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Strategic Analysis of Resource Mobilization
in Power Finance Corporation Limited
SUMMITTED BY
VIVEK SINGH MEWAR
2nd
YEAR MBA
from
Amrapali Institute,Haldwani(Nainital) Uttarakhand
Carried out during
Summer Internship Programme
At
POWER FINANCE CORPORATION LTD.,
URJANIDHI, 1, Barakhamba Lane, Connaught Place, NEW DELHI110001
Under the guidance of
Mrs. Tabassum
Asstt.Manager (Finance)
Power Finance Corporation Ltd.
Start Date for Internship: 10th
June 09
End Date for Internship: 10th
August 09
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Self Certification by the Interns
I hereby certify that I, Vivek Singh Mewar have successfully completed my internship
with Power Finance Corporation. This is also to certify that this report is an original
product and no unfair means like copying etc have been used for its completion.
Vivek Singh Mewar
Signature:
Date:
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Certificate From the Summer Internship Providing
Organization
This is to certify that Mr.Vivek Singh Mewar has successfully completed his project on
Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited
during the period 10th June 2009 to 10th August 2009 for partial fulfillment of 2nd Year MBA
in Amrapali Institute,Haldwani (Nainital) Uttarakhand. We wish him all the best for all
his future endeavors.
Signature:
Date:
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ACKNOWLEDGEMENT
I express my deep sense of gratitude to our external guide Mrs. Tasbassum, Asstt.Manager
(Finance) Power Finance Corporation Ltd., for her valuable support and guidance given to
me through out the project. I consider myself lucky to have worked under her.
This project provided me a platform to increase my knowledge and empowered me with abetter understanding of concepts in the financial world scenario. And the most special thanks
to Power Finance Corporation who accepted me in spite of my inexperience in the field and
gave me the opportunity to work and learn with them.
Last but not the least I would like to thank my God and my ever loving and caring parents for
their ever encouraging words during my days of distress.
Vivek Singh Mewar
2nd
year MBA
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INDEX
I. Power finance corporation1.1 Introduction
1.2 Vision
1.3 Mission
1.4 Objectives
1.5Products & Services
1.6Borrowers profile
1.7Recent initiatives
1.8Accomplishments
1.9Future plans1.10Indian power sector
1.11Performance high lights
1.12Swot analysis
1.12.1 Strength
1.12.2Weakness
1.12.3Opportunities
1.12.4 Threats
1.13PFC business strategy
II. Structured debt instrument
2.1Step-up bonds
2.2Insured bonds
2.3Revenue bonds
2.4GARVEEs (Grant Anticipation Revenue Vehicles)
2.5Capital indexes bonds
2.6Range Notes
2.7Modifying the coupon of a bond
2.8Zero coupon bonds
2.9Floating rate bonds
2.10Inflation linked bonds
2.11Subordinated bonds
2.12Unsubordinated bonds
2.13Other variation
2.14Modifying the term to maturity of bond
2.14.1 Callable bonds
2.14.2 Puttable bonds
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2.14.3 Convertible bonds
III. Resource Mobilization Unit
3.1Introduction
3.2Rupees resources(Domestic)
Issue of bonds on Pvt. Placement basis
Pre issue activities
Post issue activities
3.3 Foreign currency resources (International)
3.4 PFCs Resource Mobilization
IV. Commercial Paper
V. Loans
5.1.1 Mibor Linked Loans
5.1.2 FCNR Bank Loans
5 .1.3 Short term loan (STL) &Medium term loan (MTL)
5.1.4 International Bonds
VI. Indian Debt Markets: as profile
6.1 Primary corporate debt Market
6.2 Secondary corporate debt Market
VII. Bench markets Reference Rate
7.1 LIBOR
7.2 EURIBOR
7.3 CCBOR
7.4 MIBOR
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VIII. Quarter wise analysis of investor category in PFCs borrowings (Bonds)
Year 2008 09
8.1 Quarter 1
8.2 Quarter 2
8.3 Quarter 3
8.4 Quarter 4
IX. MIBBOR interest rate scenario
X. External Commercial Borrowing
10.1 Introduction
10.2 External Commercial Borrowings (ECB) policy
XI. Suggestions & RecommendationsXII. Summary & conclusion
XIII. References
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Chapter I
POWER FINANCE CORPORATION (PFC)
1.1INTRODUCTIONPFC was incorporated in 1986 as a Financial Institution (FI) dedicated to Power Sector
financing and committed to the integrated development of the power and associated sectors.
The Corporation was registered as a Non Banking Financial Company by RBI in 1997. PFC
was declared as a Navratna PSE on 22nd June, 2007 by the Govt. of India, the highest
honour and recognition that any PSE aspires for in the country.
1.2 VISION
To be the leading Institution in Financing for substantial development of Indian Power
Sector and its linkages, with an eye on global operations.
1.3 MISSION
To become the most preferred Financial Institution in Power and Financial sector providing
best products and services; promote efficient investments in Power Sector to enable
availability of required quality power at minimum cost to consumers; reach out to global
financial system for financing power development; act as a catalyst for reforming Indias
Power Sector of tomorrow.
o To provide financial resources and encourage the flow of investments in power and
allied sectors
o To work as a catalyst to bring about institutional improvement in streaming the functions
of borrowers in the areas of financial, technical and managerial to ensure optimum
utilization available resources.
o To mobilize various types of resources viz. domestic and international
o To strive for up gradation of skill in power sector for efficient and effective growth in
power sector
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1.4 OBJECTIVES
To maximize the rate of return through efficient operations and introduction of innovative
financial instruments and services in power sector.
PFC was established with the sole objective of providing necessary funds in time at
competitive rates for implementation of power projects vis--vis development of various
power utilities and overall power sector. During the course of two decades of its journey,
PFC has developed extensive power knowledge, skills and expertise to provide solutions to
various problems faced by power utilities.
1.5 PRODUCT & SERVICES
PFC offers financial assistance through a range of products and services. Term loans,
however, continues to be the principal product. Over the years, PFC has been broadening its
product range, both in the power sector and financial services. While the financial services
include both fund based and non fund-based activities, the portfolio of power sector schemes
has been expanded to cover Non-Conventional energy projects.
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PFC, through regular interactions with the borrowers, understands their specific requirements
and develops suitable products. The new products/ services developed during the recent years
include the following.
Rupee Term Loans & Foreign Currency Loans/ Bridge Loans/ Short Term Loans ;
Reform-Linked Transitional Loans ;
Bill Discounting ;
Equipment Leasing ;
Buyers Line of Credit ;
Loans to Equipment Manufacturers ;
Line of Credit for the import of Coal ;
Debt Refinancing ;
Letters of Comfort ;Non-Fund Based Products Viz. , Deferred Payment Guarantees ;
Consultancy and Advisory Services
CONSULTING AND ADVISORY SERVICES
PFC is providing consulting and Advisory Services in the power and financial sectors to cater
to State Power Utilities / Electricity Regulatory Commissions, which also includes
Restructuring and Reform activities
Financial Management of resources
Project Management
Selection of Developers through Tariff based competitive bidding guidelines
HRD, MIS etc
Ultra Mega Power Project (UMPP) The government of India mandated PFC as nodal
agency to select the developer through competitive bidding
Consultancy Services Unit is providing assistance to over 35 Clients spread across over 20
States. Some of the assignments are repeat orders which exhibit the Clients satisfaction with
the services provided in the past. To augment the consultancy business, PFC separated its
consultancy unit as subsidiary company under name PFC Consulting Pvt. Limited .
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1.6 BORROWERSS PROFILE
State Power Utilities
State Power/ Electricity Departments
Central Power Utilities
Joint Sector Power Utilities
Private Sector Power Utilities
Co-operative Societies
Municipal Bodies
Power Equipment Manufacturers
1.7 Recent Initiatives:
Exploring possibilities of faster capacity addition through Special Purpose Vehicles.
Made a foray into renewable energy sector.
Extended tenor of loans up to 20 years for Hydro and 15 years for other schemes.
Policy for short term financial assistance for import of coal introduced
Expense limit increased for reforming GENCOS.
