonds 53

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 4.1 Cost of Capital 54
4.2 Why is Cost of Capital important? 54
4.3 WACC of Power Grid 55
4.4 Cost of Bonds 56
5. Ratios 59
5.1 Computation of Ratios 60
5.2 Ratio Analysis 62
6. IFRS 70
6.1 What is IFRS? 71
6.2 IFRS in Indian context 71
6.3 Mapping of IFRS/IAS vis--vis Ind-AS 72
6.4 Beneficiaries of Convergence with IFRS 74
6.5 Problems and Challenges 75
6.6 Measures taken to address the Challenges 77
6.7 Roadmap for IFRS conversion 78
7. Taxation 80
7.1 Advance Tax 81
7.2 Interest for delay in filing the return of income [Section 84
234A]
7.3 Interest for Default in Payment of Advance Tax [Section 85
234B]
7.4 Interest for default in payment of installment(s) of 87
advance tax [Section 234C]
7.5 How to Pay Advance Tax 89
7.6 Minimum Alternate Tax 90
7.7 How to compute Assessable Profit 91

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 7.8 How to Compute MAT 93
7.9 Dividend Distribution Tax 95
7.10 Tax Deducted At Source 96
8. Conclusion 100
9. References 103

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 CHAPTER 1

EXECUTIVE
SUMMARY

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1.1 Executive Summary
The internship project was conducted at Power Grid Corporation of India Ltd. (PGCIL), Gurgaon,
Haryana. The objective of the project was:-

To study different sources of finance (like Bonds etc.) used by the company;
To compute and analyse impact of bonds and interest thereon etc on financial ratios of the
organization;
To study the accounting treatment of various aspects of Bonds and interest thereon etc
prescribed under Ind-AS/IFRS;
To study different aspects of taxation thereon.

Powergrid Corporation of India Ltd. is the Central Transmission Utility of the country and is
engaged in the transmission of bulk power across different states of India. Based on its
performance POWERGRID was recognized as a Mini-ratna category-I Public Sector Undertaking
in October 1998 and conferred the status of "Navratna" by the Government of India in May 2008.
They own and operate more than 95% of India's interstate and inter-regional electric power
transmission system. . The company plans, coordinates, supervises, and controls inter-state
transmission systems; and operates national and regional power grids. The Corporation, apart from
providing transmission system for evacuation of central sector power, is also responsible for
Establishment and Operation of Regional and National Power Grids to facilitate transfer of power
within and across the Regions with Reliability, Security and Economy on sound commercial
principles.

Power Grid's stellar financial performance in the past few years reflects the growing importance of
transmission companies in India. Revenue grew at a compounded annual growth rate (CAGR) of
24% in the last three years, while profit grew 27%. The company works on a fixed return on equity
model. Return on equity of 15.5% is guaranteed at a debt-to-equity ratio of 70:30, even in a
difficult business environment. It currently owns and operates a transmission network of about
1,00,200 circuit km of inter-state transmission lines, 167 extra high voltage (EHV) and high
voltage DC (HVDC) substations with a transformer capacity of about 1,64,763 MVA and wheels
about 50% of total power generated in the country.

The company has earmarked considerable capital expenditure, Rs.1,10,000 crore in the 12th Five-
Year Plan (2012-17), for which it plans to raise debt of Rs.70,000 crore. It has already tied up
close to 54% of this. When the strong fundamentals of Power Grid are juxtaposed with the realities
of the power sector, it's clear company has an important role to play in creating networks for
electricity to reach every corner of India. In the last fiscal, India had a 9% peak power deficit.

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 CHAPTER 2

INTRODUCTION

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2.1 Company History
Power Grid Corporation of India Limited (POWERGRID) was incorporated on October 23, 1989
under the Companies Act, 1956 with an authorized share capital of Rs. 5,000 Crore (subsequently
enhanced to Rs. 10,000 Crore in Financial Year (FY) 2007-08) as a public limited company,
wholly owned by the Government of India.
Its original name was the 'National Power Transmission Corporation Limited', and it was charged
with planning, executing, owning, operating and maintaining high-voltage transmission systems in
the country. On 8 November 1990, the National Power Transmission Corporation received its
Certificate for Commencement of Business. Their name was subsequently changed to Power Grid
Corporation of India Limited, which took effect on October 23, 1992.
POWERGRID started functioning on management basis with effect from August, 1991 and
subsequently it took over transmission assets from NTPC, NHPC, NEEPCO, NLC, NPC, THDC,
SJVNL etc. in a phased manner and it commenced commercial operation in 1992-93. In addition to
this, it also took over the operation of existing Regional Load Despatch Centers (RLDCs) from
Central Electricity Authority (CEA), in a phased manner from 1994 to 1996, which have been
upgraded and modernized with State of-the-art Unified Load Despatch and Communication
(ULDC) schemes. Consequently, National Load Despatch Centre (NLDC) was established in 2009
for overall coordination at National level.
According to its mandate, the Corporation, apart from providing transmission system for
evacuation of central sector power, is also responsible for Establishment and Operation of
Regional and National Power Grids to facilitate transfer of power within and across the Regions
with Reliability, Security and Economy on sound commercial principles. Based on its performance
POWERGRID was recognized as a Mini-ratna category-I Public Sector Undertaking in October
1998 and conferred the status of "Navratna" by the Government of India in May 2008.
POWERGRID, as the Central Transmission Utility of the country, is playing a major role in Indian
Power Sector and is also providing Open Access on its inter-State transmission system.
Power Grid Corporation of India Ltd is India's principal electric power transmission company. The
Company was notified as the Central Transmission Utility by the GoI on December 31, 1998. The
company is engaged in the transmission of bulk power across different states of India. They own
and operate more than 95% of India's interstate and inter-regional electric power transmission
system. . The company plans, coordinates, supervises, and controls inter-state transmission
systems; and operates national and regional power grids. The Companys business segments are
Transmission, Consultancy, Telecom and ULDC/ RLDC. The company has around 110514 circuit
kilometers of transmission network and 186 numbers of extra high-voltage alternating current and
high-voltage direct current sub-stations. The company also owned and operated broad band
telecom network of 29,641 kms connecting approximately 290 cities and towns in India. In
addition, it provides consultancy services in the areas of power transmission, sub-transmission,
distribution, load dispatch and communication, smart grid, and telecom sectors. The companys
consultancy services include system engineering and feasibility studies, environmental and social
impact assessment, design and engineering, contract services, project management and
construction supervision, owner's and lender's engineer, and other services. It serves state owned

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utilities, private utilities, central public sector undertakings, and government departments. The
company provides its consultancy services in India, Afghanistan, Bangladesh, Bhutan, Ethiopia,
Kenya, Myanmar, Nepal, Nigeria, Tajikistan, Sri Lanka, and the United Arab Emirates. As on 31 st
March 2014, the Gross Block of the Company was `96504 crores and Net Worth of the company
was `34413 crore. Our Company is presently listed on the BSE and the NSE.

It leases its transmission infrastructure to major telecom providers such as Bharat Sanchar Nigam,
Tata Communications, Tata Teleservices, Reliance Communications and Bharti Airtel.

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2.2 Vision, Mission and Objectives of the Company
Vision
World Class, Integrated, Global Transmission Company with Dominant Leadership in Emerging
Power Markets Ensuring Reliability, Safety and Economy.

Mission

We will become a Global Transmission Company with Dominant Leadership in Emerging Power
Markets with World Class Capabilities by:-

Setting superior standards in capital project management and operations for the industry and
ourselves;

Leveraging capabilities to consistently generate maximum value for all stakeholders in India
and in emerging and growing economies;

Inspiring, nurturing and empowering the next generation of professionals;

Achieving continuous improvements through innovation and state of the art technology;

Committing to highest standards in health, safety, security and environment.

Objectives

The Corporation has set following objectives in line with its mission and its status as Central
Transmission Utility to:

Undertake transmission of electric power through Inter-State Transmission System.

Discharge all functions of planning and coordination relating to Inter-State Transmission

System with-
- State Transmission Utilities
- Central Government
- State Government
- Generating Companies
- Regional Power Committees
- Authority
- Licensees
- Any other person notified by the Central Government in this behalf
To ensure development of an efficient, coordinated and economical system of inter-
state transmission lines for smooth flow of electricity from generating stations to the load
centres.

Efficient Operation and Maintenance of Transmission Systems.

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 Restoring power in quickest possible time in the event of any natural disasters like super-
cyclone, flood etc. through deployment of Emergency Restoration Systems.

Provide consultancy services at national and international levels in transmission sector based
on the in-house expertise developed by the organization.

Participate in long distance Trunk Telecommunication business ventures.

Ensure principles of Reliability, Security and Economy matched with the rising / desirable
expectation of a cleaner, safer, healthier Environment of people, both affected and benefited by
its activities.

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2.3 Company Profile
Transmission Sector
Transmission forms a critical link in the power sector value chain. India's power generation
capacities are unevenly dispersed across the country creating an imbalance between the
distribution of power demand and supply centres. Growth in industrialization, increasing per capita
income and rapid urbanization (Figure 1) has led to a ~50% growth in the installed power
generation capacity over the last 5 years. However, transmission capacity has grown only by ~30%
(Figure 2).

Historical trends in Generation vs. Transmission Capacities

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Current Market Structure

Both central and state governments are responsible for the development of electricity sector in
India. The market structure for power transmission is as shown in the figure. Powergrid is the
Central Transmission Utility (CTU) and is responsible for wheeling of power generated by Central
Generating Utilities (CGUs) and inter-state Mega Independent Power Producers.

The country has been demarcated into five transmission regions viz. Northern, Eastern, Western,
Southern and North Eastern. Each of these five regions has a Regional Load Despatch Centre
(RLDC), which is the apex body, as per the Electricity Act 2003, to ensure integrated operation of
the power system in the concerned region. In addition, there is an apex body at the national level
called the National Load Despatch Centre (NLDC) to ensure integrated power system operation in
the country. The NLDC and RLDCs together form a part of the Power System Operation
Corporation Limited (POSOCO), which is a wholly owned subsidiary of Power Grid Corporation
of India Limited (PGCIL). As a 14 major move, a committee was constituted in August 2008 by
the Ministry of Power had recommended that ring-fencing of Load Despatch Centres must be
done. The objective was to ensure that Load Despatch Centres have functional autonomy,
independent and sustainable revenue streams, and are adequately staffed with people having the
right skills, equipment, and incentives to deliver. However, even after concrete recommendations
by the committee, five years have passed and no concrete action has been taken on this front. The
transmission system has to meet the firm transmission needs as well as the Open Access
requirements. The Long term access gives the transmission system flexibility to cater to generation
capacity additions in future. The Short Term Open Access (STOA) facilitates real-time trading in
electricity and leads to market determined generation dispatches.
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Evolution of Transmission Sector

Indian power sector remained closed to private investments till 1991. Power generation was
opened up for private participation in 1991. The Electricity (Amendment) Act, 1998, defined
transmission as a separate activity and led to the creation of the CTU (currently PGCIL) and STUs.
The Regulatory Commission Act, 1998, mandated the setting up of an independent
regulatory mechanism at the central (CERC) and state levels (SERCs).

Electricity Act, 2003, further rationalized the approach for privatization of the power sector. For
transmission sector, some projects were to be earmarked for Tariff Based Competitive Bidding
(TBCB). CERC and SERCs would grant licenses for building, maintaining and operating
transmission lines. Both, private players and public utilities (PGCIL, STUs) could participate in
the bidding individually or through joint ventures.

The Transmission Network Plan was created detailing out new projects, up-gradation of existing
lines and the required specifications. A multi-stakeholder empowered committee would identify
projects to be developed and would reward projects after the evaluation of bids. CEA
would monitor the progress of projects as per the CERC's guidelines. National Tariff Policy 2006
introduced mandatory Tariff Based Competitive Bidding (TBCB) for all transmission projects with
the objective of promoting competitive procurement of transmission services, encouraging greater
investment by private players in the transmission sector and increasing transparency &
fairness in the process. In addition, the policy further pushed to make the power sector not only
financially viable but investment worthy. It restructured the tariffs and guaranteed a 16% rate of
return on investments made between 2001 and 2004, and 14% return on investments made after
2004.

17
Major milestones in Indian transmission sector

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Telecom Sector
POWERGRID with its brand name POWERTEL in Telecom business is the only utility in the
Country having overhead optic fibre network using Optical Ground Wire on power transmission
lines. POWERGRID has an all India Broad Band Telecom Network of 29,641 Kms.

The Indian telecommunications industry is one of the fastest growing in the world. Government
policies and regulatory framework implemented by Telecom Regulatory Authority of India (TRAI)
have provided a conducive environment for service providers. This has made the sector more
competitive, while enhancing the accessibility of telecommunication services at affordable tariffs
to the consumers. In the last two decades, the Indian Telecom Sector and mobile telephony in
particular has caught the imagination of India by revolutionizing the way we communicate, share
information; and through its staggering growth helped millions stay connected. This growth,
however, has and continues to be at the cost of the Climate, powered by an unsustainable and
inefficient model of energy generation and usage. Simultaneously, this growth has also come at
significant and growing loss to the state exchequer, raising fundamental questions on the future
business and operation model of the Telecom sector.
Telecommunication services are globally recognised as one of the driving forces for overall
economic development in a nation. They are also one of the prime support services needed for
rapid growth and modernization of various sectors of the economy. The Government of India
recognizes this fact and hence, has taken several major initiatives to provide a business friendly
environment for companies in this sector.
Driven by 3G and 4G services, it is expected that there will be huge machine-to-machine (M2M)
growth in India in 2016-17, according to UST Global. There is also a lot of scope for growth of
M2M services in the government's ambitious US$ 1.1 billion Smart City program. The rapid
strides in the telecom sector have been facilitated by liberal policies of the Government of India
that provide easy market access for telecom equipment and a fair regulatory framework for
offering telecom services at affordable prices. According to a study by GSMA, it has been
expected that smartphones will account for two out of every three mobile connections globally by
2020 and India is all set to become the fourth largest smartphone market.

