Project Lifecycle & Appraisal of

Promoters & Management

Presented by:
Bhumanyu Singh (3204)
Akshit Dhiman (3212)
Soumya Dubey (3203)
Shilpy Singh (3208)

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 Project Life Cycle
Project Identification

Project Formulation and Analysis

Appraisal and Funding

Project Management

Over Run/ Bailout Financing

Post Completion Performance Evaluation

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Project Identification

• New Project ideas can either be conceived by own intuitions and observations or
by following a systematic approach
Systematic Approach to generating ideas involve:
• Discussion with professionals and institutions such as merchant bankers and
consultants.
• Readymade project reports from technical consultancy organizations
• Studying the environment of business and industry to find new opportunities
• Financial Newspapers

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Detailed Project Report

• Identified Projects are then put under a rigorous assessment to ascertain its
viability
• DPR is the document that contains in detail the rigorous assessment of the
project
• DPR is thorough and highly focused on all aspects of the project such as
technology and equipment, employment generation, environment impact,
financial viability, risk factors, forex earnings and so on
• DPR is sent to lenders for appraisal of loans

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 DPR Encompasses an Assessment of:
• Promoters – Promoter’s quality, resourcefulness, track record and commitment to
the project
• Management – Management’s quality, organizational set-up and internal control
systems
• Marketing Viability – Ascertainment of the aggregate demand and market share
of proposed product as well as details of marketing plan which includes product
pricing, marketing policies, selling channels and promotion strategies
• Technical Feasibility – Determination and assessment of pre-requisites such as
production technology, raw materials, inputs, utilities, manpower, pollution
control etc. Also details the implementation schedule
• Financial Viability – Cost-Benefit analysis which includes cost of project, means of
financing, projected income, balance sheet and cash flow statements as well as
risk factors and risk management

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Project Management

Once the finance for the project are arranged for, actual project management
starts. This is the most crucial phase of project cycle. Hence, the need is
emphasized for high skills in project management. This includes:
• Project scheduling
• Project monitoring and control
• Construction of facilities
• Training of technical personnel
• Trial runs

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Bailout Financing

• If project is not completed in time or there are cost overruns due to poor
projections or unanticipated factors then the project’s viability needs to
reassessed and further financing might be required
• Projects with long gestation periods are more prone to cost overruns and thus are
more risky in this regard
• However, the lending institution may deem the project unviable and acquire the
assets and sell it to a third party

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Purpose of Assessment and Appraisal of Promoters
and Management
• Assessment of promoters’ background, activities, past performance,
resourcefulness, creditworthiness ,understanding of and commitment to the
proposed project
• Evaluation of shareholding pattern to ascertain contribution of key promoters and
identification of major shareholders
• Ascertainment of existing as well as proposed management structure and control
systems to ascertain whether promoters possess demonstratable professional
approach or not
• Ascertainment of experience and competence of key executives

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Appraisal of Promoters and Management by Lending
Institutions
• Difficult job as it involves a lot of intuition, objectivity and judgement on the part
of the appraiser
• Despite detailed information sought by the institutions, promoters’ appraisal in
case of new promoters is always subject to lots of uncertainties
• Lending institutions subject the information submitted by promoters and
promoters themselves to a thorough scrutiny and appraisal to ensure that their
money does not go to bad hands

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 Information Sought by Institutions Regarding Promoters
1. Promoters’ background in case of a new company
1.1 Main individual promoter Name, Age, Educational Qualifications, Address, Relevant
Industry Experience

Details of each of other companies promoted by/affiliated

with them; past performance for the last 3 years with
details of: Sales, Net Profit, Net Worth

1.2 Promoter companies In case borrowing company has been promoted by an

existing company:

Details are to be given about business operations,

background of individual promoter of the promoting
company, past performance for 5 years with details of:
Sales, Gross Profit, Operating Profit, Net Profit,
Share Capital, Net Worth
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 Information Sought by Institutions Regarding Promoters
1.2 Promoter companies Memorandum and articles of association; audited financial
statements for the past 5 years
1.3 Bank references Names of bankers with whom inquiries may be made
regarding the applicant concern, its promoters, all the
companies with which they are actively associated