Short-term loan extended to TRANSCOS against receivable from DISCOMS.
Aims to capture a share of 20-25% of the total investment to be made in the Power
Sector during the Xth and XIth Plan period.
1.8 Accomplishments
First Developmental Financial Institution to introduce Operational and Financial Action
Plans to improve efficiency in the State Power Sector.
Long term financial resources to the power sector from multilateral agencies channelized
through PFC.
Tapped international financial markets to raise ECBs, setting benchmark rates for Indian
corporate.
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Complementing the efforts of Govt. of India, for its sponsored programmes Accelerated
Generation & Supply Programme and Accelerated Power Development & Reform
Programme. Introduced new tailor-made products and services like debt re-financing, interest
restructuring, funding to equipment manufacturers, short term loans, buyers' line of
credit and loans for asset acquisition.
1.9 Future Plans
Aims to capture a share of 20-25% of the total investment to be made in the Power
Sector during the 10th and 11th Plan period.
To consolidate and expand present business.
To introduce new financial initiatives such as Universal Banking Services, Insurance,
Equity Participation and Merchant Banking.
To spread into allied sectors.
To make a foray into global markets.
Diversification in terms of forward or backward integration in the power sector
(financing for fuel tie ups and laying down of gas pipelines).
1.10 Indian Power Sector
In the recent past, Indian economy has decisively moved to a higher growth trajectory
marked by GDP growth of above 8% during the last 5 years. During the XI Plan Period
(2007-2012) a growth target of 9% has been set by National Development Council, which
requires commensurate infrastructure in power, roads, ports etc. PFC as the dominant player
in the power sector, has a key role to play not only in the power sector but also in the
associated infrastructure sector. We are all aware that the demand for power has consistently
outstripped the supply. In order to bridge this demand supply gap, Govt. of Indias National
Electricity Policy (NEP) stipulates Power For All by 2012 and aims to achieve a per capita
consumption of 1,000 Kwh by the end of XIth Plan, by adding a capacity of over 1,00,000
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MW. This requires massive investment of over Rs.10,00,000 crore during this Plan period
including establishment of requisite transmission and distribution system.
The initiatives of the Govt. of India for adding the requisite capacity, have already started
yielding the desired results. A testimony to this is the commissioning of over 9,250 MW
capacity during the 1st year of the XIth Plan period, compared to about 21,000 MW
commissioned during all the 5 years of Xth plan. In addition, over 66,000 MW is already
under construction and will be supplemented by about 28,000 MW from renewable energy
sources and captive power plants. The above capacity addition programme excludes capacity
addition of 12,000 MW through UMPPs which has already been awarded and necessary work
is under progress for their commissioning in a phased manner in the initial years of XII Plan.
To provide thrust to investment in power sector, Govt. of India has announced setting up of a
`National Fund for Transmission and Distribution Reform in the Budget for FY 2008-09.
The proposed fund is expected to facilitate higher inflow of investment for strengthening and
augmenting the T&D network commensurate with the capacity addition programme and also
targets T&D loss reduction by providing grants on achievement of loss reduction, thus
benefiting the ultimate consumer in terms of reliable and quality power.
1.11 PERFORMANCE HIGHLIGHTS
With a glorious history of over two-decades, underscored by tangible accomplishments in
Indian power sector, PFC has firmly entrenched itself as a leading Financial Institution
through its knowledge, skills and expertise by providing innovative solutions to power
utilities. PFCs catalytic role in growth of the sector has catapulted it to the centre stage. This
has paved the way for its active involvement in a host of Government-sponsored initiatives
which include:
Ultra Mega Power Projects for economies of scale and deployment of Super Critical
Technology
Accelerated Power Development & Reform Programme (APDRP) for reduction of
AT&C losses
Merchant Power Plants to achieve the targeted capacity addition Assisting State Power Utilities in preparation of CDM projects for R&M of old
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Thermal and Hydro generation plants to enhance their life at rated capacity, Delivery
through Decentralised Management (DDM) to showcase model of
excellence in distribution primarily in rural areas,
Distribution, Reform, Upgrades & Management (DRUM) for commercially viable
distribution system for reliable and quality power etc.
Company had sanctioned Rs.1,86,419 crore and disbursed Rs.92,065 crore, by the end of
FY2007-08. It had supported a capacity addition of over 70,000 MW and about 33,000 MW
capacity has already been commissioned which is about 23% of the total installed capacity in
the country.
The Corporation witnessed yet another year of sterling performance and established new
benchmarks in various areas of its operation. The loans sanctioned for various projects
reached a figure of Rs. 69,498 crores, an increase of 123% over last year which shall pave the
way for higher disbursements in the years to come. The disbursement made during the year
reached a level of Rs. 16,211 crore, an increase of 15% over previous year. The Total Income
rose to Rs. 5,040 crore compared with Rs. 3,928 crore during the previous year representing
an increase of 28%. The Net Profit is up by 22% at Rs. 1,207 crore from Rs. 986 of previous
year. The Recovery Rate stood at 99.11% in respect of principal amount due and the net
NPAs have reduced to a record low of 0.01% of Net Loan Assets as on 31.3.2008.
PFC has been supporting reforms for overall improvement in the performance of State Power
Utilities. The Utilities are categorized based on the reform status, operational and financial
performance parameters which enable PFC to determine its credit exposure and differential
loan pricing mechanism. Quarterly Performance Research Report and the Annual Report on
Performance of State Power Utilities published by PFC is acknowledged as authoritative
source of information by various stakeholders in the Power Sector and also by State Power
Utilities who take corrective measures on the key issues flagged in the report to improve their
performance. The fact that PFC is a dominant player is amply substantiated by its market
share of over 20% in Indian Power Sector in terms of investment in the X Five Year Plan.
The Corporation is poised to take full advantage of the emerging opportunities in the power
sector.
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RECENT POLICY INITIATIVES
In order to keep pace with the emerging market requirements, the Company has taken several
new initiatives during the year under review. Some of the key policies introduced during the
year relate to financing of initial project development expenditure including land acquisition,
financing of grid-connected solar PV power generation projects, funding of energy saving
projects. In addition to this, policy and guidelines pertaining to lease finance scheme for wind
power projects, extent of funding for T&D projects, and payments terms for short-term loans,
were revised during the year.
1.12 SWOT ANALYSIS
1.12.1 STRENGTHS
o Indias leading power finance company catering to diverse needs of the high growth
power sector
o Govt. of India undertaking
o Good quality management
o Well established, Long standing relations in the power industry
o Implementing agency for Government schemes like AG &SP and APDRP
o Highest credit rating for domestic debt and capped by the sovereign rating for long-term
foreign debt
o High collection efficiency with implementation of Operational and Financial Action Plan
to ensure SEB discipline
o Strong financials with high net margins.
1.12.2 WEAKNESSES
o Poor asset quality with most of the lending to SEBs, whose loan repayment capabilities
in the long run is doubtful
o Concentration risk attributed to lending in single sector
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o Significant shortages in the supply of crude oil, natural gas or coal could adversely affect
the Indian economy and the power sector projects to which PFC has exposure, which
could adversely affect PFC
1.12.3 OPPORTUNITIES
Power sector presents significant investment opportunities
Sector expertise for consultancy and providing investment gateways for domestic and
external financial agencies
New business opportunities to cover the entire range of activities in the Power sector
1.12.4 THREATS
o REC has also been allowed to disburse funds to whole power sector whose operations
were, hitherto before, were restricted to rural areas. It diluted PFCs competitive edge.
o With increasing exposure to SEBs, their weak balance sheet may affect PFCs
creditworthiness
o Currently, borrowers of PFC are unable to attract other sources of funding. If the reform
program is successful, and these entities become creditworthy, PFCs ability to lend
against quality assets would be weakened.