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Consultancy Sector
POWERGRID has a large network of primary transmission system of 195 EHV substations and
over 116625 circuit Kms of transmission lines and Transformation Capacity of 234709 MVA as on
31st May, 2015. Building upon its un-matched techno-managerial excellence in various fields of
power system, POWERGRID has been providing one stop consultancy services to State owned
utilities, Private utilities, Central Public Sector Undertakings and Government departments. It has a
client base of around 145 companies in power sector and is expanding.

Currently, the Company has 130 assignments under execution (balance Project cost worth 19000
Cr). Some of the Major assignments are:

o 220 kV Transmission System for connecting remote areas of Leh & Kargil with the
National Grid (1600 Cr.);
o Implementation of T&D Schemes in 8 North-Eastern States of India (10000 Cr.);
o Smart Grid Pilot Projects in 9 State Utilities of India (200 Cr.);
o Terminal Bays (Sub-station) for 53 IPPs;
o 400kV D/C Pallatana Silchar Bongaigaon transmission line (660 KM) for NETC
(1550 Cr.);
o 400/220/132 KV Transmission System for JSEB (1300 Cr.);
o Transmission System associated with Lalitpur TPP for UPPTCL (2300 Cr.);
o Establishment of on-line High Power Test Laboratory at Bina for Short Circuit Test
facilities (225 Cr.).

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2.4 Business areas
Power System Management

POWERGRID takes continuous action regarding operation and maintenance to seek to ensure
compliance with prescribed standards as well as to achieve high availability of the system.

Construction activity- PGCIL is engaged in construction of transmission infrastructure.

As on 31st May 2015, we own and operate more than 1,16,625 Ckt. kms network of
transmission lines, 2,34,709 MVA transformation capacity and 195 nos. substations that
constitutes most of Indias interstate and inter-regional electric power transmission system
and carries electric power across India. Total Inter-regional power transfer capacity
is 46,450 MW.

Operation and maintenance- Power Grid is also engaged in building, operating and
maintenance of transmission lines as prescribed standard under the Electricity Act.

Grid management
PGCIL has modernized all the Regional Load Dispatch Centres (RLDCs) with the Unified Load
Despatch & Communication (ULDC). This modernization has led to improvement in operations of
the power system and reduction in tripping of lines and minor grid disturbances in regional grids.

Consultancy
It provides consultancy in areas of design, engineering, procurement, inspection, project
management, construction supervision, human resource development, spare parts management,
operation and maintenance.

Telecom

The Company has diversified into the telecommunication business by developing

telecommunication network. It owns and operates a fibre-optic cable network of over 19,000
kilometers and connected over 60 major cities and territories.

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2.5 Business Overview

22
2.6 Company at a Glance

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24
2.7 Corporate Social Responsibility (CSR)
Overview
POWERGRID emphasises on the overall development of areas and communities around its
establishments. It undertakes various community development schemes through provision of
facilities like health, education, drinking water besides infrastructure like roads, community
centres etc..
POWERGRID as a responsible Corporate Citizen developed its Environment and Social Policy
and Procedured (ESPP) in 1998 to address the environmental and Socio-economic issues arising
from its activities. The ESPP was revised in 2005 and 2009 after extensive discussions with the
World Bank and through Public consultations.

POWERGRID came out with its policy on CSR in 2009 way before the issue of CSR guidelines by
Department of Public Enterprises in 2010. The CSR policy was revised in 2013 and again in 2014
to make it compliant with the revised DPE guidelines and the Companies Act 2013.

Thrust Area of CSR Activities

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CSR Expenditure

Year Expenditure (In Rs. Crores)

2009-10 4.29

2010-11 15.58

2011-12 24.93

2012-13 21.75

2013-14 27.05

2014-15 47.42

2015-16 129.31

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2.8 Joint Ventures and Subsidiaries

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2.9 Board of Directors (BOD)
Following is some of the information pertaining to BOD of the Company:-

Sl.no. Name Designation DIN*

1. Shri R.N. Nayak Chairman & Managing Director 02658070
2. Shri I.S. Jha Director (Project) 00015615
3. Shri R.T. Agarwal Director (Finance) 01937329
4. Shri Ravi P.Singh Director (Personnel) 05240974
5. Shri R.P. Sasmal Director (Operations) 02319702
6. Dr.Pradeep Kumar Government nominee Director 05125269
7. Smt. Jyoti Arora Government nominee Director 00353071
8. Prof.R.K. Gupta Independent Director 06484088
9. Dr.K.Ramalingam Independent Director 00207932
10. Shri Ajay Kumar Mittal Independent Director 00322351
11. Shri R. Krishnamoorthy Independent Director 05292993
12. Shri Mahesh Shah Independent Director 00405556
13. Shri Parvez Hayat Chief Vigilance officer (CVO) -

*DIN: Director Identification Number

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 Chapter-3

Issue of Bonds

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3.1 Fund Raising An Introduction
Domestic Financing of Projects
Every year before finalization of Annual Plan, Planning Commission conducts an exercise for
assessing the requirement of Internal Extra Budgetary Resources (IEBR) for finalizing the Annual
Plan of the Organization. It has to be ensured that such projections do not vary with what is being
finalized by Ministry of Finance (Plan Finance Division) and thus exercise of projections of
Internal and Extra Budgetary Resources influence the overall plan size.
With the above in view, detailed exercise is done to determine the Internal Resources which
mainly comprise of depreciation and retained profits. Thus, the gap in resources in financing the
annual plan is met through domestic funding i.e. by raising term loans from Banks/Financial
Institutions or through issue of power bonds in the domestic market. Thus, the role of financing the
annual plan from domestic sources in the organization cannot be over-emphasized. Ministry of
Power in consultation with Ministry of Finance authorizes the organizations to raise domestic
funds through bonds/loans for specified amounts every year.

Role of Domestic Financing in Powergrid

Powergrid is engaged in the construction of the National Grid at the end of the 12 th Plan i.e. by
2012. An estimated expenditure of approx. Rs. 50000 crores is required to be spent by Powergrid
directly and another Rs. 20000 crores is to be spent through Independent Power Transmission
Companies (IPTC) and Joint Venture route.
Out of Rs. 50000 crores, approximately Rs. 21000 crores are to be mobilized by Powergrid
through Internal Resources and domestic borrowing (Rs. 8000 crores and Rs. 13000 crores
respectively). Thus approx. 26% of the total funding has to be mobilized by Powergrid from
domestic sources which is a huge task ahead and entail upon the Finance department a big role and
responsibility.

Various Sources of Domestic Borrowings

There are various sources of raising domestic resources:
Issue of Bonds
Term Loans
Bridge loan/ Short Term loan
Commercial papers (CP)
Cash credit
While the former two are for the purpose of long term utilization of funds, the last three are mainly
used to meet the short term or temporary needs of Powergrid.

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3.2 Procedure of Fund Raising
A project may be broken down into 4 types of tasks for the purpose of arranging money from the
market.
These are:

Preliminary Studies
The preliminary consulting and feasibility study takes place at the outset of proposed project
financing.
The purpose is to determine whether the proposal has sufficient merit to warrant further
expenditure of time and effort to bring it about.

Planning
The planning phase covers everything from the initial consulting & review of the preliminary
feasibility study to arranging the finances. Plans are made regarding the best way to arrange the
finances of the project, taking into consideration the currencies, the project will generate, the
location of the project and the capital needed.

Arranging the Finances

Having gone through the planning part and preparation of feasibility report, now the Information
Memorandum is prepared.
Information Memorandum- It is a document for preparing and presenting the following
information to the prospective lenders:

(A) Promoters

(B) Other Interested Parties- Guarantors, other sponsors, and parties other than
these who will make vital contribution to the project.
A description of each of the interested parties and their pertinent qualifications and
expected contributions to the project are also mentioned.

(C) Location- Special problem which may arise because of the location is
discussed here.

(D) Estimated Construction Cost- Construction Schedule and expected cost of

interest on loan are explained.

31
 (E) The Financial Plan- It reviews cash flow projections and expected use of
those funds including principal and interest payment of the debt.
It explains the assumptions used, working capital needs, equity contributions,
supplier loan etc.

(F) Proposed term of financing- This is the heart of memorandum & outlines
the amount, priorities, maturities & timing of the financing.

Monitoring & administering of the finances

This phase is functional in three stages viz. Construction, Start- up, Operations.
In all these stages a constant vigil is maintained to be acquainted with the manner in which funds
are being used.

Selection of Outside Investor

In case the project is vast and involves huge funds, an outside investor may be appointed to get
better results and outcome.

32
3.3 Fund Raising through Bonds
Bonds
Bonds are debt and are issued for a period of more than one year. When an investor buys
bonds, he or she is lending money. The seller of the bond agrees to repay the principal
amount of the loan at a specified time. Interest-bearing bonds pay interest periodically.
Only government organizations can issue bonds.
Issue of bonds can be made:
Either issue bonds to the public at large i.e. public issue
To go through private placements i.e. Bonds are issued to a limited no. of
investors.

PSU Bonds
Public Sector Undertaking Bonds (PSU Bonds): These are Medium or long term debt
instruments issued by Public Sector Undertakings (PSUs). The term usually denotes bonds
issued by the central PSUs (i.e. PSUs funded by and under the administrative control of the
Government of India). PSU issues bonds through public issue or on private placement basis
to the targeted investors at market determined rate

Difference between a bond and a debenture

a) Long-term debt securities issued by the Government of India or any of the State
Governments or undertakings owned by them or by development financial
institutions are called as bonds. Instruments issued by other entities are called
debentures.
b) The difference between the two is actually a function of where they are registered
and pay stamp duty and how they trade..
c) A debenture transfer has to be effected through a transfer form prescribed for under
Companies Act. Issuance of stamp duty on bonds is under Indian Stamp Act 1899
(Central Act). A bond is transferable by endorsement and delivery without payment
of any transfer stamp duty.

Common terms used in association with bonds

The following characteristics and terms are always associated with bonds and we need to
understand what they mean in order to understand bonds.

Nominal value: The nominal value of a bond is the par or face value and
sometimes, also referred to as the principal value of the bond. This is the amount
the issuer of the bond has agreed to pay the bondholder at the maturity date. In view
of this, the principal is also called the redemption or maturity value.
This terminology is applicable for bonds issued & redeemed at par. However, the
bonds can be issued on premium or at discount.

Coupon rate: The coupon rate is the amount of interest the bondholder will receive
periodically.

33
 Term-to-maturity: This is the number of years over which the issuer of the bond
has promised to meet the conditions and obligations of the bond issue. During this
time, the bondholder is paid the promised coupon payments and it also indicates the
time period remaining before the bondholder is paid back the principal. The term-
to-maturity also affects the bond yield and the bond price.

Trust deed: A trust deed is the legal agreement executed by the body corporate in
favour of the trustees named therein for the benefit of debenture holders. It details
the issuers obligations related to the bond issue. It contains the terms of the bond
issue and any restrictive provisions placed on the company, such as a requirement
for the company to set up a sinking fund, or the inclusion of a call provision. An
independent trustee administers the trust deed.

Trustee: Debenture trustee means a trustee of a trust deed for securing any issue of
debenture of a body corporate. He is the third party with whom the trust deed is
made. The job of the trustee is to see that the terms and conditions of the trust deed
are carried out. As the trust deed also contains provisions in the event of default, the
trustee would undertake action to protect the interests of the bondholders in the
event of a default.

Yield: There is often confusion between the yield and the coupon rate of a bond.
While the coupon rate is fixed at issue, and does not change till maturity, the yield
is the discount rate or interest rate that an investor wants from investing in a bond.
Price bonds are quoted in relation to their yields. As the required yield increases,
the price of the bond decreases. The reverse is also true.

Call provision: A call provision entitles the issuer to repurchase or call the bond
form their holders at a stated price within a predetermined period.

Put Option: A put option entitles the investor to sell the bonds at a stated price
within a predetermined period. It is opposite of Call Option.

Sinking fund: In a sinking fund bond, the issuer periodically puts aside money for
the eventual repayment of the debt. This provision may be included in the bond
trust deed to protect investors.

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 DRR: Similarly as per SEBI guidelines, Companies issuing debentures are
supposed to set aside a portion of their profits for the final redemption purposes.
The account where this money is transferred is called Debenture Redemption
Reserve.

3.4 Regulators of Government Securities and Debenture Market

a) Reserve Bank of India (RBI)

The Reserve Bank of India is the main regulator for the Money Market. Reserve Bank of India
also controls and regulates the G-Secs Market. It also regulates the manner in which various
scheduled banks raise money from depositors. Further, it controls the deployment of money
through its policies on CRR, SLR, priority sector lending, export refinancing, guidelines on
investment assets etc.
Another major area under the control of the RBI is the interest rate policy. Earlier, it used to
strictly control interest rates through a directed system of interest rates. Each type of lending
activity was supposed to be carried out at a pre-specified interest rate. Over the years RBI has
moved slowly towards a regime of market determined controls.

b) Securities and Exchange Board of India (SEBI )

Regulator for the Indian Corporate Debt Market is the Securities and Exchange Board of India
(SEBI). SEBI controls bond market and corporate debt market in cases where entities raise
money from public through public issues or private placement.
It regulates the manner in which such moneys are raised and tries to ensure a fair play for the
retail investor. It forces the issuer to make the retail investor aware, of the risks inherent in the
investment, by way and its disclosure norms. SEBI is also a regulator for the Mutual Funds,
SEBI regulates the entry of new mutual funds in the industry. It also regulates the instruments
in which these mutual funds can invest. SEBI also regulates the investments of debt FIIs.

3.5 Costs in issuing Bonds

The process of Issuance of Bonds includes certain expenses that are incurred by the issuer, and
are better known as the Costs of Issuance. The Costs of Issuance that is covered by the issuers
during the sales of bonds includes all of the following expenditures:
Fees paid to the consultants/arrangers
Fees and charges towards legal expenses
Trustee's fees
Printing costs
Discounts on bonds or notes
Costs of credit ratings
The execution and safekeeping fees and charges of bonds or notes, and
Fees for admitting the bonds in Stock Exchange and depositories.

Bond Issuance can be considered to be a vast procedure for it includes a lot of smaller processes
as stated above.

35
Bond Issuing by organizations are done on the floors of the Primary Bond Markets where those
who are interested in providing loans to the organizations Issuing Bonds, buy the Bonds that are
issued. In other words, bonds are purchased directly from the issuer.
Later, when these Bonds that were issued earlier are traded amongst the Bond owners at the
Secondary Bond markets.