For this purpose, letter may be addresed to the bank

before submitting the loan application authorizing them to
disclose the relevant information to any or all of the
lending institutions

Copies of the letters are to be enclosed with the loan

application form

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2. Background in case of an existing operating company
2.1 Brief history A brief history of the company including any changes in
name, business management and any mergers or
reorganization that took place in the past
2.2 Promoters’ background Name, Age, Educational Qualifications, Address, Relevant
Industry Experience
2.3 Past performance Summary of audited financial statements for past 5 years

2.4 Subsidiary companies A list of all subsidiary companies together with percentage
of holding in each
2.5 Holding company Name of the holding company, other subsidiary
companies under the holding company-- Paid up capital of
subsidiaries and percentage held by the holding company

2.6 Manufacturing facilities Description of manufacturing facilities separately at each

plant as follows : date of installation of plant and
machinery --major remodeling-- design capacity and
normal capacity-- specifications of products manufactured
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2.7 Major products Information on each product group as follows : name of major
product-- licensed capacity-- installed capacity-- production and
sales quantity and value
2.8 Location advantages Description of location advantages of the existing plant
2.9 Raw material, utilities and Details of existing requirement of raw materials, utilities and
services services and arrangement for their supply
2.10 Export sales Description of export sales over last 5 years
2.11 Insurance Description of items covered-- basis of insurance-- name of
insurer-- risk type covered
2.12 Litigation Details of pending litigation either by or against the company

2.13 Research and development Nature of activities-- total amount of capex--extent of

activity commercial exploitation

2.14 Tax status Year up to which company has been assessed for income tax--
details of unclaimed tax benefits

2.15 Existing debentures and long Purpose of loan– original amount—amount outstanding—rate of
term secured loan interest—any defaults in interest or principal repayment—
trustees for debenture holders– name of lending institutions
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• In both cases, new as well as existing operations, companies have to submit the following information :

3. Shareholding pattern

3.1 Shareholders owning 5% or A list of shareholders owning 5% or more equity shares and
more business relationship with them

3.2 Number of shareholders Total number of shareholders, equity as well as preference

3.3 Distribution of shareholdings Following details on the distribution of shareholdings only in

case of existing companies seeking borrowing:
Indian promoters; foreign collaborators; central
government; state government; financial institutions; banks;
public; with tabulations having equity and preference shares
Columns

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Key Appraisal Criteria for Promoters

• The institutions’ focus is on examining the following key factors in this area:

• Competence, industry experience, past track record, resourcefulness and

creditworthiness

• In case of existing borrowing company : details of past performance of business

operations, research and development, track record in debt service, existing
outstanding debt obligations and also justification of expansion project in case of
under-utilization of existing capacity

• Understanding of the project and past specific experience in that line of business

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Key Appraisal Criteria for Promoters

• Ability to market the proposed products and manage the unit

• Commitment to the project

• Shareholding arrangement among the promoters

• Assessment of approach of promoters towards professional management on the

basis of examination of management structure

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 Information Sought by the Institution
Regarding Management Structure

Board
1. Board of Directors
1.1 Members of the Name, Age, Address, Education
board Qualifications, Relevant industry
experience, Existing shareholdings (%),
Proposed shareholdings (%)
1.2 Affiliated/group Name, Nature of business, Details of
companies any of their financial dealings with the
applicant company, Turnover, Net
worth

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Existing Key Executives
2. Existing Key Executives
Details of existing key administrative, finance, marketing & technical
executives: Name, Age, Qualifications, Experience, Salary, Length of
service

Existing Personnel Other Than Key Executives

3. Existing Personnel Other Than Key Executives
Number of personnel employed in each existing plant in these
categories: Supervisor, Skilled Semi-skilled, Unskilled

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Proposed Arrangement for Executive Management
4. Proposed Organizational Setup
4.1 Qualification & Minimum qualification and experience
Experience expected of senior personnel proposed
for recruitment to be specified
4.2 Tentative Joining Indication of timing when the personnel
will be in position to join
4.3 Organizational Should indicate the function of each
Chart department, name & designation of each
officials (if already appointed) heading the
department

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Proposed Management Control System
5. Proposed Management Control System
Proposed note: Corporate Governance, Cost & budgetary control
system, internal audit, Management information system, Inventory
Control System, Purchase of raw material &components, Safeguards of
assets, etc.