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1.13 PFC BUSINESS STRATEGY
Figure 2-2 PFC BUSINESS STRATEGY
IMPLEMENTATION OF GOVERNMENT POLICIES AND PROGRAMMES
PFC, a Government Company, occupies a key position in government plans for the growth
and development of the Indian power sector. PFC had played and will continue to play a key
role in the implementation of government policies and programmers. PFC is acting as a
nodal agency to implement various policies and programmers of the GoI such as Accelerated
Power Development & Reform Program (ARDRP), Accelerated Generation & Supply
Programmers (AG&SP), Distribution Reform, Upgrades and Management (DRUM),
Delivery through Decentralized Management (DDM), Rural Electrification Initiative.
PFC had also provided value to its clients by improving their operational and managerial
capabilities and also by assisting them in their reform and restructuring programmes.
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PROMOTING REFORM & RESTRUCTURING OF STATE POWER UTILITIES BY PFC
State Entity Action Plans - Reform Operational and Financial Action Plans (R-OFAP) are
formulated in consultation with utility concerned for developing a scheme for
improvement of the entities technical and financial performance; preparing a financial
package where funding is linked to the entity reaching specified targets and goals, it
also focuses on self-sustainability of the sector in the long run.
Initiative towards Reforms and Restructuring - PFC has been acting as a catalyst and
promoting reforms for over all improvement in the financial and technical performance
of the State Power Utilities.
It brings out a research report containing key operational and financial performance
parameters, reform status, implementation of Electricity Act 2003, areas of concern and
conditions for improvements on quarterly basis and is sent to the stakeholders flagging the
key issues for review and corrective measures.
GROWTH STRATEGIES
State Sector financing to continue to be mainstay with focus on enhanced funding of
Private Sector
Loan Syndication for Large projects
Expansion of borrowers portfolio to cover various fuel suppliers for power generation
like coal, lignite, oil & gas companies etc
To focus on non-Conventional Energy Sources like Wind Power, Biomass etc and
Energy Conversation and Energy Efficiency projects.
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Chapter II
STRUCTURED DEBT INSTRUMENTS
Debt instruments represent contracts whereby one party lends money to another on pre-
determined terms with regard to rate of interest to be paid by the borrower to the lender, the
periodicity of such interest payments, and the repayment of the principal amount borrowed.
The terms of lending can be varied to arrive at innovative debt instruments to attract wider
investor base.
2.1 Step-up Bonds
In this kind of bonds the coupon rate increases over time. The bond structure could be so
designed where in the coupon rate would be x % for first few years and then x + y % for the next
few years and so on. It provides incentive to the investors to hold on to the bond for a longer
duration. (Ex: IDBI Growing Interest Bond (1999-2000)).
2.2 Insured Bonds
In this kind of instrument principal and coupon interest is insured by an insurance company. The
deal is so worked out that the bond holder is paid by the insurance company in case of default or
delay in payment.
2.3 Revenue Bonds
These kinds of bonds are issued for enterprise financing that is secured by the revenues generated
by the completed projects themselves. These bonds can be typically linked to each most secured
project/proposal available.
2.4 GARVEEs (Grant Anticipation Revenue Vehicles)
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These bonds are issued by large transportation/infrastructure projects where cost of debt is lesser
than cost of delay.
2.5 Capital Indexed Bonds
These kinds of bondshave two components of Coupon Rate. First is the base coupon rate and
latter part is linked to some benchmark rate, which could be rate of inflation. This benchmark
could be anything inflation, crude oil prices etc. Typical advantage of this kind of bonds is that
they reduced the uncertainty related to the benchmark rate. Ex: RBI issued first ever 5 yr Capital
Indexed Bonds on Dec 29, 1997 for Rs. 704.52 Cr having a base coupon of 6%..
2.6 Range Notes
These are those securities which have floating rate bound within a specific range. If the reference
rate crosses a particular range the coupon rate becomes zero. (Reference rate is LIBOR).
2.7 Modifying the Coupon of a Bond
In a plain vanilla bond, coupon is paid at a pre-determined rate, as a percentage of the par value
of the bond. Several modifications to the manner in which coupons/ interest on a bond is paid are
possible.
2.8 Zero Coupon Bond
In such a bond, no coupons are paid. The bond is instead issued at discount to its face value, at
which it will be redeemed. There are no intermittent payments of interest. When such a bond is
issued for a very long tenor, the issue price is at a steep discount to the redemption value. Such a
zero coupon bond is also called a deep discount bond.
2.9 Floating Rate Bonds
Instead of a pre-determined rate at which coupons are paid, it is possible to structure bonds,
where the rate of interest is re-set periodically, based on a benchmark rate. Such bonds whose
coupon rate is not fixed, but reset with reference to a benchmark rate, are called floating rate
bonds. Some floating rate bonds are also have caps and floors, which represent the upper and
lower limit within which the floating rates can vary. A ceiling or a cap represents the maximum
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interest that the borrower will pay, should the benchmark rate move above such a level. Most
corporate bonds linked to the call rates, have such a ceiling to cap the interest obligation of the
borrower, in the event of the benchmark call rates rising very steeply. Floating rate bonds,
whose coupon rates are bound by both a cap and floor, are called as range notes, because the
coupon rates vary within a certain range.
2.10 Inflation linked BondsIn these bonds the principal amount is indexed to inflation. The interest rate is lower than for
fixed rate bonds with a comparable maturity. However, as the principal amount grows, the
payments increase with inflation. The government of the United Kingdom was the first to issue
inflation linked Gilts in the 1980's. Treasury Inflation-Protected Securities (TIPS) and I-bonds are
examples of inflation linked bonds issued by the U.S. Government.
2.11 Subordinated Bonds
These have a lower priority than other bonds of the issuer in case of liquidation. In case of
bankruptcy, there is a hierarchy of creditors. First the liquidator is paid, then government taxes,
etc. The first bond holders in line to be paid are those holding what is called senior bonds. After
they have been paid, the subordinated bond holders are paid. As the expectation that you get
paid back is lower, the risk is higher. Therefore, subordinated bonds have a lower credit rating
then senior bonds. The main examples of subordinated bonds can be found in bonds issued by
banks, and asset-backed securities. The latter are often issued in tranches. The senior tranches
get paid back first, the subordinated tranches later
2.12 Unsubordinated Bonds
In addition to the credit quality of the issuer, the priority of the bond is a determiner of the
probability that the issuer will pay you back your money. The priority indicates your place in
line should the company default on payments. If you hold an unsubordinated security and the
company defaults, you will be first in line to receive payment from the liquidation of its assets.
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2.13 Other Variations
The structures that enable the borrowers to defer the payment of coupons can also be created.
Some of the more popular structures were : (a) deferred interest bonds, where the borrower
could defer the payment of coupons in the initial 3 to 7 year period; (b) extendible reset bond,
in which investment bankers reset the rates, not on the basis of a benchmark, but after re-
negotiating a new rate, which in the opinion of the lender and borrower, represented the rate of
the bond after taking into account the new circumstances at the time of reset.
2.14 Modifying the Term to Maturity of a Bond
2.14.1 Callable Bonds
Bonds that allow the issuer to alter the tenor of a bond, by redeeming it prior to the original
maturity date, are called callable bonds. The inclusion of this feature in the bonds structure
provides the issuer the right to fully or partially retire the bond, and is therefore in the nature of
call option on the bond. Since these options are not separated from the original bond issue,
they are also called embedded options. A call option can be an European option, where the
issuer specifies the date on which the option could be exercised. Alternatively, the issuer can
embed an American option in the bond, providing him the right to call the bond on or anytime
before a pre-specified dated.
2.14.2 Puttable Bonds
Bonds that provide the investor with the right to seek redemption from the issuer, prior to the
maturity date, are called puttable bonds. The put options embedded in the bond provides the
investor the right to partially or fully sell the bonds back to the issuer, either on or before pre-
specified dates. The actual terms of the put option are stipulated in the original bond indenture.
2.14.3 Convertible Bonds
A convertible bond provides the investor the option to convert the value of the outstanding
bond into equity of the borrowing firm, on pre-specified terms. Exercising this option leads to
redemption of the bond prior to maturity, and its replacement with equity. At the time of the
bonds issue, the indenture clearly specifies the conversion ratio and conversion price.