3.6 Fund Raising Through Bonds in Powergrid

Powergrid has been raising domestic finance through issue of bonds under private placement since
its inception. It has so far raised 29 series of bonds. The bonds were raised for financing its annual
capital outlay. Issue of bonds has always remained a major source of domestic financing for
Powergrid. In future also it is expected to remain so.

Up to 1996-97, Powergrid bonds used to be in bullet repayment structure. However, from 1997-98
onwards (both VI th issue) bonds are being issued in the form of staggered repayment basis usually
with a moratorium of 3-4 years. This is mainly to suit the long gestation period of transmission line
projects. Because of the staggered repayment structure of the bonds there is no pressure on cash
flow due to redemption even though each issue size is approx. Rs.750-1000 crore.

Features of bonds issued by Power Grid

Secured

A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property)
as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the
loan.
There are two purposes for a loan secured by debt. In the first purpose, by extending the loan
through securing the debt, the creditor is relieved of most of the financial risks involved because it
allows the creditor to take the property in the event that the debt is not properly repaid.
Accordingly charge is to be created on the assets of the company to secure interest as well as the
interest on the bonds. The security is to be created in favour of the trustees for the bonds
Various bonds are secured through different means:
a) Equitable mortgage of Properties
b) By floating charge over the fixed assets of the Corporation
c) By way of Debenture Trust Deed ranking Pari Passu on immovable properties of
Powergrid.
d) Hypothecation of assets of various projects i.e. Transmission Lines and Sub-stations set up
by Power Grid for transmission of electricity.

Separately transferrable, redeemable Principal Parts (STRPPS)

Each bond is divided into separately tradable and transferrable parts which are called STRPPS.
Presently PowerGrid issue bonds in 12 STRPPs of 12.5 lakhs each. Earlier it was mandatory to
have each STRPPs of Rs.10 lakhs but this norm is no more a compulsion.
As the name suggest. Each part is separately tradable in the market. Such division helps in
trading of bonds easily in the secondary market. Bonds can be sold/purchased in one STRPP or
more.

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 D-Mat (Electronic Mode)

At present all the bonds are issued through D-Mat A/C (electronic mode), while earlier bonds
were also issued in physical form. Though many of them have with time converted to electric
mode and the remaining ones still traded in their own format.

Green shoe option

This option is a feature attached to Power Grid Bonds where issuer can retain over subscription
over and above the issue size.

WDM (Wholesale Debt Market)

This term is used to define the debt component of NSE where the fixed interest earning bonds
are listed in the stock exchange.

Depositories - NSDL, CDSL

Depositories are companies registered under the Companies Act and registered with SEBI as
depository. Depositories provide facilities to keep securities in electronic form (in Demat
Account) through its participants. There are two depositories: NSDL, CDSL.
All the information of the trade is supplied to the beneficiary i.e. Account Holder from time to
time.

Line of Credit

A line of credit is any credit facility extended to a business by a bank or financial institution. A
line of credit may take several forms such as cash credit, overdraft,
demand loan, export packing credit, term loan, discounting or purchase of commercial bills etc.
It is like an account that can readily be tapped into if the need arises or not touched at all and
saved for emergencies. Interest is only paid on the money actually taken out.
Lines of credit are often extended by banks and financial institutions to credit worthy
customers to overcome liquidity problems.

Non- convertible

The feature defines that the interest is paid periodically as per the terms of the issue.

Non- cumulative

This feature defines that the bonds issued will not have a feature of annuity and the interest
would be paid annually and would not accumulate and compound to be paid as lump sum at the
time of maturity.

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 Redeemable

It says that the bonds have a maturity and would have to be repaid when the maturity period
ends.

Taxable

The term defines that the person earning on the investment in the bonds i.e. the investor who
will earn by way of interest will have to pay interest on it.

Arrangers

Merchant bankers are the institutions who put in to arrange funds for the co. in case it is not
confident of doing so on its own.
Powergrid appoints arrangers from time to time depending upon market conditions.

Private placement

The company doesnt raise money through inviting public at large for it. It can just ask for
investment privately and there also the people or organizations invited should not exceed 50.

Book building Process

Though no such procedure has been prescribed in law but money market has evolved a process
over time.
It means a process undertaken by which a demand for the securities proposed to be issued by a
body corporate is elicited and built up and price for such securitites is assessed for the
determination of the quantum of such securities. It is practically a price discovery process
which tries to optimize issue size at the most competitive rate.
This will lead to decision about one cut-off rate for the entire issue after considering the rates
quoted by the investors.

Debenture Trust Deed

There is a deed made between the trustee and the investor which caters to the interest of the
investor. This deed is basically for setting the terms of bonds. The deed is executed at the time
of the issue of bonds.

Borrowing Cost

All the borrowing cost are earmarked to specific projects. The costs so allocated are capitalized
or charged to revenue, based on whether the project is under construction or in operation.

38
3.7 Guidelines to issue Bonds for A PSU
External Guidelines
Definition

These guidelines apply to all PSUs wholly or partially owned by the Central Bank to whom
specific allocations for Bond issues are made by Central Govt.

The guidelines are:

Amount of issue should be approved by GOI.

Each PSU should preferably raise the amount in two or more trenches, each trench being linked to
the loan requirement for the subsequent few months.

Choice of issue

The choice of raising the amount as a public issue or by private placement will be left to the issuer.

SEBI Guidelines

All the PSUs are to abide by the SEBI guidelines set for the same, where ever public issues is
made.

Maturity & Tax

Tax free bonds should have minimum maturity of 5 yrs but taxable ones have no criteria.
Private Placement
Company may go for private placement provided the terms of such placements including any
front-end fees payable on the bond, are in conformity with the guidelines internally drawn up by
the PSU and every private placement proposal is approved by its board.
Buy-back arrangement
The organization issuing bonds can make use of buy-back but all the information about it should
be mentioned and given beforehand. However, the bonds which the company is issuing here dont
allow for buy-back arrangement.
Arrangers
PSUs are free to appoint arrangers/ merchant bankers to manage the issue if the market conditions
do not support raising of bonds itself by the company.
The company is using this facility after 4 years because of liquidity crunch and other market based
difficulties.

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Stock exchange.
All bonds to be raised should be listed on stock exchange with all the documents required to be
filed with them.
Bonds have been listed with NSE for the present issue.

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Internal Guidelines
Definition

These guidelines are framed as per the rules of GOI, Ministry of finance, Investment Division of
Bonds during the year 1993-94 vide press release dated 13-10-1993 prescribes that every Public
Sector Undertaking should frame internal guidelines to ensure transparency in transactions relating
to issue of Bonds on Private Placement Basis specifying inter-alia, the manner in which the
organizations for placement of bonds, the manner in which the organizations for placement of
bonds are to be selected, the ceilings of the size of individual placement, and the payment of any
front-end fee.
Applicability

The guidelines shall be applicable to all private placements of taxable/tax-free bonds made by the
company and will be subject to the guidelines issued by GOI. They will remain applicable till there
are any modifications made by GOI or any fresh guidelines are issued for the same.

Institutions eligible for Private Placement

Keeping in view the size of requirement of funds for the Company, the potential investors who
could subscribe funds to the extent required are large institutions/bodies.
As such individual investors are outside the scope of private placement.
Who all can apply for the bonds, if specifically approached?

a) Companies and bodies corporate including Public Sector Undertakings

b) Scheduled commercial banks.
c) Regional rural banks
d) Co- operative Banks
e) Subsidiaries of Nationalized Banks
f) Financial Institutions
g) Insurance Companies
h) Mutual Funds
i) Provident, Pension, Superannuation, & Gratuity Funds
j) Port Trust
k) Any other investor authorized to invest in these bonds, subject to confirmation
of the issuer

The size of private placement

The amount of bonds to be issued on private placement basis will be determined with reference to
the funds required for next two quarters. The total amount of Bonds to be raised by Power Grid
from the capital market during the year will be approved by Board of Directors and President of
India in terms of Articles of Association of the Company.

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Terms & Conditions

a) All the terms & conditions like Maturity Date, Coupon Rate, Call & Put features should be
approved by the Board of Directors.
b) Offers for PP will be invited directly from banks/institutions/Bodies and no broker or
intermediary will be appointed for the same.
c) Bonds will be fully paid and allotments will be made only after receipt of full application
money.

Front End Fee

The company should make efforts not to indulge with brokers/commission agents etc.
However, in case the payment of front end fee/ brokerage/ commission becomes inevitable
then:
It should not exceed 2.5% of the total amount subscribed and allotted under Private
Placement.
It would be made directly to the subscribers of the bonds and not to any intermediary.

Minimum & Maximum Limits

The minimum & maximum limits as to value of bonds to be allotted to a single institution shall be
Rs. 10 lakhs and Rs. 20 crores respectively.

Selection Criteria

There are various criterions through which Private Placement of Bonds can be made:
a) Direct dialogue with the funding institutions like LIC, GIC, UTI etc.
b) Direct invitation for bonds under PP from the institutions.
c) There are companies who dont respond to the invitations even if they have considerable
amount of money, for such organizations arrangers are appointed after approval from Board of
Director for the same.

Method of Evaluation & Approval

The offers will be evaluated by the committee for bonds with the CMD as the incharge.

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3.8 Hierarchy of Functioning

Committee for Bonds

CMD

Director (Finance) Director (Projects) Director (Operations)

It works in the form of a hierarchy. The board of directors forms a committee for bonds which
consist of:

I. CMD- Chairman
II. Director (Finance)- Member
III. Director (Operation)- Member
IV. Director (Projects)- Member

Functioning
This committee has all the powers of decision making and permits the execution of the work.
It further delegates the tasks as per each department. For e.g. finance department has a bonds
section which looks into tasks related to the procedural aspects and the cost part of the securities to
be issued. This section is headed by Director Finance who is a member of the committee.
Since the members have the required authority so their subordinates work in their name and
responsibility.
All the departments function on these bases.

43
3.9 Strategy of the Bond Issue

44
Bond Issuance can be considered to be a vast procedure for it includes a number of processess as
stated above. Bond Issuing by organizations are done on the floors of the Primary Bond Markets
where those who are interested in providing loans to the organizations Issuing Bonds, buy the
Bonds that are issued.
The issuer agrees and undertakes:
a) To designate the co. sec. as the compliance officer who shall be responsible for
monitoring the process of registering transfer of securities and report the same at the
meeting of Board of Directors subsequently.
b) To conduct due diligence survey to ascertain whether the Registrar & Transfer Agent
(RTA) is sufficiently equipped with the infrastructure facilities.

Decision to raise Bonds- Initial Approval

In the beginning of the financial year, board is supposed to approve the funds
requirement which is supposed to arise during the year.
On April9, 08, the board approved raising of funds amounting to Rs. 4235 crores in the
form of bonds or any other form of security in one or more tranches during the current
financial year under private placement.

Role of Board of Director

On the same date the following decisions were made in the board meeting:
i. CMD/ED/GM/AGM/DGM are jointly or severally authorized to negotiate the terms
and conditions of the loans and do all such acts and deeds and take all
actions as may be necessary for raising of such loans under the common seal
wherever required as per the rules of articles of association.
ii. The board also approves raising of bonds either through arrangers or otherwise
through the process of book building or otherwise, having denomination of Rs.
1250000 each or such other denomination deemed fit.
iii. It also gives committee of directors for bonds, the authority to finalize the terms and
conditions of shelf information Memorandum for private placement/ public issue of
bonds, including finalization of interest, redemption/maturity period, issue,
allotment, creation of charge etc. and any other deeds thereby required.
iv. CMD/Director /ED are authorized to appoint arrangers for the issue.
v. Authorization is also given for the bonds to be listed in one or more stock
exchanges of the country.
vi. It is also resolved that copies of the bonds trust deed/ loan agreement, deed of
hypothecation/ trustee agreement or any other document executed by the company
for creation of security for the said bonds/term loans be placed before the board for
information.
vii. It allows CMD/Director (Finance), to raise short term loans to meet any contractual
requirements at the best available rate. These loans will be repaid out of the fresh
borrowings made in form of bonds.
In short, all the authority required by the committee to fulfill the responsibilities is provided
with, in addition to making the finance department known about their areas of performance.

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Private Placement

PowerGrid raises funds through private placement where it cannot invite more than 49
people or organizations to invest their money.
Basically the amount involved in such transactions are huge and so the institutions invited
should be carefully considered so that the risk of default is least and the operation of raising
funds is low.

Rating of the Company

Company has to get itself valued by the credit rating agencies as per the norms so that the
investors have some confidence in its strength and ability to pay back the investment. Three
agencies viz. ICRA, CRISIL, Care rate the company taking into account the new bond
issue.

a) ICRA
It relied back on November27 and assigned a rating LAAA to POWERGRID and
also announced the instrument to be totally risk free. This is the highest credit-
quality rating given by ICRA. It means the instrument has lowest credit risk.
However, it was as per the information about the terms and conditions supplied to
them about the issue, therefore any changes in them would affect the rating. Also if
so happens, it should be duly informed.
Also it was suggested that the rating is in no means any recommendation to buy the
security.

b) CRISIL
After due consideration the rating was affirmed as AAA/Stable rating which
indicates highest degree of safety with regard to timely payment of interest and
principal on the instrument by CRISIL.

c) Care
Care assigned a rating of AAA i.e. best credit quality, offering highest safety for
timely servicing of debt obligations.

Companies should co-operate with the Credit Rating Agencies in giving correct and
adequate information for potential review of the securities during lifetime of the rated
securities.
All the agencies provided with a good rating thus making the task of arrangement a bit
easier.

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Arrangers
i. Decision about arrangers
At this stage i.e. when the actual demand arises, the decision regarding the use of
merchant bankers is to be decided. Looking at the market conditions and its own
capabilities, company either opts for getting the funds themselves or through the
merchant bankers.
In this bonds issue the company went for the services of merchant banker because of the
tough market which is not very supportive for the borrowers.

ii. Board Approval

The board approved that the committee of directors for bonds may engage
Merchant bankers/Arrangers including the three merchant bankers who were
associated with the IPO of POWERGRID, for raising of bonds.

iii. Invitation to Arrangers

Looking at the Prime League Table (Dated November1,07 October31,08),
company selects first 12 companies (excluding the above mentioned names), for the
task. They are asked to send their bids for the fees they wish to charge, also
specifying the reasons therein for the same.
The two arrangers who were associated with the IPO were already there in the table
consulted and so the third one was separately called.