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 Key Appraisal Criteria for Management
Institution’s focus is on examining the following key factors in this
area:

1) Directors, managers & executives

o Are they professional, experienced and competent?

2) Requirement & availability of further manpower

3) Proper organizational setup: existing as well as proposed

o Whether decision making is decentralized?

o Delegation of responsibilities

4) Adequacy of proposed management information & control system &

corporate governance 21
5) Comparison of other similar projects
Sundar Pichai
Introduced Google Chrome to the world,
in 2008. Finally after the gap of 11 years,
since he joined Google; he was selected as
the next CEO of Google on August 10,
2015. In December 2019 he also was
named CEO of Alphabet, replacing Larry
Page, who stepped down.
Satya Nadella
Nadella changed the company's direction
after becoming CEO of Microsoft.Under
Nadella Microsoft revised its mission
statement to "empower every person and
every organization on the planet to
achieve more". His key goal has been
transforming Microsoft's corporate
culture into one that values continual
learning and growth.
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 Precautions Taken by Financing Institutions

Following are the precautions while carrying out an appraisal for

promoters and management:

1. Borrower company to have a board-based board of directors:

o Should comprise of independent director

o Corporate governance is becoming crucial role in listed companies
Independent director ensure ethical conduct and professionalism

2. Corporate governance norms provided by SEBI should be put in place

3. Nominee director on the board to ensure safeguard of institutional

interest & participate in overall decision making
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4. Appointment of key executives at initial stage for big projects:

o Helps in developing executives knowledge & understanding

o Expectation of further improving management control structure
of the organisation

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 Role of Nominee Director
1) Should bring in attention of the board and its nominating institution
any undesirable practice / abuse of powers & privileges by promoters
group

2) Provide adequate feedback about the operations of the companies

on which he is presented

3) Should make suggestions for :

o Better management practice

o Effective functioning of board

o Improvement in production efficiency and

o Continued growth 25
Items to be brought before board

Nominee director should endeavour to see that:

1. Development of proper management information system

2. Providing regular feedback about company’s performance, prospects

and problems

3. Policy matters and developments related to performance of the

company should be brought in notice of the board

4. Information & reporting should focus on really critical factors rather

than becoming mechanistic exercise

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 Matters in which company is generally
required to obtain prior approval of
institutions
Nominee director should ensure that assisted company has
obtained/proposed to obtain the prior approval of institution before any
decisions related to the matter:

1. Appointment/re-appointment, change in terms of appointment of

MD, full time director/chairman/consultant

2. Appointment/ re-appointment, change in appointment of selling

agent

3. Proposal to undertake diversification/expansion programmes

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4. Proposal to make inter-corporate or other investments
5. Declaration of dividends

6. Proposal for changes in MoA/AoA

7. Proposal to raise additional funds (except for working capital)

8. Proposal to insuring company’s assets – insurers to be approved

9. Proposal to take any general trading activity other than sale of

company’s own products

10.Proposal for approval of transfer of company’s share from the

promoter’s group to others

11.Proposal for substantial changes in technical, managerial, financial &

commercial aspects of projects
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Significance of Appraisal of Promoters & Management

• Key consideration in appraisal and funding

• Backbone of the project
• Basic factor in projecting the success or otherwise of a project
• Basic factor behind deciding the institutional exposure and its extent
• In case of exposure, institutions may stipulate lower debt with higher
contribution from promoters and a higher rate of interest