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Chapter III
Resource Mobilization Unit
3.1 Introduction
Resource Mobilization Unit (RMU) is responsible for raising fund resources both in domestic
for further disbursement as financial assistance to its customers. RMU also undertakes
various activities like appointment for various agencies like RTA, Trustees, IPA, Collecting
and Paying Banker for coordinating the resource mobilizing process. It is also responsible for
listing for various debt instruments on NSE.
The main objective of the RM department is to mobilize resources/raise funds at the
minimum cost and the easiest terms and conditions keeping in mind the requirements,
objectives and the financial position of the company.
The fund requirement for carrying out disbursement varies from year to year. In 2000-2001,
the disbursement was amounting to Rs. 3230 Crores. In the year 2005-2006 PFC achieved a
disbursement level of as high as 9870 Crores, a three-fold increase. Thus, in order to keep
pace with the increasing level of disbursement needs, the RMU has to keep itself occupied
and vigilant to tap the markets for smooth operations of the company.
It generally funds assets, comprising loans to the power sector, with borrowings of various
maturities in the international and domestic market. Market borrowings include bonds, short
term loans, medium term loans, long term loans, and commercial papers. Since 1999, all
funds raised, both domestic and international, have been raised on an unsecured basis and we
have no outstanding secured loans as on March 31, 2008 The following table sets forth debt-
funding operations for total indebtedness classified by rupee denominated and foreign
currency source at March 31, 2002, 2003, 2004, 2005,2006,2007 and 2008. The Rupee
equivalents of foreign currency debts are based on the bank- selling rate at the end of each
fiscal year.
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The company segments the market into two:
Domestic and
International
3.2 Rupee resources (Domestic)
In terms of the domestic resource, a significant proportion of Rupee funds are raised through
privately placed bond issues in the domestic market and term loans. It has a diverse investor
base of banks, financial institutions, mutual funds, insurance companies, provident fund trusts
and superannuation trusts. The bonds issued are unsecured, redeemable, non-convertible,
non-cumulative and taxable and are listed on the wholesale debt market segment of the NSE.
The bonds are rated LAAA by ICRA and AAA by CRISIL, the highest safety domestic
ratings.
In fiscal 1988, the ministry of finance authorized public sector issuers that were infrastructure
oriented to issue tax-exempt bounds. The corporation historically has been given a large shareof this annual allocation and a large portion of the funds were raised through tax-exempt
bounds. From fiscal 2001 onwards, it became part of governments overall policy to reduce
funding support to companies that had became financially independent and that could raise
resource at competitive rates at their own. After this time, direct support from the
Government of India for raising debt reduced. As on march 31, 2007, corporation had
Rs.2,800 million in tax-exempt bonds outstanding.
In addition as on march 31, 2007, corporation had Rs. 1015000 million in non-exemptbounds and Rs. 350000 million in term loans from Indian banks and financial institutions.
In fiscal 2006, PFC issued Rs. 1,340 million worth of infrastructure bounds, on a private
placement basis, which were issued with tax benefit under section 88 of the income tax Act,
1961. These tax benefits made the bonds attractive to individuals and Hindu Undivided
Familys.
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Portfolio during 07-08
During the Financial year 07-08 the RMU was able to mobilize enough funds to meet the
disbursement targets. However it raised lesser amount of funds as compared to the amount of
funds which were estimated in the borrowing plan for the financial year due to the revised
disbursement targets. The majority of the funds in the financial were raised by the bonds
(unsecured, non-convertible). The RMU was also able to mobilize around 50% of the funds
requirement by the way loans having maturities ranging from 6 months to 5 years.
Borrowings during
FY 2008-09 (in %age) Commercial
Paper
10%
Short Term
Loan
6%
Long Term
Loan25%
Bonds
59%
Commercial Paper
Short Term Loan
Long Term Loan
Bonds
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Issues of bonds on private placement basis.
a) Pre issue activity
Statutory Guidances
in r/o issue of bonds
on Private placement
Preparation of
information
Memorandum
presentation of
financial and
market data
Forward lookingstatements
Risk factors
Board approval and
uploading on NSE Web
site on WDM Segments
A. Registrar and Transfer Agent
B. Trustees
C. Collection Bankers
D. Merchant Bankers
E. Issuing & Paying agent
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b) Post Issue Activities
Fig 2.3: Post Issue Activities
Borrowing Plan/ Fund
Requirement from TMU
Analysis of liquidity
and market scenario
Assessment of AL&RM positionfor fixation of tenure
Decision on type of
Bond Issue
Tenor Coupon RateFixed/
Floating
With/ Without
Arranger
Plain Vanilla
/Swap
Launch of Bond Issue
Receipt of Funds/
Application Forms
Closure of issue
Allotment of Bonds
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3.3Foreign currency resources (International)
PFC began accessing foreign currency loans from multilateral, bilateral and export credit
agencies in fiscal 1991 when it obtained funds from the French government, which were
guaranteed by the government of India. Subsequently, it obtained a complementary financing
loan from the Asian Development Bank in fiscal 1991, which was denominated in US Dollars
and Japanese Yen. Traditionally, major foreign currency borrowing has been from
multilateral institutions such as the World Bank and the ADB. These funds were routed
through government of India, were the foreign exchange risk was borne by government of
India.
PFC first accessed commercial foreign currency borrowings that were not guaranteed by the
Government of India in January 1997 with the establishment of a syndicated loan facility.
Since then, corporation has borrowed funds in the international commercial markets in the
form of syndicated loans as well as fixed and floating rate note/bonds issues. This has
enabled PFC to diversify the investor base.
At present the corporation is borrowing directly from these agencies, where foreign exchange
risk is borne by the corporation. PFC has a US$50 million line of credit facility with the ADB
that has a 20 year tenure. This line of credit facility is guaranteed by the government of India.
Projects in the states of west Bengal and Maharashtra for strengthening the transmission and
distribution systems of state Power utilities and for the renovation and modernization of
thermal power plant are being funded this line of credit facility.
The 3 main decisions taken by Resource Mobilization department are:
i. When to raise Funds and for what tenure.
ii. Instruments to be used for raising these funds.
iii. Pricing of the debt raised.
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i ) When to raise funds
The RM Unit has to decide when will it be most conducive to raise funds for the company so
as to ensure there is:
a. Timely availability of funds.
b. Lowest Cost at which funds can be raised.
c. Least pressure for obligations.
The amount of funds to be raised is normally decided by the Treasury Management Unit. The
RM Unit prepares a Liquidity Statement to find out the time for raising funds when there is
least pressure for obligations for the company. Liquidity Statement shows the funds inflows
and outflows of the company. The following factors are taken into consideration while
preparing it:
Amount ofDisbursement that has to be made.
Interest Payments.
Repayment of loan taken by the company.
Taxes, Dividends, etc.
Funding Sources:
PFC generally fund their assets, comprising loans to the power sector, with borrowings of
various maturities in the international and domestic markets. Their market borrowingsinclude bonds, short term loans, medium term loans, long term loans, and commercial papers.
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ii) Instruments to be used for raising funds:
Debt instruments are obligations undertaken by the issuer of the instrument as regards certain
future cash flows representing interest and principal, which the issuer would pay to the legal
owner of the instrument. Debt instruments are of various types. They are:
a. Money Market Instruments: The term money market refers to the market for
short-term requirements and deployment of funds. Money market instruments are
those instruments, which have a maturity period of less than one year. The most active
part of the money market is the market for overnight and term money between banks
and institution (called call money) and the market for repo transactions. The main
traded instruments are commercial papers (CPs), certificate of deposits (CDs) and
Sources of Funds
Debt Equity
Short Term
Domestic International
Commercial Paper
FCNR (B)
Loan
ICD
ECB
Multilateral Loans
ECAs
Taxable & Non
Taxable Bonds
FCNR (B) (Fixed &
LIBOR Linked)
MIBOR
Linked
Fixed
Rate
Loans
Long Term to
Medium Term
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treasury bills (T-Bills). All of these are discounted instruments i.e. they are issued at a
discount to their maturity value and the difference between the issuing price and the
maturity/face value is the implicit interest. These are also completely unsecuredinstruments. One of the most important features of money market instruments is their
high liquidity and tradability. A key reason for this is that these instruments are
transferred by endorsement and delivery and there is no stamp duty or any other fee
levied when the instrument changes hands. Also there is no tax deducted at source
from the interest component.
b. Long term Debt Instruments: These are the instruments having a maturity
exceeding one year. The main instruments are Government of India securities
(GOISEC), State Government securities (state loans), Public Sector bonds (PSU
bonds), corporate debentures, etc.