HOWEVER this invitation is in no way to be construed as any indication for appointment

as arrangers for the proposed band issue.
In case date is extended or changed then the arrangers should be informed about it within
stipulated time as here date had to be extended because of the incident of 26/11 in Mumbai
and the work coming to a halt for some time, So the due date was extended to Dec1,08.

iv. Bid opening

They sent in their bids within the stipulated time and these bids are opened on the
due date in the presence of all the applicants. A committee comprising of one
representative each of finance, company secretariat, and contract services is
constituted to open and evaluate the quotation received from arrangers and submit
their recommendations.
Following people will evaluate the quotations received as a committee:
i. Shri Mrinal Srivastava Manager (Co. Sectt.)
ii. Shri K.C. Pant (Fin.)
iii. Shri Tapan Das (CS)
If any company applies without an invitation then his bid is not considered received and is
sent back without opening it.

v. Reasoning for the quote

The applicants are asked to justify their quotes as many of them have proposed to
charge 0% fees.
They rationalize in these ways:
a. The unique structure of the bonds. No other similar rated PSU is offering this
structure in the market.
b. The AAA ranking under the book building category.

47
 c. Also book building would provide the company with liberty to invest as per
their comfort.
The association with such organization will improve their own status in PRIME
LEAGUE TABLE which is widely accepted for studying the ranking of the
organizations.

vi. Selection
The criteria for shortlisting the arrangers is given below
1. Period of Consideration : 01.11.2007 to 31.10.2008
2. Issue type : Debt Private Placement
3. Issuer type/ Industry :All
4. Other Conditions :
a) All issues : Distributed, Structured, On-Tap & Mobilization
b) Issue amount in Indian Rupees
c) Excluding Capital Gain & Infrastructure Bonds
d) Full credit of issue to Arranger
e) Issue with tenure and Put/Call option of 1 yr and above
The arrangers are selected on the basis of their quotes and the above criteria.
Here, the arrangers who applied for 0% bid were selected and appointed as official
arrangers for the company. The following were selected:
a) Axis Bank
b) I- SECPD
c) AK Capital
d) ICICI Bank
e) Stan Chart
f) HSBC
g) Kotak Bank
h) Citi Bank
i) IDFC- SSKI
j) Almondz
They are informed about the same.

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Disclosure Document

The document has been prepared to facilitate investors to take a well informed decision for
making investment in the proposed issue. It should be clearly understood that the Company
is primarily responsible for the correctness, adequacy and disclosure of all relevant
information in this document.
The Bonds will be issued solely and sold on a private placement basis. This Disclosure
Document cannot be acted upon by any person other than to whom it has been specifically
addressed. Multiple copies hereof given to the same entity shall be deemed to be given to
the same person and shall be treated as such. This Disclosure Document has been prepared
by the Company solely for use in connection with the issue and sale of the Bonds. Each
prospective purchaser, by accepting delivery of this Disclosure Document, agrees to the
foregoing and to make no copies of this Disclosure Document.
A disclosure document is to be approved by the committee for bonds.The Company
believes that the information contained in this Disclosure Document is accurate in all
respects as of the date hereof.

Some of the components of the document are given below:

a) Authority to the issue
It states the resolution passed under the Companies Act, 1956 by which company is
allowed to raise money in this form.
b) Description of the bond
c) WDM Segment
d) Trustee for the bond holders and registrar to the issue and their addresses.
e) Arrangers to the issue
f) Names and addresses of the directors
g) Summary of business of issuer and its line of business
h) Brief history of issuer since incorporation including amalgamation, change in
capital structure and borrowings etc.
It talks about all the details related to details of the companys incorporation
i) Information regarding registrar, bankers to issue, reg. compliance officer
j) Credit rating and rationale thereof
k) Debt equity prior and post the issue
l) Servicing behavior in other securities and borrowings
m) Undertaking regarding common form of transfer
n) Material event, Development or change at the time of issue
o) Permission/Consent from existing creditors
p) Statement containing particulars of the dates and parties to all material contract
agreements involving financial obligation of the issuer.
q) Name of recognized stock exchange where securities are expected to be listed
r) Terms of offer and all details from features to redemption

49
Discussing work with Arrangers

The selected arrangers are then called for a meeting to discuss about Issue Structure,
Programme and Timing of the proposed raising of bonds. The outcome of this meeting is
further approved by the committee of directors for Bonds.

a) Meeting with the arrangers

The meeting is conducted for detailed discussion regarding timing, size, coupon
rate etc.

b) Arrangers inform that:

a. There are expectations in the market that RBI may cut the interest rates.
b. Other PSUs with good ranking have coupon rates like 11%, 11.25%,
10.70% etc.
These rates are quoted to give an idea of the prevailing market rates and thereby
helping in decision making.

c) Other details decided about the bond:

a. Size of the issue
b. Timing of the issue- opening and closing date, intimation date, pay-in date,
deemed date of allotment.
c. Coupon band- cap @ 10.20%, floor kept open
The upper band was at 10.20% bearing in mind the AAA ranking of POWERGRID
and the market volatility. The lower rate is kept open to take advantage of the
expected interest rate cut.

Listing on a Stock Exchange

As per stipulation of the guidelines issued by the GOI Ministry of finance for issue of PSU
Bonds, all bonds are to be listed in Stock Exchanges. As per the guidelines, listing of the
securities issued under private placement is compulsorily to be listed on Stock Exchange.
An application for listing of bonds at the WDM market in the prescribed format is
furnished to the National Stock Exchange along with prescribed annexure and certified true
copies of relevant documents.
On satisfactory compliance of all the required formalities, demand for listing fees is raised
by the Stock Exchange. Listing is done by the exchange on release of the requisite listing
fee.

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Market Study

The factors which govern the interest rates are mostly economy related and are commonly
referred to as macroeconomic. Some of these factors are:

a) Demand for money

b) Government borrowings
c) Supply of money
d) Inflation rate
e) The Reserve Bank of India and the Government policies which determine some
of the variables mentioned above.

Based on these factors various outputs can be:

a) Prevailing financial crisis at global level, economic slowdown, increasing

liquidity crunch in money market and rising interest rate scenario forces to set a
rate at which investors come to provide with the money required.
b) There are expectations in the market that RBI may cut the interest rates.
c) The upper band was at 10.20% bearing in mind the AAA ranking of
POWERGRID and the market volatility.
d) The lower rate is kept open to take advantage of the expected interest rate cut.

Final Details

1. The duration and redemption is discussed with comparison to the already floated
government securities. Then the time is specified to use the G-Sec for
comparison.
In this issue there is no other government security till now with such features.
And since the duration is 9.5 yrs but G-Sec with 9 yrs is not traded actively so
the comparable G-sec would be the one with 10 yrs duration.
2. The upper band was at 10.20% bearing in mind the AAA ranking of
POWERGRID and the market volatility. The lower rate is kept open to take
advantage of the expected interest rate cut.
3. Some details are decided like:
a. Size of the issue
b. Timing of the issue- opening and closing date, intimation date, pay-in date,
deemed date of allotment.
c. Coupon band- cap @ 10.20%, floor kept open.
4. The face value is decided upon with the number of STRPPS. The moratorium
and maturity is also specified. Use of application forms and their allocation is
given.
5. Trustee to the issue is appointed and their consent is obtained.
6. Citibank N.A. requested that Citigroup Global Market India Pvt. Ltd., their 100%
subsidiary who was a merchant banker for the IPO be permitted to act as
arranger and committee is requested to approve the same, which is further
approved.

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Application forms

a) Arrangers apply for the application forms to be filled in and sent by investors
for allotment of bonds, also specifying the name of concerned investors. Though
they are provided with 4 application forms each to give to the investors .
b) Investors, arranged by arrangers confirm their investment through written
communication.
c) Letters sent to the organization applying for the bonds (specifying the name of
concerned arranger) for the amount they are supposed to pay for the bonds allotted
to them. The number of bonds and the cut-off rate is specified in the letter itself.
d) Company sending the offer document containing the terms and conditions of the
proposed issue and other instructions along with the letter of commitment and the
application form.

Issue of bonds

Amount is received by bank and transferred to current A/C. the amount for which the
bonds are raised.

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 Chapter-4

Cost of Bonds

53
4.1 Cost of Capital- An Introduction
The concept of cost of capital is crucial in financial management. There is a cost of doing business
that must serve as the benchmark as to how to use the funds in various projects, in long-term
assets, and various investment opportunities. This cost is called Cost of Capital.

Company creates value for shareholders by earning a return on the invested capital that is above
the cost of that capital. The cost of capital for any investment, whether for an entire company or
for a project, is the rate of return the capital providers would expect to receive if they would have
invested their capital elsewhere. In other words, it is an opportunity cost. Cost of Capital applies to
long-term funding of assets as opposed to short-term funding of working capital.

There are many misconceptions about the cost of capital which must be carefully avoided. If, for
example, a business has large amount of cash which it proposes to invest in a project, it might
appear that the finance in this case is free of charge because no payment has to be made for its use
to outside suppliers. But, it should be remembered that, it does have an opportunity cost, i.e. the
cost of foregoing which the cash might have earned if it had been invested somewhere else, or
even deposited in a bank.

4.2 Why is Cost of Capital important?

Cost of Capital is very important for any businessmen because one has to earn an overall rate of
return on the assets that is higher than the cost of capital. And if not, the business or the firm is
actually losing value. Also, the investors expect some returns on their investments, so before one
can commit to create that much value, it is important to know the cost being incurred by the
business.

Thus, the management of a company must always take notice of the cost of capital while taking a
financial decision. The concept is quite relevant for the following managerial decisions.
1. Capital Budgeting Decision: Cost of capital may be used as the benchmark for deciding
whether to adopt an investment proposal or not. The firm, naturally, will choose the project
which gives a satisfactory return on investment which would not be less than the cost of
capital incurred for its financing. In various methods of capital budgeting, cost of capital is
the key factor in deciding the project out of various proposals pending before the
management. It measures the financial performance and determines the acceptability of all
investment opportunities.

54
 2. Designing the Corporate Financial Structure: The cost of capital is significant in
designing the firm's capital structure as it is influenced by the changes in capital structure
due to capital market fluctuations. So, the firm tries to achieve sound and economical
capital structure for the firm. One may try to substitute the various methods of finance in
an attempt to minimize the cost of capital so as to increase the market price and the
earning per share.

3. Deciding about the Method of Financing: A company must have knowledge of the
fluctuations in the capital market and should analyze the rate of interest on loans and
normal dividend rates in the market from time to time. Whenever company requires
additional finance, it may have a better choice of the source of finance which bears the
minimum cost of capital. Although cost of capital is an important factor in such
decisions, but equally important are the considerations of relating control and of avoiding
risk likes high gearing ratios because of tax, cost of finances, risk of insolvency using
debt and cost of bankruptcy, etc.

4. Other Areas: The concept of cost of capital is also important in many others areas of
decision making, such as dividend decisions, working capital policy etc.

4.3 WACC of Power Grid

Weighted Average Cost of Capital (WACC) is an expression of the cost of capital of a company
and is used to see if certain intended investments or projects or purchases are worthwhile to
undertake. It is expressed as percentage, also known as the "Hurdle Rate" or "Discount Rate".

The capital funding of a company is made up of two components: debt and equity. Lenders and
equity holders each expect a certain return on the funds or capital they have provided. The cost
of capital is the expected return to equity owners (or shareholders) and to debt holders, so
WACC tells us the return that both stakeholders - equity owners and lenders - can expect.
WACC, in other words, represents the investors' opportunity cost of taking on the risk of putting
money into a company.

In this method, the calculation of a firm's cost of capital is done on the basis of the proportional
weights of each source of funds. All capital sources - common stock, preferred stock, bonds and
any other long-term debt are included in a WACC calculation. WACC is calculated by
multiplying the cost of each capital component by its proportional weight and then adding:
where: = cost of equity, = cost of debt, = market value of the firm's equity, = market

value of the firm's debt, = , i.e. value of the firm, = percentage of financing that is

equity, = percentage of financing that is debt, = corporate tax rate.

The cost of debt is relatively simple to calculate, as it is composed of the rate of interest paid. In
practice, the interest-rate paid by the company will include the risk-free rate plus a risk
component, which itself incorporates a probable rate of default, thus, companies with high credit
ratings can manage to borrow at lower costs.

Cost of equity is more challenging to calculate as equity does not pay a set return to its investors,
but in fact it is the measure of investors expectations of the returns on his investments.

4.4 Cost of Bonds

Power Grid has issued 45 series of bonds till date and all of them were fixed interest bonds.

The bonds issued by Power Grid are in the form of STRPPs which are traded in the bond market
in India. Each bond of value Rs. 1.5 Crores is divided in 12 equal STRPPs, each of face value of
Rs.12.5 lacks. These 12 parts are named as series A, B, C, , K, and L, each of which is
redeemed annually.
Power Grid Corporation of India Limited issues bonds with fixed coupon rate determined by the
book building procedure. The average maturity of most of the bonds is 15 years (4 years of
moratorium and then repayment of loan in 12 equal annual installments). Apart from this it has
also issued different structure bonds of 6 years Maturity ( 1 year moratorium and 6 annual equal
repayments), 12 years maturity ( 3 years moratorium and 10 equal annual repayments) etc.

The interest rate is determined based on the prevailing interest rate on 10 year GSec ( for a 15
year PG bond, since the average tenure turns up to be 9 years because of equally annual
repayments) and a spread defined by FIMMDA for a AAA rated bond for 10 years is added to
define a range for bidding by investors. Then the rate obtained by the book building process is
taken as the coupon rate.

For the calculation of cost of bonds, the information gathered included:

The details of all the bonds issued by Power Grid were taken. These details included the loan
statement, repayment schedule and loan agreement documents.
Cost of bonds

It has been calculated using the interest paid on the borrowings (total debt) for the period varying

From 2008 to 2013.