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Case Study: Impact of Appraisal of Promoters on
Capital Structure
• Two companies Dome’s steels Ltd (DSL) and Kalyan Steels Ltd (KSL) approach IFLS
Ltd, a universal bank for financing of a new project similar in all respect and
costing Rs 275 crores
• IFLS has some reservation about the promoters of DSL due to their lack of
experience in steel industry and avg market performance of their other listed
group companies’ shares.
• Bank finances both the companies but stipulates different financing plans
Details DSL KSL
Debt- Equity ratio 0.75:1 1.6:1
Promoters' contribution (% of project cost) 35% 20%
Rate of interest on loan 15.50% 11.25%
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Impact of Stipulated Financial Plans on the Capital
Structure
DSL KSL
Sl no. Details Rs(cr) & Rs(cr) &
Data rates(%) rates(%)
A Cost of Project as given 275 275
Cost*(Debt/to
B Debt tal) 117.86 169.23
C Equity (total) A-B 157.14 105.77
Promoters contribution in 35% of A(DSL)
D equity 20% of A (KSL) 96.25 55
E Outside Equity C-D 60.89 50.77
Outside Equity available in
F proportion to total equity E/C 0.3875 0.48
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Final Capital Structure
Details DSL KSL
Proportion of Proportion of
Rs (cr) project cost Rs (cr) project cost
Equity:
(a) Promoters 96.25 0.35 55 0.2
(b) Outsiders 60.89 0.22 50.77 0.18
Total equity 157.14 0.57 105.77 0.38
Debt 117.86 0.43 169.23 0.62
Cost of Project 275 1 275 1

Disadvantages for DSL: A lower leverage and higher burden on the promoters’
resources

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Impact of Stipulated Financing Plans on Profitability
• Projected PBIT = Rs 54.5 crs for both the companies & tax rate = 31.5%
Sl.
No. Details DSL KSL
Rs(cr) & Rates Rs(cr) & Rates
Data (%) (%)
A 1st year's interest charge on debt Debt*int rate 18.27 19.04
Interest charge for DSL, had the rate Debt*KSL's int
B been 11.25% rate 13.26 NIL
C Relative excess interest cost for DSL A-B 5.01 NIL
D Projected PBIT as given 54.50 54.5
E Projected PBT D-A 36.23 35.46
F Taxation E*tax rate 11.41 11.17
G Projected PAT E-F 24.82 24.29
H Projected annual return on equity G/Equity 0.1579 0.2297
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Impact of Stipulated Financing Plans on WACC
• Rate of cost of equity for financial appraisal is 15% post tax
Sl. No. Details DSL KSL
Data Rs(cr) & Rates (%) Rs(cr) & Rates (%)
A Rate of cost of equity as given 0.15 0.15
B Equity as calculated 157.14 105.77
C Amount of cost of equity B*A 23.57 15.87
D Rate of interest on debt as given 0.155 0.1125
E Tax rate as given 0.315 0.315
F Rate of interest post tax (1-tax rate)* debt 0.1062 0.0771
G Debt as calculated 117.86 169.23
H Amount of interest cost net of tax G*F 12.51 13.04
I Total cost of capital (equity+debt) C+H 36.08 28.91
J Total capital B+G 275.00 275.00
G WACC post tax I/J 0.1312 34 0.1051
Adverse Impact of Financing Plans on the Overall
Financial of DSL
• Lower leverage advantage: debt of only Rs 117.86 cr. as against Rs169.23 cr. to
KSL
• Higher interest cost leading to a loss of Rs 5.01 cr.
• Higher promoters’ contribution and thus huge opportunity loss
• Amount of outside equity available quite low
• Higher WACC at 13.2% as against 10.52 in case of KSL
• Low returns of 15.79% on equity as against 22.96% in case of KSL

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IRR Spread
• It represents the difference of IRR over WACC
• Calculated to determine the profitability of the project to enable
• The promoter decide whether to take up the project or not
• The lending institutions decide whether to finance the project or not

IRR Spread Profitability Decision

Positive Profitable Yes
Zero No profit no loss No
Negative Loss making No

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Determination of IRR and IRR Spread
• Life of the project = 10 years
• Cash flows for 1st nine years is Rs 69.56 cr and Rs 83.31 cr for 10th year
Year Cash flow
0 -275
1 69.56 Details DSL KSL
2 69.56
3 69.56
IRR 21.98% 21.98%
4 69.56
WACC post tax 13.12% 10.51%
5 69.56
6 69.56 IRR Spread 8.86% 11.47%
7 69.56
8 69.56
9 69.56
10 83.31
IRR 21.98% 37