Most of these are coupon bearing instruments i.e. interest payments (called coupon)
are payable at pre specified dates called coupon dates. At any given point of time,
any such instrument has a certain amount of accrued with it i.e. interest which has
accrued (but is not yet due) calculated at the coupon rate from the date of the last
coupon payment. E.g. if 30 days have elapsed from the last coupon payment of a 14%
coupon debenture with a face value of Rs.100, the accrued interest will be
100*0.14*30/365 =1.15
Whenever coupon-bearing securities are traded, by convention, they are traded at a
base price with the accrued interest separate. In other words, the total price would be
equal to the summation of the base price and the accrued interest.
iii) Pricing of the Issue: The unit has to keep a number of factors into consideration to
decide upon the price of the instruments and loan facilities it wish to avail.
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The factors considered by the company normally are:
Liquidity Position of the company
Present Benchmark Rates
Primary / Secondary Market Conditions
Timing of issue or raising
Quantum of funds to be raised
Liquidity in the debt market
Other Economic and market consideration
3.4 PFCs Resource Mobilization
PFC has initially made forays into the debt market to raise long-term funds through Tax-free
Bonds / SLR Bonds / Taxable Bonds. With the gradual withdrawal of budgetary support from
Govt of India and to keep up the high growth rates of disbursement, PFC diversified and looked
at the other long term sources like Rupee Term Loans from Term Lending Institutions/Banks/
Other Financial Intermediaries and Vanilla / Structured Taxable Bond Issuances. The preferred
mode of issuance has been private placement.
As the resource requirement for PFC is growing to keep up its disbursement growth rate it
needs to penetrate into the market by diversifying its investor base and also issuing innovative
debt Instruments to attract wider investor base. Some of the alternatives to diversify investor base
and debt instruments, PFC can look at the following strategies: -
Investor Base
The typical Investors in PFCs Paper have been the investors as detailed below. PFC can look at
penetrating into these segments more exhaustively and comprehensively
Banks FIs
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Mutual Funds
Provident Funds
Insurance Companies
PFC can also look at the other potential Investors as detailed below to diversify and add to its
investor base.
Regional Rural Banks
State Co-operative Banks & Scheduled Urban Co-operative Banks
State Financial Corporations
State Industrial Development Corporations
State Small Industries Development Corporations
Housing Finance Corporations
NBFCs
FIIs
Charitable Institutions, Trusts and Societies
Autonomous Bodies/Local Authorities
Primary Dealers
Corporates High Net worth Individuals
PFC has already written letters to most of the untapped investor base mentioned above to
indicate their interest in investing in PFC. Further, to build relations with Investors we are in
touch with them to handle any queries if any and have been sending information about PFC like
annual reports, intermediate financial results etc.
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Chapter IV
COMMERCIAL PAPER (CPs)
Commercial paper (CP) is an unsecured debt instrument of up to 365 days' maturity issued by
investment-grade corporations. CPs are issued by corporations/banks to finance their short-term
credit needs such as account receivables and inventories, to provide bridge financing in
connection with various transactions, and for day-to-day cash management. Despite this active
new-issue market, secondary trading is thin, consisting primarily of trades between the major
dealers and investors who wish to liquidate their holdings. In addition to having limited liquidity,commercial paper is subject to default. Hence, the difference in expected returns between a long-
term position in commercial paper and a strategy of rolling over shorter-term paper will reflect
not only the usual premia that compensate investors for interest-rate risk, but also premia to
compensate for default risk.
Chapter V
5.1 LOANS
5.1.1 MIBOR LINKED Loans
The benchmark index incase of these kinds of short terms instruments is Mumbai Inter-bank
Offer Rate (MIBOR). This instrument typical involves linking of interest rates to MIBORX
basis points. These kind of loans are one of the most cheapest source of finance
5.1.2 FCNR Bank Loans
FCNR (B) loans are a low cost, short-term funding source available to Indian Corporates.
Banks have been permitted to provide foreign currency denominated loans to their
customers from the resources mobilised under the FCNR (B) scheme. RBI granted this
permission to help banks to deploy their FCNR funds in a more commercially viable manner
and make available a better avenue of credit at cheaper interest rates to resident
borrowers. No special permission is required from the regulatory authorities for availing
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FCNR (B) loans and the existing rupee credit limits can be converted into a foreign currency
loan. The interest rates and the tenor of the loans are left free to be decided by negotiation
between banks and borrowers. They are generally granted for periods Upto three years.
Normally, loans under this scheme are not given for an amount less than USD 100,000.
Loans are generally denominated in the four currencies in which FCNR deposits are
accepted viz. US Dollar, Euro, Japanese Yen and Pound Sterling, the US Dollar being the
most popular currency of choice. In recent times, FCNR (B) loans have been the preferred
route for many Corporates especially with regard to their working capital requirements.
Even though Commercial Paper (CP) can be used to raise low cost funding, it is not possible
for all corporates to issue CPs due to the requirement of an acceptable credit rating for the
purpose. While the introduction of the scheme has placed a low cost funding option at the
disposal of Indian corporates, they have to deal with two types of risks when they avail such
loans.
Foreign exchange risk - risk of rupee depreciation against the currency of loan as the
principal and the interest have to be repaid in the foreign currency in which the loan is
denominated.
Interest rate risk - risk of the benchmark interest rate (LIBOR) being reset higher
e.g. one year loan with interest rate fixing (reset) every three months).
Therefore, the borrower has to take note of the fact that the loan is an advantage only
when the overall cost of borrowing (cost of forward forex cover + interest cost) in foreign
currency is less than the rupee cost of funds.
5.1.3 SHORT TERMS LOANS (STL) & MEDIUM TERM LOANS (MTL)
STLs & MTLs are loans which are available from banks. These kinds of loans normally carry a
prepayment clause but are hardly ever exercised. Typical advantage of STLs & MTLs is that it
can be drawn in tranches and according to requirement and constitutes no carrying costs. These
loans are to be repaid on a monthly basis and annualized cost is slightly higher than the indicative
cost of the Term Loan.
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Apart from the above sources of finance PFC can look into tapping the funds from other sources
such as Mutual funds, Insurance firms etc. In this regard process has been initiated with Life
Insurance Corporation (LIC) of India Limited for tapping their funds.
4.1.4 INTERNATIONAL BONDS
a) Euro bonds
b)Foreign bonds
a) Euro Bonds
Euro bond refers to the bonds issued and sold outside the home country of the currency of
issue. For e.g. a dollar bond issued in Europe is called euro dollar bond. Euro bonds are
simultaneously sold in many countries other than the country of currency in which the issue
is denominated. These bonds are issued in international market and denominated in hard
currency i.e. dollar, yen, pound, euro. Euro bonds in particular are bearer securities, the
names of the bearer are not registered anywhere. Euro bonds generally unsecured debt
securities maturing atleast a year after launch. Euro bonds are long-term loans usually having
a maturity period between 5 years to 30 years. Nowadays euro bonds have a maximum
maturity period of 10 years. The euro bonds may be fixed or floating rate bonds. Eurobonds
are suitable sources of finance for operations, which require:
Large capital sums of money for long period
Borrowing not subject to domestic regulations especially exchange controls, which may
limit their ability to export capital gains.
b) Foreign Bond
A bond issued in a particular country by a foreign borrower (or) a bond sold by a foreign
borrower, denominated in the currency of country in which it is sold and is underwritten &
syndicated by national underwriting syndicate in the lending country .Foreign bonds are
floated in the domestic capital markets (and are in the domestic currency of those markets) by
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non-resident entities. These bonds are different from Euro bonds in the sense that they are
governed by the regulations of the country in which they are issued whereas Euro bonds are
not. The bonds are generally named on the basis of the\ capital markets in which they arefloated. Some of the well-known foreign bonds are as follows:
Yankee Bonds: Yankee bond is a dollar denominated bond issued in U.S by a non-
U.S. borrower in the U.S. market. The advantages of Yankee bonds are that the longer
maturities of bonds place them outside the ECB ceiling. Yankee bond markets are
extremely deep and liquid market and funds are available at low interest rates for long
maturity periods. The US markets are not bound by rigid syndicates and fee
structures.