1) For 2010-2011

Interest paid = 1213.64 Total debt = 15112.07

Cost of debt = interest paid / total bonds = 8.03%

Cost of debt = interest paid/total bonds(1-tax rate) (after tax) = 8.03%*(1-.67)

= 5.38%

2) For 2011-2012

Interest paid = 1560.75 Total debt = 21171.83

Cost of debt = interest paid / total bonds =7.37%

Cost of debt = interest paid/total bonds(1-tax rate) (after tax) = 7.37*(1-.67)

= 4.94%

3) For 2012-2013

Interest paid = 2168.4 Total debt = 25286.11

Cost of debt = interest paid / total bonds =8.58%\Cost of debt = interest paid/total
bonds (1-tax rate) (after tax) = 8.58%*(1-.67)

= 5.75%

4) For 2013-2014

Interest paid = 2696.98 Total debt = 33443.51

Cost of debt = interest paid / total bonds

=8.06%
Cost of debt = interest paid/total bonds (1-tax rate) (after tax) = 8.06%*(1-.67)

= 5.40%

5) For 2014-2015

Interest paid = 3530.04

Total debt = 43085.29

Cost of debt = interest paid / total

bonds =8.19%

Cost of debt = interest paid/total bonds(1-tax

rate) (after tax) = 8.19% *(1-.67)

= 5.49%

Here, some observations which can be made are:

For the initial issues, when the prevailing interest rates in the markets were high, the interest rate
for its issues is also high, in the range of 10% to 13%.
But, over the years as the interest rates in the markets have come down, consequently the interest
rate for the bonds of Power Grid has also come down.

Similarly in this way the cost of debt sources were also calculated for the five years.
CHAPTER 5

RATIOS
5.1 COMPUTATION OF RATIOS
Sr.
PARTICULARS 2013-14 2012-13 2011-12 2010-11 2009-10
No
FINANCIAL
I
INFORMATION
1.00 Sales 15230.28 12757.85 10035.33 8388.70 7127.45
2.00 Other Income 491.13 570.89 749.68 711.10 376.13
3.00 Total Income 15721.41 13328.74 10785.01 9099.80 7503.58
4.00 Net Profit After Tax (PAT) 4497.42 4234.50 3254.95 2696.89 2040.94
5.00 Share Capital 5231.59 4629.73 4629.73 4629.73 4208.84
Reserves & Surplus 29181.30 21583.68 18858.05 16724.05 11708.23
6.00 Net worth 34412.89 26213.41 23487.78 21353.78 15917.07
7.00 Net Fixed Assets 73154.07 61400.64 47662.30 37223.98 32061.26
-
8.00 Net Current Assets
10416.73 -8443.05 -5041.12 527.86 -465.57
9.00 Capital Employed(7+8) 62737.34 52957.59 42621.18 37751.84 31595.69
10.00 Current Assets 9100.40 6265.45 8337.62 10517.13 9627.32
Inventories 712.40 551.53 440.31 381.51 344.90
Sundry Debtors 1578.46 1434.09 2315.37 3162.09 2214.86
11.00 Liquid Assets 8388.00 5713.92 7897.31 10135.62 9282.42
Current Liabilities &
12.00
Provisions 19517.13 14708.50 13378.74 9989.27 10092.89
13.00 Long Term Loan Funds 81094.85 66467.99 55349.56 42029.51 35120.30
14.00 Repayment of Loans 2700.00 2000.00 1650.00 1450.00 1250.00
15.00 Depreciation 3995.68 3351.92 2572.54 2199.39 1979.69
16.00 Interest Paid 3167.52 2535.22 1943.26 1625.44 1543.24
PAT + Depreciation +
17.00 11660.62 10121.64 7770.75 6521.72 5563.87
Interest

II Profitability Ratios (%)

Net Profit to Total Income
18.00 28.61 31.77 30.18 29.64 27.20
(4/3)
Net Profit to Capital
19.00 7.17 8.00 7.64 7.14 6.46
Employed (4/9)
20.00 Net Profit to Net Worth (4/6) 13.07 16.15 13.86 12.63 12.82

Liquidity Ratios (Times)

21.00 Current Ratio (10/12) 0.47 0.43 0.62 1.05 0.95
22.00 Debt to Equity Ratio (13/6) 2.36 2.54 2.36 1.97 2.21
 Other Ratios (%)
23.00 Debtor to Sales Ratio 10.36 11.24 23.07 37.69 31.08
24.00 Inventory to Sales Ratio 4.68 4.32 4.39 4.55 4.84
Sr.
PARTICULARS 2013-14 2012-13 2011-12 2010-11 2009-10
No
Other Ratios (Times)
Debt Service Coverage Ratio
25.00 1.99 2.23 2.16 2.12 1.99
[17/(14+16)]
Interest Coverage Ratio
26.00 3.68 3.99 4.00 4.01 3.61
[17/16]
Debtor Turnover Ratio
27.00 10.11 6.81 3.66 3.12 6.44
(Sales/Av Receivables)

Other Ratios (Days)

Debtor Velocity (365/Debtor
28.00 36.10 53.64 99.61 116.98 56.71
Turnover Ratio)
5.2 Ratio Analysis
1. Net Profit to Total Income

A ratio of profitability calculated as net income divided by revenues, or net profits

divided by sales. It measures how much out of every rupee of sales a company actually
keeps in earnings.

PARTICULARS 2013-14 2012-13 2011-12 2010-11 2009-10

Net Profit to Total Income
28.61 31.77 30.18 29.64 27.20
(4/3)

Profit margin is very useful when comparing companies in similar industries. A higher
profit margin indicates a more profitable company that has better control over its costs
compared to its competitors. Powergrids profit margin ratio in financial year 2013-14 is
28.61 indicating that the company has a net income of Rs. 0.2861 for each rupee of sales.
With Net profit margin ratio of Tata Power 11.05%, NTPC 14.69% and Reliance
Power15.42%, PGCIL has a significantly higher net profit margin compared to its
competitors for the year 2013-14.

Creditors and investors use this ratio to measure how effectively a company can convert
sales into net income. Investors want to make sure profits are high enough to distribute
dividends while creditors want to make sure the company has enough profits to pay back
its loans. In other words, outside users want to know that the company is running
efficiently. An extremely low profit margin would indicate the expenses are too high and
the management needs to budget and cut expenses.

2. Net profit to Net Worth Ratio

The net worth ratio states the return that shareholders could receive on their investment in
a company, if all of the profit earned were to be passed through directly to them. Thus,
the ratio is developed from the perspective of the shareholder, not the company, and is
used to analyze investor returns.
The net worth ratio of PGCIL for the year 2013-14 is 13.07 which is higher than its
competitors Tata power (7.26), NTPC (12.78) and Reliance Power (0.33) which indicates
that the company is efficiently utilizing the shareholder investment to create returns for
them.
 PARTICULARS 2013-14 2012-13 2011-12 2010-11 2009-10
Net Profit to Net Worth (4/6) 13.07 16.15 13.86 12.63 12.82

An excessively high net worth ratio may indicate that a company is funding its operations
with a disproportionate amount of debt and trade payables. If so, a decline in its business
could result in the inability to pay back the debt, which increases the risk of bankruptcy;
this means that the shareholders may lose their investment in the company. Thus, an
investor relying upon this measurement should also examine company debt levels to see
how excessive returns are being generated.

3. Current Ratio

The current ratio is a liquidity and efficiency ratio that measures a firm's ability to pay off
its short-term liabilities with its current assets. The current ratio is an important measure
of liquidity because short-term liabilities are due within the next year.

This means that a company has a limited amount of time in order to raise the funds to pay
for these liabilities. Current assets like cash, cash equivalents, and marketable securities
can easily be converted into cash in the short term. This means that companies with larger
amounts of current assets will more easily be able to pay off current liabilities when they
become due without having to sell off long-term, revenue generating assets.

PARTICULARS 2013-14 2012-13 2011-12 2010-11 2009-10

Current Ratio (10/12) 0.47 0.43 0.62 1.05 0.95

The current ratio helps investors and creditors understand the liquidity of a company and
how easily that company will be able to pay off its current liabilities. This ratio expresses
a firm's current debt in terms of current assets. So a current ratio of 4 would mean that the
company has 4 times more current assets than current liabilities.

A higher current ratio is always more favorable than a lower current ratio because it
shows the company can more easily make current debt payments.

If a company has to sell of fixed assets to pay for its current liabilities, this usually means
the company isn't making enough from operations to support activities. In other words,
the company is losing money. Sometimes this is the result of poor collections of accounts
receivable.
 The current ratio also sheds light on the overall debt burden of the company. If a
company is weighted down with a current debt, its cash flow will suffer.

4. Debt to Equity Ratio

The debt to equity ratio is a financial, liquidity ratio that compares a company's total debt
to total equity. The debt to equity ratio shows the percentage of company financing that
comes from creditors and investors. A higher debt to equity ratio indicates that more
creditor financing (bank loans) is used than investor financing (shareholders).

PARTICULARS 2013-14 2012-13 2011-12 2010-11 2009-10

Debt to Equity Ratio (13/6) 2.36 2.54 2.36 1.97 2.21

A debt to equity ratio of 1 would mean that investors and creditors have an equal stake in
the business assets.

A lower debt to equity ratio usually implies a more financially stable business.
Companies with a higher debt to equity ratio are considered more risky to creditors and
investors than companies with a lower ratio. Unlike equity financing, debt must be repaid
to the lender. Since debt financing also requires debt servicing or regular interest
payments, debt can be a far more expensive form of financing than equity financing.
Companies leveraging large amounts of debt might not be able to make the payments.

Creditors view a higher debt to equity ratio as risky because it shows that the investors
haven't funded the operations as much as creditors have. In other words, investors don't
have as much skin in the game as the creditors do. This could mean that investors don't
want to fund the business operations because the company isn't performing well. Lack of
performance might also be the reason why the company is seeking out extra debt
financing.
5. Debtors to Sales Ratio

Debtors to Sales ratio, is defined as the debtors divided by the turnover of the company.
This ratio demonstrates what percentage of credit the company gives on its sales. The
formula is the following:

= (average debtors / turnover) * 100

PARTICULARS 2013-14 2012-13 2011-12 2010-11 2009-10

Debtor to Sales Ratio 10.36 11.24 23.07 37.69 31.08

6. Inventory to Sales Ratio

The inventory to sales ratio looks at your investment in inventory in relation to your
monthly sales amount. The inventory to sales ratio helps you identify recent increases in
inventory. In contrast, the average inventory investment period may only report inventory
information from the previous year, if that was the only information available to calculate
the period.
The inventory to sales ratio can serve as a quick and easy way to look at recent changes
in inventory levels, since it uses monthly sales and inventory information. This ratio will
help predict early cash flow problems related to your business's inventory.
The inventory to sales ratio is calculated by dividing your inventory balance at the end of
any month by your total sales for the same month.

PARTICULARS 2013-14 2012-13 2011-12 2010-11 2009-10

Inventory to Sales Ratio 4.68 4.32 4.39 4.55 4.84

An increase in your inventory to sales ratio from one month to the next indicates that one
of the following is happening:
your investment in inventory is growing more rapidly than sales
sales are dropping
No matter which situation is causing the problem, an increase in the inventory to sales
ratio may signal an oncoming cash flow problem.
Likewise, a decrease in the inventory to sales ratio from one month to next indicates that
one of these is occurring:
your investment in inventory is shrinking in relation to sales
sales are increasing
 Here again, no matter which situation is causing the reduction in the inventory to sales
ratio, either one suggests that you are effectively managing your business's inventory
levels and its cash flow.

7. Debt Service Coverage Ratio

The debt service coverage ratio is a financial ratio that measures a company's ability to
service its current debts by comparing its net operating income with its total debt service
obligations. In other words, this ratio compares a company's available cash with its
current interest, principle, and sinking fund obligations.
The debt service coverage ratio is important to both creditors and investors, but creditors
most often analyze it. Since this ratio measures a firm's ability to make its current debt
obligations, current and future creditors are particularly interest in it.
Creditors not only want to know the cash position and cash flow of a company, they also
want to know how much debt it currently owes and the available cash to pay the current
and future debt.
Unlike the debt ratio, the debt service coverage ratio takes into consideration all expenses
related to debt including interest expense and other obligations like pension and sinking
fund obligation. In this way, the DSCR is more telling of a company's ability to pay its
debt than the debt ratio.

PARTICULARS 2013-14 2012-13 2011-12 2010-11 2009-10

Debt Service Coverage Ratio
1.99 2.23 2.16 2.12 1.99
[17/(14+16)]

The debt service coverage ratio measures a firm's ability to maintain its current debt
levels. This is why a higher ratio is always more favorable than a lower ratio. A higher
ratio indicates that there is more income available to pay for debt servicing.

For example, if a company had a ratio of 1, that would mean that the company's net
operating profits equals its debt service obligations. In other words, the company
generates just enough revenues to pay for its debt servicing. A ratio of less than one
means that the company doesn't generate enough operating profits to pay its debt service
and must use some of its savings.

Generally, companies with higher service ratios tend to have more cash and are better
able to pay their debt obligations on time.
8. Interest Coverage Ratio
The interest coverage ratio is a financial ratio that measures a companys ability to make
interest payments on its debt in a timely manner. Unlike the debt service coverage ratio,
this liquidity ratio really has nothing to do with being able to make principle payments on
the debt itself. Instead, it calculates the firms ability to afford the interest on the debt.
Creditors and investors use this computation to understand the profitability and risk of a
company.

PARTICULARS 2013-14 2012-13 2011-12 2010-11 2009-10

Interest Coverage Ratio
3.68 3.99 4.00 4.01 3.61
[17/16]

Analyzing a coverage ratio can be tricky because it depends largely on how much risky
the creditor or investor is willing to take. Depending on the desired risk limits, a bank
might be more comfortable with a number than another. The basics of this measurement
dont change, however.

If the computation is less than 1, it means the company isnt making enough money to
pay its interest payments. Forget paying back the principle payments on the debt. A
company with a calculation less than 1 cant even pay the interest on its debt. This type of
company is beyond risky and probably would never get bank financing.

If the coverage equation equals 1, it means the company makes just enough money to pay
its interest. This situation isnt much better than the last one because the company still
cant afford to make the principle payments. It can only cover the interest on the current
debt when it comes due.

If the coverage measurement is above 1, it means that the company is making more than
enough money to pay its interest obligations with some extra earnings left over to make
the principle payments. Most creditors look for coverage to be at least 1.5 before they
will make any loans. In other words, banks want to be sure a company make at least 1.5
times the amount of their current interest payments.
9. Debtors Turnover Ratio

DTR is an efficiency ratio or activity ratio that measures how many times a business can
turn its accounts receivable into cash during a period. In other words, the accounts
receivable turnover ratio measures how many times a business can collect its average
accounts receivable during the year.
This ratio shows how efficient a company is at collecting its credit sales from customers.
Some companies collect their receivables from customers in 90 days while other take up
to 6 months to collect from customers.

PARTICULARS 2013-14 2012-13 2011-12 2010-11 2009-10

Debtor Turnover Ratio
10.11 6.81 3.66 3.12 6.44
(Sales/Av Receivables)

Since the receivables turnover ratio measures a business' ability to efficiently collect its
receivables, it only makes sense that a higher ratio would be more favorable. Higher
ratios mean that companies are collecting their receivables more frequently throughout
the year. For instance, a ratio of 2 times means that the company collected its average
receivables twice during the year. In other words, this company is collecting is money
from customers every six months.
Higher efficiency is favorable from a cash flow standpoint as well. If a company can
collect cash from customers sooner, it will be able to use that cash to pay bills and other
obligations sooner.

Accounts receivable turnover also is an indication of the quality of credit sales and
receivables. A company with a higher ratio shows that credit sales are more likely to be
collected than a company with a lower ratio. Since accounts receivable are often posted
as collateral for loans, quality of receivables is important.

10. Debtors Velocity Ratio

Debtors turnover ratio or accounts receivable turnover ratio or velocity ratio indicates
the velocity of debt collection of a firm.
In simple words, it indicates the speed of collection of credit sales.

PARTICULARS 2013-14 2012-13 2011-12 2010-11 2009-10

Debtor Velocity (365/Debtor
36.10 53.64 99.61 116.98 56.71
Turnover Ratio)
Debtors Turnover Ratio = Net Credit Sales / Average Trade of Debtor

Velocity Ratio or debtors turnover ratio indicates the number of times the debtors are
turned over a year i.e. cash is collected by the debtors. The higher the value of debtors
turnover the more efficient is the management of debtors or more liquid the debtors are.
Similarly, low debtors turnover ratio implies inefficient management of debtors.
 CHAPTER 6

International
Financial Reporting
Standards (IFRS)
6.1 What is IFRS?
International Financial Reporting Standards (IFRS) are designed as a common global
language for business affairs so that company accounts are understandable and comparable
across international boundaries. They are a consequence of growing international shareholding
and trade and are particularly important for companies that have dealings in several countries.
They are progressively replacing the many different national accounting standards. The rules to
be followed by accountants to maintain books of accounts which is comparable, understandable,
reliable and relevant as per the users internal or external.

The goal with IFRS is to make international comparisons as easy as possible. This is difficult
because, to a large extent, each country has its own set of rules. For example, U.S. GAAP are
different from Canadian GAAP. Synchronizing accounting standards across the globe is an
ongoing process in the international accounting community.

6.2 IFRS in Indian context

At present, Accounting Standards Board (ASB) formulates and issues accounting standards in
India which are more or less in line with IFRS except for a few instances where departure is
necessary to comply with the legal, regulatory and economic environment. Council of the
Institute of Chartered Accountants of India (ICAI) opined in May 2006 that adopting IFRS was
considered and supported by the ASB. IFRS task force was set up to provide a road map for
convergence and it decided to converge with IFRS from the accounting period commencing on
or after 1 April 2011.

In India, Ministry of Corporate Affairs carried
Accounting Standards with IFRS after a wide
stakeholders in pursuance of G-20 commitment
Standards converged with International Financial
AS).
out the process of convergence of Indian
range of consultative process with all the
and as result thirty five Indian Accounting
Reporting Standards (henceforth called IND

Adopting IFRS in India is going to be very challenging by Indian Corporate but at the same time
Indian Corporate are likely to obtain significant benefits from adopting IFRS. The European
Union addresses many benefits as a result of adopting IFRS. Overall most investors, financial
statement prepares and auditors concern that IFRS improve the quality of financial statements
and implementation of IFRS was a positive sign for development for European Union financial
reporting (2007 ICAEW Report on EU Implementation of IFRS and the Fair Value Directive).At
the present time IFRS are harmonizing as a financial reporting language across the globe. Over a
100 counties in the Europe Union, Africa, Most-Asia and Asia-Pacific region either require or
permit the use of IFRS.

In India recently ICAI released a concept paper on convergence with IFRS in India; it includes
the detail of strategy for adoption of IFRS in India with effect from April 1 2011. Ministry of
Corporate Affairs had also confirmed the agenda for convergence with IFRS in India by 2011. In
the US replacing the IFRS in place of US GAAP, is still an ongoing debate.
6.3 Mapping of IFRS/IAS vis--vis Ind-AS
The list of IAS/IFRSs and corresponding Ind-Ass notified by MCA is given below along with
their applicability at Powergrid Corporation of India Limited (PGCIL):

IAS No. Title Corresponding

Converged Ind
AS
IAS 1 Presentation of Financial Statements Ind AS 1
IAS 2 Inventories Ind AS 2
IAS 7 Cash Flow Statements Ind AS 7
IAS 8 Accounting policies, changes in accounting Ind AS 8
estimates and errors
IAS 10 Events after the balance sheet date Ind AS 10
IAS 11 Construction Contracts Ind AS 11
IAS 12 Income Taxes Ind AS 12
IAS 16 Property, Plant and Equipment Ind AS 16
IAS 17 Leases Ind AS17
IAS 18 Revenue Ind AS 18
IAS 19 Employee Benefits Ind AS 19
IAS 20 Accounting for Govt. Grants and Ind AS 20
Disclosure of Govt. assistance
IAS 21 The effects of changes in the Foreign Ind AS 21
Exchange rate
IAS 23 Borrowing Costs Ind AS 23
IAS 24 Related Party Disclosures Ind AS 24
IAS 26 Accounting and reporting by Retirement Ind AS 26
Benefit Plans
IAS 27 Consolidated and separate financial Ind AS 27
statements
IAS 28 Investments in associates Ind AS 28
IAS 29 Financial reporting in Hyper Inflationary Ind AS 29
Economics
IAS 31 Interest in Joint Ventures Ind AS 31
IAS 32 Financial Instruments: Presentation Ind AS 32
IAS 33 Earnings Per Share Ind AS 33
IAS 34 Interim Financial Reporting Ind AS 34
IAS 36 Impairment Assets Ind AS 36
IAS 37 Provisions, Contingent Liabilities and Ind AS 37
Contingent Assets
IAS 38 Intangible Assets Ind AS 38
IAS 39 Financial Instruments: Recognition and Ind AS 39
Measurement
IAS 40 Investment Property Ind AS 40
IAS 41 Agriculture Ind AS 41
IFRS -1 First time adoption of IFRS Ind AS 101
IFRS -2 Share Based Payments Ind AS 102
IFRS -3 Business Combination Ind AS 103
IFRS -4 Insurance Contracts Ind AS 104
IFRS -5 Non-current assets held for sale and Ind AS 105
discontinued operations
IFRS -6 Exploration for and evaluation of mineral Ind AS 106
resources
IFRS -7 Financial Instrument: disclosure Ind AS 107
IFRS -8 Operating Segment Ind AS 108
IFRS -9 Financial Instruments Exposure draft
issued
IFRS 10 Consolidated Financial Statement Exposure draft
issued
IFRS 11 Joint Arrangement -do-
IFRS 12 Disclosure of Interest in other entities -do-
IFRS 13 Fair value measurement No corresponding
standard

Note: IAS 3, 4, 5, 6, 9, 13, 14, 15, 22, 25, 30 and 35 have been superseded.
6.4 Beneficiaries of Convergence with IFRS
The researchers have pointed out several beneficiaries to the convergence of Indian Generally
Accepted Accounting Principles (GAAP) with IFRS. Some of them are discussed here below.

1. The Investors: Convergence of Indian Accounting Standards with IFRS makes

accounting information more reliable, relevant, timely and comparable across different
legal and economic frameworks and requirements since it would then be prepared by
using a common set of accounting standards which will facilitate the investors who
willing to invest in the countries apart from India. It will also develop better
understanding of financial statements worldwide which increase the confidence among
the people as investors.

2. The Industry: The other important set of beneficiary the researchers came across is the
industry which in the event of convergence with IFRS will be benefited because of some
basic reasons. Firstly it will enhance confidence in the minds of the foreign investors,
secondly, it decreases the burden of financial reporting, thirdly, it would make the
process of preparing the individual and group financial statements easier and simplest,
and the last and important one is that this will reduce cost of preparing the financial
statements using different sets of accounting standards.

3. Accounting Professionals: However, there would be initially many problems but

convergence with IFRS would surely benefit the accounting professionals and it will be
helpful them to sell their talent and expertise across the globe.

4. The corporate world: Convergence with IFRS would build the reputation and long lasting
relationship of the Indian corporate world with the international financial entities.
Moreover, the corporate entities back in India would be benefited because of several
reasons. The higher level of consistency will be maintained between external and internal
reporting, two, because of better access to global financial markets, three, it will improve
the risk rating and makes the corporate world more and more competitive globally as
their comparability with the global competitors will increase.

5. The Economy: All the discussions made above explains how convergence with IFRS
would help industry grow and is beneficial to the corporate entities in the country as this
would make the internal and external highly consisted, and it will report improvement in
the risk rating among the foreign investors. Moreover, the international comparability is
also benefiting the industrial and capital markets in the country which lead to better
economy across the country.
6.5 Problems and Challenges
IFRS are formulated by International Accounting Standard Board. However, the responsibility of
convergence with IFRS vests with local government and accounting and regulatory bodies, such
as the ICAI in India. Thus ICAI need to invest in infrastructure to ensure compliance with IFRS.
India has several constraints and practical challenges to adoption and compliance with IFRS. So
there is a need to change some laws and regulations governing financial accounting and reporting
in India. There are some legal requirements which determine the manner in which financial
information are presented in financial statements.

1. Difference in GAAP and IFRS: Adoption of IFRS means that the entire set of financial
statements will be required to undergo a drastic change. The differences are wide and
very deep routed. It would be a challenge to bring about awareness of IFRS and its
impact among the users of financial statements.

2. Issue of GAAP Reconciliation: The Securities Exchange Commission(SEC) laid out two
options in its proposal-one calling for the traditional IFRS first-time adoption
reconciliation, the other requiring that step plus an on-going unaudited reconciliation of
the financial statements from IFRS to U.S. GAAP which is clearly more costly approach
for companies and for investors.

3. Training and Education: Lack of training facilities and academic courses on IFRS will
also pose challenge in India. There is a need to impart education and training on IFRS
and its application.

4. Legal and Regulatory considerations: Currently, the reporting requirements are governed
by various regulators in India and their provisions override other laws. IFRS does not
recognize such overriding laws. The regulatory and legal requirements in India will pose
a challenge unless the same is been addressed by respective regulatory.

5. Taxation: IFRS convergence would affect most of the items in the financial statements
and consequently the tax liabilities would also undergo a change. Thus the taxation laws
should address the treatment of tax liabilities arising on convergence from Indian GAAP
to IFRS.

6. Fair value Measurement: IFRS uses fair value as a measurement base for valuing most of
the items of financial statements. The use of fair value accounting can bring a lot of
instability and prejudice to the financial statements. It also involves a lot of hard work in
arriving at the fair value and valuation experts have to be used.

7. Re-negotiation of Contract: The contracts would have to be re-negotiated which is also a

big challenge. This is because the financial results under IFRS are likely to be very
different from those under the Indian GAAP.
8. Reporting systems: Companies would have to ensure that the existing business reporting
model is amended to suit the reporting requirements of IFRS. The information systems
should be designed to capture new requirements related to fixed assets, segment
disclosures, related party transactions, etc.
6.6 Measures taken to address the Challenges

1. For changes required in rules and regulations of various regulatory bodies, draft
recommendations have been placed before Accounting Standard Board.

2. The ICAI issued 30 interpretations of accounting standards, with a view to resolve

various intricate interpretational issues arising in the implementation of new
accounting standards.

3. Guidance notes have been issued by ICAI for providing immediate guidance on
accounting issues.

4. To facilitate discussions at seminar, workshops, etc. ICAI has issued background

material on newly issued accounting standards

5. For the purpose of assisting its members, the ICAI council has formed an expert
advisory committee to answer queries from its members.

Moreover to face the challenges we need to take more effective steps like we should build
adequate IFRS skills professionals by investing in training processes for Indian accounting
professionals to manage the conversion projects for Indian corporate. This can be done by
research on effect of IFRS conversion in different countries and brief knowledge of IFRS should
be added into the studies for professional courses with worldwide latest examples.
6.7 Roadmap for IFRS conversion
On April 9, 2014, ICAI proposed a road map for convergence of Ind AS with IFRS. According
to this, there would be 2 sets of AS: Ind AS and Existing Notified AS.
It proposed that the Ind AS should be applied by specified class of companies by preparing
consolidated financial statements for financial periods beginning on or after April 1, 2016, along
with Comparatives for the year ending March 31, 2016.

In the Budget speech of FY 2014-2015, the Finance Minister stated that there is an urgent need
to converge the current Indian AS with IFRS. He had proposed for the adoption of Ind AS by
the Indian companies from FY 2015-2016 Voluntarily; and from FY 2016-2017 on a mandatory
basis.