Samurai bond: Samurai bonds are yen denominated bonds issued in Japan by a
non-Japanese borrower.
Bulldog bonds: Bulldog bonds are pound denominated bonds issued in U.K.
domestic market by a non U.K. borrower.
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Chapter VI
Indian Debt Markets: A Profile
Indian debt markets, in the early nineties, were characterized by controls on pricing of assets,
segmentation of markets and barriers to entry, low levels of liquidity, limited number of
players, near lack of transparency, and high transactions cost. Financial reforms have
significantly changed the Indian debt markets for the better. Most debt instruments are now
priced freely on the markets; trading mechanisms have been altered to provide for higher levels
of transparency, higher liquidity, and lower transactions costs; new participants have entered
the markets, broad basing the types of players in the markets; methods of security issuance, and
innovation in the structure of instruments have taken place; and there has been a significant
improvement in the dissemination of market information.
Regulator's
SEBI,RBI,DCA
MARKET SEGMENT ISSUER INSTRUMENT INVESTOR
SOVERIGN ISSUE
PUBLIC SECTOR
PRIVATE SECTOR
Central Govt.
State Govt.
Comm Banks/DFIs
PSUs
Govt. Agencies &Stat. Bodies
Corporates
Pvt. Sector Banks
GOI dated security,T-Bill, State Govt.
Security, Index Bond,
Zero Coupon Bond
Govt. Guaranteed Bonds/Debentures
PSU Bonds,Debenture, CP
CD, Bonds,Debenture
CD, Bonds,Debenture,CP
PCDs, Bonds,Debenture, CP, SPN,Floating Rate Notes
RBI
DFI
BANK
PENSION FUND
FIIs
CORPORATES
INDIVIDUALS
PROVIDENT FUND
INSURANCE Co.,TRUST, MUTUAL
FUND
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6.1 Primary Corporate Debt Market
Market structure consists of issuers, instruments, processes, investors, rating agencies and
regulatory environment.
A. Issuers - Indian Debt Market has almost all possible variety of issuers as is the case in
many developed markets. It has large private sector corporate, public sector undertakings
(union as well as state), financial institutions, banks and medium and small companies.
B. Instruments - Till recently Indian debt market was predominantly dominated by plain
vanilla bonds. Over a period of time, many other instruments have been issued. They
include partly convertible debentures (PCDs), fully convertible debentures (FCDs), deep
discount bonds (DDBs), zero coupon bonds (ZCBs), bonds with warrants, floating rate
notes (FRNs) / bonds and secured premium notes (SPNs).
C. Processes - There are several processes that are in vogue in India as well as in other
markets. The more popular ones are public issue and private placement routes. The
dominance of private placement in total issuances is attributable to the following factors -
Under private placement, the deals can be tailor made to suit requirements of both the
issuer and the investor.
The mandatory lengthy issuance procedure for public issues, in particular, the
information disclosure requirements, was not applicable to private placement.
It is observed that private placement route generally involves lower issuance costs.
D. Intermediaries - Two classes of intermediaries required for the proper development of
debt market are broker and investment banker/ merchant banker. Most of the brokers as
well as merchant bankers in India are inadequately capitalized and their professional
knowledge also needs further improvement.
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E. Investors - For the development of Corporate Debt Market / Fixed Income Securities
Market, it is necessary and sufficient to have a large as well as diverse number of
sophisticated / institutional investors.
F. Rating agencies - India has a well developed Credit Rating Agency system and rating
agencies are well experienced and regarded. By and large, their ratings do carry
confidence in the market.
6.2 Secondary Corporate Debt Market
Appropriate micro-structure of secondary market is vital for trading, clearing and
settlement. The present infrastructure has its own merits and demerits. Some of the micro
structure features are discussed below:
A. Trading PlatformCorporate debt instruments are traded either on bilateral agreement
between two counterparties or on a stock exchange through brokers. Worldwide, the
majority of transaction in corporate bonds is conducted in the over-the-counter (OTC)
market by bilateral agreements. In India corporate bonds are traded (ANNEXURE 1),
mostly, on WDM segment of NSE. The National Stock Exchange (NSE) introduced a
transparent screen- based trading system in the whole sale debt market, including
government securities in June 1994. The wholesale debt market (WDM) segment of NSE
has been providing a platform for trading / reporting of a wide range of debt securities.
The WDM trading system, known as NEAT (National Exchange for Automated
Trading), is a fully automated screen based trading system, which enables members
across the country to trade simultaneously with enormous ease and efficiency.
B. Clearing and Settlement Mechanism - Primary responsibility of settling trades
concluded in the WDM segment rests directly with the participants and the exchange
monitors the settlement. Mostly these trades are settled in Mumbai. Each transaction is
settled individually and netting of transactions is not allowed.
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C. Investors in WDM - large investors and high average trade value characterize this
segment. Till recently the market was purely an informal market with most of thetrades
directly negotiated and stuck between various participants. The commencement of this
segment by NSE has bought transparency and efficiency to the debt market, along with
effective monitoring an surveillance to the market.
D. Regulatory Environment - listed corporate debt is under the regulations of SEBI. SEBI
is involved whenever there is any entity raising money from individual investors through
public issue/private placement. It regulates the manner in which such money are raised
and tries to ensure a fair play for the retail investor.
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Chapter VII
Benchmarks Reference Rate
A good benchmark reference rate provides the pulse and direction of the market for the day
as it is collated in early market hours from important market participants who Weigh their
options on various factors that would likely to drive their lending and borrowing business
during the course of the day. The important factors include, among others, information on
liquidity condition in the market, demand and supply condition, central banks likely support
to the market, money flows in and out of the market, general rates prevailing in the short term
markets, inflation rate updates, important policy directives, etc. A good benchmark rate
should garner the respect of the market participants and used widely in. LIBOR (London
Inter Bank Offer Rate) disseminated by British Banks Association is one of the most
important and widely used benchmark reference rate in the world. Many central banks also
disseminate reference rates like Repo/Reverse Repo rates. A dynamic benchmark reference
rate is a very important infrastructural support to the market participants in financial markets.
This is important as all derivative pricing is done on the basis of the reference benchmark
rates. The benchmark reference rate is an interest rate closely followed by market participants
in pricing their products and using the same while executing various other transactions. An
ideal benchmark rate plays a useful role not only in the short term market but also helps inpricing of complex products like derivatives. Some of the most followed benchmark rates are
-
7.1LIBOR - The London Interbank Offered Rate is a daily reference rate based on the
interest rates at which banks offer to lend unsecured funds to other banks in the London
wholesale money market (or interbank market). LIBOR will be slightly higher than the
London Interbank Bid Rate (LIBID), the rate at which banks are prepared to accept deposits.
During 1984 it became apparent that an increasing number of banks were trading actively in a
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variety of relatively new market instruments, notably Interest Rate Swaps, Foreign Currency
Options and Forward Rate Agreements. Whilst recognizing that such instruments brought
more business and greater depth to the London Interbank market, it was felt that futuregrowth could be inhibited unless a measure of uniformity was introduced. In October 1984
the British Bankers' Association working with other parties such as the Bank of England
established various working parties, which eventually culminated in the production of the
BBAIRS terms - the BBA standard for Interest Swap rates. Part of this standard included the
fixing of BBA Interest Settlement rates, the predecessor of BBA LIBOR. From 2 September
1985 the BBAIRS terms became standard market practice. BBA LIBOR fixings did not
commence officially before 1 January 1986, although before that some rates have been fixed
for a trial period commencing in December 1984. LIBOR is published by the British Bankers'
Association (BBA) after 11:00 am (and generally around 11:45 am) each day, London time,
and is a filtered average of inter-bank deposit rates offered by designated contributor banks,
for maturities ranging from overnight to one year. There are 16 such contributor banks and
the reported interest is the mean of the 8 middle values. The shorter rates, i.e., up to 6 months,
are usually quite reliable and tend to precisely reflect market conditions. The actual rate at
which banks will lend to one another will, however, continue to vary throughout the day.