Type Net worth Date for following new

Listed/Process of Listing
Listed/Process of Listing
Unlisted More than Rs. 250 Crore, less
Banking, NBFCs and
Insurance Companies
Listed/Process of Listing on
SME Exchange
Companies not covered in the
roadmap
accounting norms/IFRS
Rs. 500 crore or more 1st April 2016
Less than Rs. 500 crore 1st April 2017
1st April 2017
than Rs. 500 crore
- Exempted
- Exempted
- Follow Existing Accounting
Standards

Highlights:

Companies can comply with the new norms voluntarily from 1st April, 2015 but following
classes of Companies will have to comply mandatorily with the New Ind AS from the prescribed
dates, as mentioned below:

o Companies whose equity and/or debt securities are listed or are in the process of listing on
any stock exchange in India or outside India and having net worth of Rs 500 crore or more
shall have to follow the new norms from 1st April, 2016. Comparatives for the year ending
31st March, 2016, to be prepared because all the opening balances should also comply with
IFRS.

o Companies having a Net-worth of less than Rs 500 crore but are listed or in the process of
getting listed shall have to follow the new accounting norms from April 1, 2017 And
Comparatives for the year ending 31st March, 2017.
o Other Companies that are Unlisted having a Net-worth of Rs 250 crore or more but less than
Rs 500 crore, shall have to start implementing the new accounting norms from April 1, 2017.

o The deadline mentioned above shall also apply to Holding, Subsidiary, Joint Venture or
Associate Company of the company; in all the cases mentioned above.

o Banking Companies, NBFCs and Insurance companies are exempted from complying with
these new norms. The Finance Minister had said in his Budget speech that the Regulators will
separately notify the date of implementation for them, on the basis of an international
consensus.

o Companies whose securities are listed or in the process of listing on SME exchanges shall not
be required to apply New Accounting Standards. Such companies shall continue to comply
with the existing accounting norms.

o Companies shall follow the Ind AS for all the subsequent financial statements, if they opted
once.

o Companies not covered by the above roadmap shall continue to apply existing accounting
standards prescribed in Annexure to the Companies (Accounting Standards) Rules, 2006.
 CHAPTER 7

TAXATION
7.1 Advance tax
Advance Tax is part payment of ones tax liability before the end of the fiscal year i.e. 31 March.
The provisions of the Income Tax Act make it obligatory for every individual, salaried/ self-
employed professional, businessman and corporate to pay Advance Tax, on any income on
which TDS is not paid.

Do I need to pay Advance Tax?

An individual is liable to pay advance tax if he has income from interest, commission, rent,
business or profession, etc., on which no tax has been deducted at source (or tax has been
deducted at a lower rate). Advance tax liability arises where the balance tax liability is Rs
10,000/- or more.

If you are salaried person with only salary as the sole source of income, Advance Tax would not
be applicable as tax deducted at source would be taken care of by your employer. If you have
other sources of income, such as, income from capital gains, shares and mutual funds, income
from house property, etc.; Advance Tax is mandatory.

How to calculate Advance Tax?

While calculating Advance Tax payable, a taxpayer needs to make only a projection or estimate
of his income, as the actual income could be calculated only by the fiscal year end.

- Using the projected income for the fiscal year, the tax payable is to be calculated as per the tax
slabs applicable for the current financial year.
- From the tax so computed, subtract the tax deducted at source, if any.
- Include educational cess while calculating advance tax.
- The amount arrived at is the advance tax payable, in installments.
When do I have to pay Advance Tax?

Due Dates for payment of Advance Tax

FY 2016-17
For both individual and corporate taxpayers

Due Date Advance Tax Payable

On or before 15th June 15% of advance tax

On or before 15th September 45% of advance tax

On or before 15th December 75% of advance tax

On or before 15th March 100% of advance tax

7.2 Interest for delay in filing the return of income [Section 234A]
Under section 234A, interest is levied for delay in filing the return of income. In other words, if
the taxpayer files the return of income after the due date specified in this regard, interest under
section 234A will be levied.

Rate of interest

Interest under section 234A is levied for delay in filing the return of income. Interest is levied at
1% per month or part of a month. The nature of interest is simple interest. In other words, the
taxpayer is liable to pay simple interest at 1% per month or part of a month for delay in filing the
return of income.

Period of levy of interest under section 234A

Interest under section 234A is levied from the period commencing on the date immediately
following the due date of filing the return of income and ending on the date of furnishing the
return of income, or in case where no return has been furnished, on the date of completion of the
assessment under section 144. It should be noted that while computing the period of levy of
interest, part i.e. fraction of a month is considered as full month.

Amount liable to interest under section 234A

Interest under section 234A is levied on the amount of tax as determined under section 143(1)
and where regular assessment is made, the tax on total income as determined under such regular
assessment as reduced by advance tax, tax deducted/collected at source, relief claimed under
various sections like sections 90/90A/91 and tax credit claimed under section 115JAA/115JD.
7.3 Interest for Default in Payment of Advance Tax [Section 234B]
Interest under section 234B is levied in following two cases:

When the taxpayer has failed to pay advance tax though he is liable to pay advance tax;
or
Where the advance tax paid by the taxpayer is less than 90% of the assessed tax.

As per Section 208 of the Act, advance tax shall be payable by the taxpayer during the financial
year if estimated tax liability of assessee during that year is ten thousand rupees or more.

Rate of interest

Under section 234B, interest for default in payment of advance tax is levied at 1% per month or
part of a month. The nature of interest is simple interest. In other words, the taxpayer is liable to
pay simple interest at 1% per month or part of a month for default in payment of advance tax.

Amount liable for interest

Interest under section 234B is levied on the amount of unpaid advance tax. If there is a shortfall
in payment of advance tax, then interest is levied on the amount by which advance tax is short
paid. The amount of unpaid/short paid advance tax is computed as follows:

(*) Assessed tax means the amount of tax as determined under section 143(1) and where regular
assessment is made, the tax on total income as determined under such regular assessment as
reduced by tax deducted/collected at source, relief/deduction of tax claimed under various
sections like sections 90/90A/91 and tax credit claimed under section 115JAA/115JD.

Period of levy of interest

Interest under section 234B is levied from the first day of the assessment year, i.e., from 1st
April till the date of determination of income under section 143(1) or when a regular assessment
is made, then till the date of such a regular assessment. If the taxpayer has paid any tax before
completion of assessment, then interest will be levied as follows:
 Upto the date of payment of self-assessment tax, interest will be computed on the amount
of unpaid advance tax.
From the date of payment of self-assessment tax, interest will be levied on the unpaid
amount of advance tax after deducting the self-assessment tax paid by the taxpayer.
7.4 Interest for default in payment of installment(s) of advance tax
[Section 234C]
Section 234C provides for levy of interest for default in payment of installment(s) of advance
tax. Before getting into the detailed provisions of section 234C, lets recall the provisions relating
to payment of advance tax by a taxpayer. As per section 208, every person whose estimated tax
liability for the year exceeds Rs. 10,000, shall pay his tax in advance in the form of advance
tax by following dates:

Status By 15th June By 15th Sept. By 15th Dec. By 15th March

Non Corporate Upto 15% of Upto 45% of Upto 75% of Upto 100% of
taxpayers Advance Tax Advance Tax Advance Tax Advance Tax
Corporate Upto 15% of Upto 45% of Upto 75% of Upto 100% of
Taxpayers Advance Tax Advance Tax Advance Tax Advance Tax

Interest under section 234C is levied, if advance tax paid in any installment(s) is less than the
required amount. In other words, interest under section 234C in case of deferment of different
installments of advance tax is levied in following cases:

In case of corporate taxpayers i.e. companies, interest is levied under section 234C, if the
advance tax paid by the taxpayer on or before June 15th is less than 12% of advance tax
payable.
Interest under section 234C is levied if the advance tax paid by the taxpayer on or before
September 15th is less than 30% of advance tax payable by him (in case of a non-
corporate taxpayer) or 36% of advance tax payable (in case of a corporate taxpayer).
Interest under section 234C is levied if the advance tax paid by the taxpayer on or before
December 15th is less than 60% of advance tax payable by him (in case of a non-
corporate taxpayer) or 75% of advance tax payable (in case of a corporate taxpayer).
Interest under section 234C is levied if the advance tax paid by the taxpayer on or before
March 15th is less than 100% of advance tax payable by him (in case of a corporate as
well as non-corporate taxpayer).

No levy of interest if shortfall in payment of advance tax is due to capital gains or winning
from lottery, etc.

Interest under section 234C is not levied, if, the shortfall in payment of advance tax is due to
failure to estimate the amount of capital gains or income referred to in section 2(24)(ix) (i.e.
winning from lotteries, crossword puzzle, etc.) and the taxpayer pays the required advance tax on
such income as a part of immediate following installments or till 31st March, if no installment is
pending.
Rate of Interest

Interest under section 234C for default in payment of installment(s) of advance tax is charged at
1% per month or part of a month. The nature of interest is simple interest. In other words, the
taxpayer is liable to pay simple interest @ 1% per month or part of a month for short payment/
non-payment of individual installment(s) of advance tax.

Period of levy of interest

In case of corporate taxpayer, interest under section 234C is levied for a period of 3 months, in
case of short fall in payment of 1st, 2nd and 3rd installment and for 1 month, in case of short fall
in payment of last installment. In case of non-corporate taxpayer, interest under section 234C is
levied for a period of 3 months, in case of short fall in payment of 1st and 2nd installment and
for 1 month in case of short fall in payment of last installment.

Amount liable for interest

Interest under section 234C is levied on the short paid amount of installment(s) of advance tax.
7.5 How to Pay Advance Tax
You can pay Advance Tax as per the following process:-
- Challan no ITNS 280 should be filled out with all the correct details of the taxpayer
- The filled challan along with amount should be submitted to any bank accepting tax payments.
- Keeping in view your convenience, you can also pay tax online through any bank facilitating
e-payment of taxes.
7.6 Minimum Alternate Tax
Normally, a company is liable to pay tax on the income computed in accordance with the
provisions of the Income-Tax Act, but the profit and loss account of the company is prepared as
per provisions of the Companies Act.

In the past, a large number of companies showed book profits on their profit and loss account
and at the same time distributed huge dividends. However, these companies didnt pay any tax to
the government as they reported either nil or negative income under provisions of the Income-
Tax Act.

These companies were showing book profits and declaring dividends to their shareholders but
were not paying any tax. These companies are popularly known as zero tax companies.

The Indian Income-Tax Act allows a large number of exemptions from total income. Besides
exemptions, there are several deductions permitted from the gross total income. Further,
depreciation allowable under the Income-Tax Act, is not the same as required under the
Companies Act. The latter provides a lower rate viz-a-viz the I-T Act which computes a higher
rate of depreciation.

The result of such exemptions, deductions, and other incentives under the Income-Tax Act in the
form of liberal rates of depreciation is the emergence of zero tax companies, which in spite of
having high book profit are able to reduce their taxable income to nil.

In order to bring such companies under the I-T net, Section 115JA was introduced from
assessment year 1997-98. Now, all companies having book profits under the Companies Act
shall have to pay a minimum alternate tax at 18.5%.

As per sub Section (1) of Section 115JB of the Act, if total income of a company in any year
commencing from A.Y. 2012-13 is less than eighteen and one half per cent on its book profit,
then such book profit shall be deemed to be the total income of the assessee company and the tax
payable by such company will be eighteen and one half per cent of such book profit.
Sub Section (2) of Section 1 15JB mandates that every company shall prepare its P&L Account
in accordance with the provisions of parts-II & III of Schedule-VI to the Companies Act, 1956.
For arriving book profit of the company, the net profit as shown in the P&L Account as per the
provisions of the Companies Act is to be increased by the items mentioned in clause (a) to (j)
toExplanation-1 of Section 1 15JB (if these items are debited to the P&L account) and is to be
reduced by the items mentioned in clause (i) to (viii) to Explanation-1 of Section 1 15JB of
the Act.
It is to be noted that rate of eighteen and one half per cent is applicable for A.Y. 2012-13
onwards. These rates were eighteen per cent for A.Y. 2011-12 and fifteen per cent for A.Y.
2010-11.
 7.7 How to compute Assessable Profit
POWER GRID CORPORATION OF INDIA LIMITED
FOR THE FINANCIAL YEAR 2013-14
ASSESSMENT YEAR 2014-15

STATEMENT OF ASSESSABLE INCOME

AMOUNT
PARTICULARS AMOUNT (Rs.) (Rs.)

Profit as per Profit & Loss Account (A)

Add:
i) Depreciation for separate consideration (Note 2.29)
Depreciation claimed under Prior Period Adjustment
ii) (Note 2.31)
iii) Loss on Fixed Assets discarded/sold (Note 2.30)
iv) Income During Construction (Note 2.32)
a) Interest- Bank & others
b) Income others
c) Miscellaneous Income
d) Hire Charges
v) Interest under Income Tax Act (u/s 234 B & C)
vi) Interest under Income Tax Act (u/s 201)
vii) Provision(Note 2.30)
viii) Small value of items debited to P&L account
ix) Disallowance under section 43-B
Tax Audit Report- Para 21(i) (B)
Leave encashment provided as per Tax Audit Report
Others
Less: Leave encashment paid as per Tax Audit Report
Less: Others
Capital recovery for State Sector Leased Assets (Notes on
x) accounts)
In-direct Expenditure for earning taxfree income as per
xi) Sec. 14A
Amount disallowed U/s 40A(9) ( Para 21(f) of 3CD ) (
xii) PEWA /Mahila Samaj
xiii) Advance Against Depreciation (AAD) ( Note 2.25 )
Depreciation amortised due to FERV adjustment (Note
xiv) 2.29)
 Depreciation transferred to expenditure during
xv) construction(IEDC) (Note 2.32 )
xvi) Amount of Intt inadmissible
TOTAL ADDITIONS (B)
Less: i) Depreciation as per Income-Tax Act 1961
ii) Transferred from Grant-in-aid(Note 2.26)
iii) Profit on sale of assets(Note 2.26)
iv) Interest on bonds & loan exempted U/s 10(15)(I)(Note
2.26)
v) Transfer from Insurance Reserve (Note 2.26)
vi) Dividend exempted u/s 10(34)( Note 2.26)
vii) Provision written back(Note 2.26)
viii) Share Issue Expenses (1/5 claimed from AY 2012-
13)-Ist FPO Nov10
TOTAL DEDUCTIONS (C)
Assessable Profit( A+B-C)
Less: Brought forward losses (As per Tax Audit Report)
Less: Deduction U/s 80IA
Net assessable Profit
TAX @ 33.99
 7.8 How to Compute MAT
ANNEXURE-A
(See Paragraph 2)
Details relating to the computation of the book profits for the purposes of
Section 115JB of the Income- Tax Act 1961

1 Name of the assesse Power Grid Corporation of India Limited

2 Particulars of address B-9 Qutab Institutional Area, Katwaria Sarai, New
Delhi 110016
3 Permanent Account Number AAA CP 0252G, Circle 14 New Delhi
4 Assessment year 2014-15
5 Total income of the company under the Income Tax Act (After 80IA Deduction)
6 Income-tax payable at 30% on total income along with surcharge and Education
Cess
7 Whether Statement of Profit and Loss is prepared in accordance with the provisions
of part II and Part III of Schedule VI to the Companies Act 1956 ( I of 1956)
8 Whether the Statement of Profit and Loss referred to in column (7) above has
followed the same accounting policies accounting standards for preparing the profit
and loss account and the same method of rates for calculating depreciation as have
been adopted for:
9 Net profit according to Statement of Profit and Loss referred to in (7) above
10 Amount in net profit as shown in Statement of Profit and Loss as increased by the
amounts referred to in clauses (a) to (f) of Explanation of sub-section (2) of this
section (file working separately where required)
Rs. Rs.
Amount as per 9 above
Add:
(a) Provision for Taxation (Net)
(i) Income Tax
(ii) Deferred Tax
(iii) Interest under Income Tax Act
(iv) Interest on TDS u/s 201
(v) Depreciation as per statement of P & L
(b) Provisions
11 The amount as referred to in item 10 as reduced by the amounts referred to in clause
(i) to (vii) of Explanation of sub-section (2) of this Section (file working separately
where required)
Amount as per 10 above
Less:
(a) (i) Interest on Bonds/Loans exempted u/s
 10(15) (i)
(ii) Dividend exempted u/s 10(34)
Less: Expenses as per Sec. 14A
(b) Provision written back
(d) Wage revision & PRP paid for the past
period
(e) Advance Against Depreciation
(AAD)(Net)
(f) Depreciation as per statement of P & L
12 Book profit as computed according to Explanation given in sub-section (2)
13 18.5% of book profit as computed in 12 above + 10% surcharge + 3% Cess
14 In case income tax payable by the company referred to at Sl. No. 6 is less than
eighteen percent of its Book Profit shown in Column 12 the amount of income tax
payable by the company would be 18.5% of column 12 i.e. as per (13)
7.9 Dividend Distribution Tax
Dividend distribution tax is a tax which is required to be paid @15%by the company who has
declared, distributed or paid any amount as dividend. The provisions Dividend Distribution Tax
are governed by Section 115-O under chapter XII-D and were introduced by the Finance Act
1997.

Changes Introduced by Finance Act 2014

Arun Jaitley while announcing the Finance Act 2014 has introduced certain changes in the
manner in which the Dividend Distribution Tax is to be levied. Although the rate of tax i.e. 15%
remains the same as earlier, the manner of application has changed.

Earlier Dividend Distribution Tax @15% was applied on the amount paid as Dividend after
reduction of Dividend Distribution Tax by the Company/ Mutual Funds. Therefore, the tax was
computed with respect to the Net amount paid as dividend to the shareholders.

As the Dividend Distribution Tax was levied on the net amount instead of the gross amount, the
effective rate was lower than 15%.

And therefore the Finance Act 2014 has amended Section 115-O and with the introduction of
this amendment dividends would be required to gross up for the purpose of payment of
Dividend Distribution Tax.

Due Date for payment of Dividend Distribution Tax

The company shall be liable to pay the tax on distributed profits to the credit of the central
government within 14 days from the date of-

1. Declaration of any dividend; or

2. Distribution of any Dividend; or
3. Payment of any dividend,

(Whichever is earliest)

No deduction under any other provision of this act shall be allowed to the Company
or a shareholder in respect of the amount which has been charged to dividend
distribution tax.
Surcharge @10% and Education Cess and SHEC @ 3% would also be levied on this
15% Dividend Distribution Tax.
7.10 Tax Deducted At Source

Tax deducted at source (TDS), as the very name implies aims at collection of revenue at the very
source of income. It is essentially an indirect method of collecting tax which combines the
concepts of pay as you earn and collect as it is being earned. Its significance to the
government lies in the fact that it prepones the collection of tax, ensures a regular source of
revenue, provides for a greater reach and wider base for tax. At the same time, to the tax payer, it
distributes the incidence of tax and provides for a simple and convenient mode of payment.
The concept of TDS requires that the person, on whom responsibility has been cast, is to deduct
tax at the appropriate rates, from payments of specific nature which are being made to a specified
recipient. The deducted sum is required to be deposited to the credit of the Central Government.
The recipient from whose income tax has been deducted at source gets the credit of the amount
deducted in his personal assessment on the basis of the certificate issued by the deductor.

TDS Return process

24Q, 26Q and 27Q are TDS return forms containing deductee details. Form 24Q is prescribed for
Return of TDS details on Salary Payment. Form 26Q for Return of TDS details on Other than
Salary Payments (Domestic).Form 27Q is also for Return of TDS details on Other than Salary
Payments (NRI/Foreign). Form 27EQ is for TCS returns

Form 27A is generated after processing these forms having the deductor (company) sign and
stamp.

Status of the form is checked by logging in tin-nsdl website. If the form is approved, deductees
are issued form 16(for 24Q) or 16A (other than 24Q) which serve as an acknowledgement for the
deductee that a particular amount has been deducted as TDS by the Deductor.

There are cases where TDS might be deducted at lower rates

Issue of Certificate 197- Clause 197 seeks to empower the Assessing Officer to give a
certificate for lower or no deduction of tax to the deductee where the deductee is a
resident or to the deductor where the deductee is a non-resident, if the Assessing Officer
is satisfied that the total income of the deductee justifies deduction of tax at a lower or nil
rate. Accordingly, the clause provides that deduction shall be made in accordance with
the certificate, until such certificate is cancelled by the Assessing Officer or the expiry of
the validity of the certificate, whichever is earlier.

15G/15H- Income from Interest on Fixed Deposits- Form No 15G: Only a person who
is resident in India can submit Form No. 15G. So an NRI cannot submit this form. Any
person other than a company can submit Form No. 15 G. So any individual, HUF, Trust,
Association of Persons or Body of Individuals can submit Form No. 15G. Form 15G is
submitted by individuals who are less than 60 years of age. Form No. 15H: Any resident
 Individual who is above sixty years of age or completes sixty years during the financial
year can submit Form No. 15H provided his tax liability on the basis of his estimated
income is nil for the financial year

The returns for the TDS must be filed by all deductors every quarter on the prescribed forms.
The respective due dates for filing of returns are 15 July, 15 October, 15 January and 15 May.

Payments covered under the TDS mechanism and the rates for deduction of
tax at source:

Sec. 192 - Payment of salary [normal tax rates are applicable SC : 10% (if net income
exceeds Rs. 1 crore), EC : 2% and SHEC : 1%]

Sec. 194 - Dividend

a. deemed dividend under section 2(22)(e) 10

b. any other dividend Nil

Sec. 194A - Interest other than interest on securities 10

Sec. 194C - Payment or credit to a resident contractor/sub-contractor

a. payment/credit to an individual or a Hindu undivided family 1

b. payment/credit to any person other than an individual or a Hindu undivided family 2

Sec. 194H - Commission or brokerage 10

Sec. 194J - Professional fees, technical fees, royalty or remuneration to a director 10

Section 194LC: Payment of interest by an Indian Company or a business trust in respect 5

of money borrowed in foreign currency under a loan agreement or by way of issue of long-
term bonds (including long-term infrastructure bond)

Section 194LD: Payment of interest on rupee denominated bond of an Indian Company or 5

Government securities to a Foreign Institutional Investor or a Qualified Foreign Investor
 Section 195: Payment of any other sum to a Non-resident

a) Income in respect of investment made by a Non-resident Indian Citizen 20

b) Income by way of long-term capital gains referred to in Section 115E in case 10
of a Non-resident Indian Citizen
c) Income by way of long-term capital gains referred to in sub-clause (iii) of 10
clause (c) of sub-Section (1) of Section 112
d) Income by way of short-term capital gains referred to in Section 111A 15
e) Any other income by way of long-term capital gains [not being long-term 20
capital gains referred to in clauses (33), (36) and (38) of Section 10]
f) Income by way of interest payable by Government or an Indian concern on 20
moneys borrowed or debt incurred by Government or the Indian concern in
foreign currency (not being income by way of interest referred to in Section
194LB or Section 194LC)
g) Income by way of royalty payable by Government or an Indian concern in 10
pursuance of an agreement made by it with the Government or the Indian
concern where such royalty is in consideration for the transfer of all or any
rights (including the granting of a license) in respect of copyright in any
book on a subject referred to in the first proviso to sub-section (1A)
of Section 115A of the Income-tax Act, to the Indian concern, or in respect
of any computer software referred to in the second proviso to sub-section
(1A) of Section 115A of the Income-tax Act, to a person resident in India
h) Income by way of royalty [not being royalty of the nature referred to point g) 10
above E] payable by Government or an Indian concern in pursuance of an
agreement made by it with the Government or the Indian concern and where
such agreement is with an Indian concern, the agreement is approved by the
Central Government or where it relates to a matter included in the industrial
policy, for the time being in force, of the Government of India, the
agreement is in accordance with that policy
i) Income by way of fees for technical services payable by Government or an 10
Indian concern in pursuance of an agreement made by it with the
Government or the Indian concern and where such agreement is with an
Indian concern, the agreement is approved by the Central Government or
where it relates to a matter included in the industrial policy, for the time
being in force, of the Government of India, the agreement is in accordance 30
with that policy
j) Any other income
Consequences for non-deducting of TDS & non-depositing of TDS if deducted.
A deductor would face the following consequences if he fails to deduct TDS or after deducting
the same fails to deposit it to the credit of Central Governments account:-

a) Disallowance of expenditure
As per section 40(a) (i) of the Income-tax Act, any sum (other than salary) payable outside India
or to a non-resident, which is chargeable to tax in India in the hands of the recipient, shall not be
allowed to be deducted if it is paid without deduction of tax at source or if tax is deducted but is
not deposited with the Central Government till the due date of filing of return.
However, if tax is deducted or deposited in subsequent year, as the case may be, the expenditure
shall be allowed as deduction in that year.
Similarly, as per section 40(a) (ia), any sum payable to a resident, which is subject to deduction
of tax at source, would attract 30% disallowance if it is paid without deduction of tax at source or
if tax is deducted but is not deposited with the Central Government till the due date of filing of
return.
However, where in respect of any such sum, tax is deducted or deposited in subsequent year, as
the case may be, the expenditure so disallowed shall be allowed as deduction in that year.

b) Levy of interest
As per section 201 of the Income-tax Act, if a deductor fails to deduct tax at source or after the
deducting the same fails to deposit it to the Governments account then he shall be deemed to be
an assessee-in-default and liable to pay simple interest as follows:-

(i) at one per cent for every month or part of a month on the amount of such tax from the
date on which such tax was deductible to the date on which such tax is deducted; and
(ii) at one and one-half per cent for every month or part of a month on the amount of such
tax from the date on which such tax was deducted to the date on which such tax is
actually paid.

c) Levy of Penalty
Penalty of an amount equal to tax not deducted or paid could be imposed under section 271C.
 CHAPTER 8

CONCLUSION
 Conclusion
The project report completed at POWERGRID CORPORATION OF INDIA LTD. which is the
pioneer and market leader in power transmission sector in India, helped in gaining practical
knowledge in various fields of finance and accounting.

In Fiscal 2014, the Company displayed an impressive financial performance. Turnover of the
Company increased to 15,721 Crore and Profit after Tax increased to 4,497 Crore, which are
17.9% and 6.2% higher respectively, compared to the previous Fiscal 2013. Powergrids Gross
Fixed Assets as on 31st March, 2014 stands at 96,504 Crore as against 80,600 Crore in last
fiscal.

The Company continues to make significant progress in all its business areas including Telecom
and Consultancy, enhancing the value for the shareholders. With 28.61% net profit to total
income and 13.07% Net worth ratio indicates that PGCIL is a profitable company and has
control over its cost.

As per the roadmap proposed by ICAI on April 9th, 2014 for convergence of Ind AS with IFRS,
Powergrid being a listed company and having Net worth of more than Rs. 500 cr. has to follow
new accounting norms/IFRS from 1st April, 2016.

Powergrid has been regularly paying dividend @30% of PAT as prescribed under DPE
guidelines. For FY 2013-14, the Company has proposed a final dividend of 1.31 per share in
addition to `1.27 per share of interim dividend paid in March, 2014. Thus, the total dividend
payout for the year amounts to 1,350 Crore (including an interim dividend of ` 665 Crore) as
against 1,273 Crore paid during the previous year. The total dividend payout including dividend
tax accounts for 35% of Profit after Tax of the Company.

The 6 weeks spent in PGCIL has been a unique experience. It was an eye opener to how real
world tasks are dealt with and the exposure to office work was a welcoming practice.
Practical training has helped gain an exposure to systematic work coordination in an
environment that is conductive coupled with friendly staff that are always there to help.
 CHAPTER 9

REFERNECES
 References
http://www.ficci.com/spdocument/20311/power-transmission-report_270913.pdf

http://www.cci.in/pdfs/surveys-reports/Telecom-Sector-in-India.pdf

http://www.powergridindia.com/_layouts/PowerGrid/User/ContentPage.aspx?PId=76&L

angID=English

http://www.myaccountingcourse.com/financial-ratios/

http://www.investopedia.com/

http://www.powergridindia.com/_layouts/PowerGrid/User/ContentPage.aspx?PId=186&

LangID=english

IFRS and India: Problems and Challenges, Gurpreet Kaur and Amit Kumar, Volume 1,

Issue 7 (Jan 2014)

http://www.iasplus.com/en/news/2015/01/india

http://www.mca.gov.in/Ministry/pdf/PressRelease_06012015.pdf

https://en.wikipedia.org/wiki/International_Financial_Reporting_Standards

http://taxguru.in/income-tax/minimum-alternate-tax-mat-115jb-income-tax-act-1961.html

http://www.charteredclub.com/advance-tax/

http://www.charteredclub.com/dividend-distribution-tax/

http://www.moneycontrol.com/tax/tds/what-is-tds-or-tax-deducted-at-

source_664924.html