7.2EURIBOR - The Euro Interbank Offered Rate is a daily reference rate based on the
averaged interest rates at which banks offer to lend unsecured funds to other banks in the euro
wholesale money market (or interbank market). EURIBOR rates are used as a reference rate
for euro-denominated forward rate agreements, short term interest rate futures contracts and
interest rate swaps, in very much the same way as LIBOR rates are commonly used for
Sterling and US dollar-denominated instruments. They thus provide the basis for some of the
world's most liquid and active interest rate markets. Domestic reference rates, like Paris'
PIBOR or Frankfurt's FIBOR merged into EURIBOR on EMU day on 1 January 1999. A
representative panel of banks provide daily quotes of the rate, rounded to two decimal places,
that each panel bank believes one prime bank is quoting to another prime bank for interbank
term deposits within the Euro zone, for maturity ranging from one week to one year. Every
Panel Bank is required to directly input its data no later than 10:45 a.m. (CET) on each day
that the Trans-European Automated Real-Time Gross-Settlement Express Transfer system
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(TARGET) is open. At 11:00 a.m. (CET), Reuters will process the EURIBOR calculation and
instantaneously publish the reference rate on Reuters pages 248-249, which will be made
available to all its subscribers and to other data vendors. The published rate is a rounded,truncated mean of the quoted rates: the highest and lowest 15% of quotes are eliminated, the
remainder are averaged and the result is rounded to 3 decimal places. EURIBOR rates are
spot rates, i.e. for a start two working days after measurement day. Like US money-market
rates, they are Actual/360, i.e. calculated with an exact day count over a 360-day year.
EURIBOR was first published on 30 December 1998 for value 4 January 1999.
7.3CCBOR - CCIL released its Collateralized Benchmark Reference Rates
(CCBID/CCBOR) with effect from March06. The rates were derived out of orders placed in
the Collateralized Borrowing and Lending Obligations (CBLO) market. CBLO segment has
been in the forefront of the short term market for a long time and it leads the other short term
markets like Repo and call in setting up the rates. It is the largest short term market in terms
of volume. The CCBID/CCBOR rates are leased at 10.10AM on the basis of the orders
received in CBLO market by 10.00AM.
7.4MIBOR - It is one of the most widely used benchmark reference rate, MIBOR (Mumbai
Inter Bank Offer Rate), is disseminated by National Stock Exchange since 1998 and has been
most widely accepted benchmark rate. The MIBOR has been widely used in the IRS (Interest
Rate Swaps) contracts. The same is popularly known as FIMMDA-NSE-MIBOR/MIBID.
Many banks, finance companies and financial institutions have issued MIBOR-linked
deposits/papers. NSE MIBOR has been designed to give the overnight clean reference rate
and generally tracks the call market. The basic design behind the said rate is the polling
methodology. Rates are polled from the traders over phone as to what rate they would quote
to borrow or lend Rs.500 million in the overnight call money market. Thirty three banks and
primary dealers are polled on daily basis at 9.30 AM for overnight rate and at 11.30 AM for
term rates. The average rate with lowest standard deviation is taken as the reference rate for
the market. However, a boot strapping is used if there are sufficient rates polled in order to
derive multiple average rates with their respective standard deviations. However, the traderscan wrongly quote the rate as there is no compulsion on the polled trader to correctly give a
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quote and do a deal on the said rate. NSEIL disseminates 4 MIBOR/MIBID rates daily:
overnight, 14-day, 1-month and 3-month (ANNEXURE). However, only overnight
benchmark is relevant and widely used while other rates are not relevant as most of the days,it receives very few rates from polled members.
Characteristics of MIBID/MIBOR
Unbiased -The function of forecasting is more meaningful as the information comes
from a source, which is not only reliable but has no vested interest of its own in the
market movements.
Market Representation - It is based on rates polled by NSE from a representative
panel of 33 banks/ primary dealers.
Transparent - The reference rate is released to all the market participantssimultaneously through various media, making it transparent with the aspiration of the
market. Ensuing transparency helps the market participants to judge the market mood
and the probable rate one is likely to encounter in the market.
Reliable - The high level of co-relation between actual deals and the reference rate
gives an indication of its reliability. The bootstrapping technique guards against the
possibility of cartelisation and of extreme observations influencing the mean.
Scientifically Computed - The methodology of "Polling" with "Bootstrapping" is
scientific and the values are generated through a system that has been extensively
tested. The technique involves generating multiple data sets based on the rates polled
with a dynamically determined number of iterations, identification of outliers,
trimming the data set of its extreme values and computation of the mean and its
standard deviation.
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Elimination of Noise - The trimming procedure is vulnerable to market manipulation
of the rates due to the amount of sampling noise. Excessive trimming may lead to loss
of information whereas no trimming may lead to excessive influence of the extreme
values. To derive a true representative benchmark for the market NSE ensures that
after trimming at least 14 data points should remain in observation for the bid and for
the ask rates.
Consistency - The Exchange ensures that everyday the FIMMDA-NSE MIBID
MIBOR along with the respective standard deviations are disseminated.
Panel of Participants
Call Money Market
The major parties in the call money market are :
RBI - It regulates the call money market by changing the various reserve requirements
which has to be maintained by the banks and also by way of injecting and absorbing
money from the market (Liquidity Adjustment Facility).
Banks - These are the major players of the call money market. They borrow and lend
money in this market to meet their money demands and park the excess funds.
Primary Dealers - A primary dealer is a bank or securities broker-dealer that are
appointed by Reserve Bank of India. They are required to make bids or offers when the
RBI conducts open market operations. At present there are around 18 primary dealers
appointed by RBI (ANNEXURE).
NSE - It disseminates the benchmark reference rate which is the most widely used
benchmark reference rate, MIBOR (Mumbai Inter Bank Offer Rate), is disseminated
since 1998 and has been most widely accepted benchmark rate.
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CBLOs - CBLO segment has been in the forefront of the short term market for a long
time and it leads the other short term markets like repo and call in setting up the rates. It is
the largest short term market in terms of volume.
Parties in Call Money Market
RBI
PRIMARYDEALERS
CBLOs
NSE
BANK
CALL MONEYMARKET
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Chapter VIII
Quarter wise analysis of investor category in PFCs
borrowings (Bonds) Year 200809
8.1 Quarter I of Financial Year 200809
RBI has undertaken various measures, to curb the money supply and credit growth in the
economy and in turn ease the demand side pressures on inflation. However, the measures
didnt dampen the credit deployment activity. The various measures announced by RBI have
only increased the cost of borrowing for banks. As regards the availability of funds/liquidity
is concerned, there exists a cushion in form of the LAF Repo window. Under this window the
RBI continues to provide liquidity to the market on a daily basis. The RBI has hiked CRR by
125bps since April 2008. This has roughly amounted to a total absorption of Rs 47,000 cr
from the system. This roughly matches the amount infused in money markets through the
LAF Repo window. It implies that measures undertaken by RBI, largely in form of CRR
hikes, have only raised borrowing cost of banks and not reduced the availability of liquidity.
The banks are funding their loan books by, borrowing under the LAF window at a higher cost
and submitting securities from their existing portfolios as collateral. The
Any one of the measures considered above will no doubt increase the cost of borrowing
substantially for all the market participants. It had the desired impact on banking systemthrough rise in both deposit and lending rates and decline in availability of funds for credit.
But at the same time, it had impacted the primary dealers severely, through rise in their cost
of funding.
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During the said quarter PFC had enough liquidity to match the required liquidity. As PFC
was not desperately need of funds and market looked uncertain about the interest rate PFCventured in to the market with innovative structure which PFC which PFC had never tried
before. PFC launched floating MIBOR based bonds for the limited period of 3 years. The
MIBOR based bond was a huge success and PFC could mobilize good amount of funds. As
PFC had a long borrowing programme during the FY 2008-09 PFC had launched a proper
vanilla type bond issue in multiple segment of 3,5 and ten years at the market benchmark
rate. The issue too was a great success. PFC had mobilized 17.19% of the total funds
mobilized through bonds during FY 2008-09.
Qtr 1 Distibution
Limited
Company
18%
Mutual Fund
5%
Co operative
Bank
3%
Bank
21%Pension/Provid
ent/Superannua
tion/retirement
Fund
28%
Insurance
Companies
25%
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8.2 Quarter II of Financial Year 200809
The second quarter of 2008-09 (July-September) commenced with easing of liquidity
conditions mainly on account of a decline in the cash balances of the Central Government.
Accordingly, the call rate declined sharply and moved within the informal corridor of reverse
repo and repo rates in the first week of July 2008. Subsequently, the call rate edged above the
repo rate on most of days of the month, reflecting the two-stage CRR hike of 25 basis points
each (effective from the fortnights beginning July 5 and July 19, 2008, respectively) to 8.75
per cent. The average call rate was 8.76 per cent during July 2008. On a review of the
macroeconomic and monetary conditions, the First Quarter Review of the Annual Statement
on Monetary Policy for 2008-09 announced a 50 basis points hike in the repo rate (to 9.0 per
cent) effective July 30, 2008 and 25 basis points hike in the CRR (to 9.0 per cent) effective
the fortnight beginning August 30, 2008. The liquidity conditions mostly remained in a
deficit mode during July-August 2008 and accordingly the call rate hovered around the repo
rate. The average call rate was 9.10 per cent during August 2008.
During the second quarter of 2008-09 (up to September), scheduled commercial banks
(SCBs) increased their deposit rates for various maturities by 25-150 basis points. Interest
rates offered by public sector banks (PSBs) on deposits of maturity of one year to three years
increased from the range of 8.25-9.50 per cent in June 2008 to the range of 8.75-10.25 per
cent in September 2008. Interest rates of private sector banks on deposits of maturity of one
year to three years increased from the range of 8.00-9.50 per cent to the range of 8.30-10.50
per cent, while the deposit rates of foreign banks on maturity of one year to three years
increased from the range of 3.50-9.75 per cent to the range of 3.50-10.50 per cent during the
same period
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Monetary
In the second quarter, the primary business i.e. disbursement of loans to the lenders gained
some momentum and more over the debt servicing requirement was huge hence, the need for
the funds was felt by Corporation. PFC came up with multiple bond issues for period of 3,5,7
and 10 years tapping all segments. PFC had mobilized and amount of Rs 6206.60 Crs during
the period which also includes the record issue maximum subscription received by anycorporation in India. The subscription received under the bond issues mobilized during the
period, Banks had topped the list subscribing 34% of the bond issues. Pension funds, gratuity
funds superannuation fund retirement funds had also participated largely in the said issues.
Corporation had mobilized around 48.46% of the total funds mobilized through bonds during
the FY 2008-09.
Qtr II Distibution
Limited
Company
14%
Mutual Fund
11%
Co operative
Bank
3%
Bank
34%
Pension/Provid
ent/Superannua
tion/retirement/
gratuity Fund
26%
Insurance
Companies
12%
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8.3 Quarter III of Financial Year 200809
This quarterly review is set in the context of a deteriorating global economic outlook and
heightened uncertainty about the global financial sector. In fact, there has been a rapid and
marked downturn in the global economic outlook since the Reserve Banks Mid-term Review
in October 2008. The continued bad news from large international financial institutions on a
regular basis renews concerns as to when the global financial sector might attain a semblance
of stability.
The initial hope that the crisis could be contained in the financial sector has been belied.
With all the advanced economiesthe US, Europe and Japanfirmly in recession, the crisishas fully transmitted from the financial sector to the real economy. The loss of confidence in
the global financial markets has set off a chain of deleveraging, declining asset values, falling
income, contracting demand and rising unemployment. Governments and central banks
around the world are responding to the crisis with bold and unconventional initiatives. Even
so, there is a contentious debate on whether these measures are adequate and appropriate, and
when, if at all, they will begin to have an impact.
RBI MONETARY POLICY 2008-09 REMAIN UNCHANGED IN THIRD QUARTER
The Bank Rate has been kept unchanged at 6.0 per cent.
The repo rate under the LAF has been kept unchanged at 5.5 per cent.
The reverse repo rate under the LAF has been kept unchanged at 4.0 per cent.
The Reserve Bank has the flexibility to conduct repo/reverse repo auctions at a fixed rate or
at variable rates as circumstances warrant.
The cash reserve ratio (CRR) of scheduled banks has been kept unchanged at 5.0 per cent of
NDTL.
Liquidity Facilities
The Reserve Bank has allowed banks to avail liquidity support under the LAF for the purpose
of meeting the funding requirements of mutual funds (MFs), non-banking financial
companies (NBFCs) and housing finance companies (HFCs) through relaxation in the
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maintenance of SLR up to 1.5 per cent of their NDTL. Second, a special refinance facility for
scheduled commercial banks (excluding RRBs) was provided by the Reserve Bank on
November 1, 2008 under Section 17 (3B) of the RBI Act, 1934 up to 1.0 per cent of eachbanks NDTL as on October 24, 2008. Both these facilities are currently available up to June
30, 2009. In order to ensure that banks continue to have flexibility in their liquidity
management operations in the current market conditions, it has been decided:
To extend both the refinance facilities up to September 30, 2009.
The Government and the Reserve Bank also initiated a host of measures to increase capital
inflows and improving liquidity conditions. On September 22, 2008, the limit for borrowers
in the infrastructure sector for availing external commercial borrowing (ECB) was increased
to US$ 500 million per financial year from the earlier limit of US$ 100 million per financial
year for rupee expenditure for permissible end-uses under the approval route. The all-in-cost
ceiling for ECBs over average maturity of seven years was increased by 50 basis points to
450 basis points over 6-month LIBOR. On October 8, 2008, ECB policy was further
liberalised by including development of the mining, exploration and refinery sectors in thedefinition of Infrastructure sector.
On a review of the liquidity conditions, particularly in the context of the deterioration in the
global financial environment, the Reserve Bank announced a reduction of the cash reserve
ratio (CRR) by 250 basis points to 6.50 per cent with effect from the fortnight beginning
October 11, 2008. The Reserve Bank decided to conduct 14-day repo under the LAF at 9.0
per cent per annum for a notified amount of Rs.20,000 crore on October 14, 2008 with a view
to meet the liquidity requirements of mutual funds. It was also decided to conduct this repo
every day until further notice to a cumulative amount of Rs.20,000 crore for the same
purpose. Furthermore, the restriction on lending against certificates of deposits (CDs) and
buy back of CDs was relaxed for a period of 15 days with effect from October 14, 2008, only
in respect of CDs held by mutual funds.
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In view of the continuing global financial market uncertainties and their indirect impact on
Indian financial markets, the Reserve Bank announced a host of measures on October 15,
2008. First, it was decided, purely as a temporary measure, that banks may avail of additionalliquidity support exclusively for the purpose of meeting the liquidity requirements of mutual
funds to the extent of up to 0.5 per cent of their net demand and time liabilities (NDTL). This
additional liquidity support would terminate 14 days from the closure of the special term repo
facility announced on October 14, 2008. This accommodation was made available in
addition to the temporary measure announced on September 16, 2008 thereby permitting
banks to avail of additional liquidity support to the extent of up to 1 per cent of their NDTL.
Second, the Reserve Bank instituted a mechanism of Special Market Operations (SMO) for
public sector oil marketing companies in June-July 2008 taking into account the then
prevailing extraordinary situation in the money and foreign exchange markets. The Reserve
Bank announced on October 15, 2008 t