financial advisory report - hindustan petroleum
TRANSCRIPT
FINANCIAL ADVISORY REPORT
Strictly Private & Confidential
Development of Common User Facilities
Prepared by:
SBI CAPITAL MARKETS LIMITED 202, Maker Tower ‘E’, Cuffe Parade, Mumbai 400 005 Tel. (022) 22178300, Fax (022) 2216 0379 / 2218 8332
Website: www.sbicaps.com A Subsidiary of State Bank of India
June 2014
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IMPORTANT NOTICE
This Financial Advisory Report (‘FAR’) is strictly confidential and accordingly, this FAR and its contents
are on the basis that they will be held in and with complete confidentiality. By accepting a copy of this
FAR, the recipient agrees to keep its contents and any other information, which is disclosed to such
recipient, confidential and shall not divulge, distribute or disseminate any information contained herein,
in part or in full, without the prior written approval of SBI Capital Markets Limited (“SBICAP”). The
recipient also agrees to indemnify SBICAP against any claims that may arise as a result of a breach of
any confidentiality arrangement, which governs the contents of this FAR.
This FAR has been prepared for the internal use of consortium of PSU Oil Marketing Companies
(“OMCs”) led by M/s. Indian Oil Corporation Limited (“IOCL”) and may contain proprietary and
confidential information. The FAR has been prepared for taking internal financial approvals and the
same should not be used for purposes other than those specified in the FAR. This FAR has been prepared
by SBICAP, inter alia on the basis of the information and documents available in the public domain, data
made available by the OMC officials and in-house databases available to SBICAP as a part of its
professional practice and, which SBICAP believes to be reliable. SBICAP has not carried out any
independent verification for the accuracy or truthfulness of the same.
This FAR constitutes an opinion expressed by SBICAP and each party concerned has to draw its own
conclusions on making independent enquiries and verifications and SBICAP cannot be held liable for any
financial loss incurred by anyone based on this report. Further, on accepting a copy this FAR, the
recipient accepts the terms of this Notice, which forms an integral part of this FAR and the recipient shall
be deemed to have agreed to indemnify SBICAP against any claims that may be raised against SBICAP
as a result of or in connection with the data and opinions presented in this FAR.
The delivery of this FAR at any time does not imply that the information in it is correct as of any time
after the date set out on the cover page hereof, or that there has been no change in the operation,
financial condition, prospects, creditworthiness, status or affairs of the subject or anyone else since that
date. Further, capital costs and operating expenditures are subject to uncertainties concerning the effects
that changes in legislation or economic or other circumstances may have on future events, and different
people may have a different view in future. There will usually be differences between projected and
actual results because events and circumstances do not occur as expected, and those differences may be
material. Under the circumstances, no assurance can be provided that the assumptions or data upon
which any Projections have been based are accurate or whether these business-plan Projections will
actually materialize.
Neither SBICAP, nor State Bank of India or any of its associates, nor any of their respective directors,
employees or advisors make any expressed or implied representation or warranty and no responsibility
or liability is accepted by any of them with respect to the accuracy, completeness or reasonableness of
the facts, opinions, estimates, forecasts, Projections, or other information set forth in this FAR or the
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underlying assumptions on which they are based or the accuracy of any computer model used and
nothing contained herein is, or shall be relied upon as a promise or representation regarding the historic
or current position or performance of the OMCs’ or their affiliates, or any future events or performance
of the OMCs’ and their affiliates.
This FAR is divided into sections & sub-sections only for the purpose of reading convenience. Any partial
reading of this FAR may lead to inferences, which may be at divergence with the conclusions and
opinions based on the entirety of this report. Neither this Report, nor the information contained herein,
may be reproduced or passed to any person or used for any purpose other than stated above.
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Contents IMPORTANT NOTICE ............................................................................................................................................. 1
1. BACKGROUND ................................................................................................................................................ 6
1.1 SCOPE OF WORK FOR SBICAP .................................................................................................................... 7
2. COMMON USER INFRASTRUCTURE FACILITY .................................................................................... 8
2.1 EXISTING BILATERAL PRODUCT EXCHANGE & PRODUCT PURCHASE ARRANGEMENT ................................ 8 2.2 NEW FACILITY CONSTRUCTED AS CUF BY ONE OF THE OMCS .................................................................... 8 2.3 BILATERAL ARRANGEMENT FOR IMPLEMENTING CUF UNDER BOO/BOOT ............................................... 9 2.4 CUF TO BE IMPLEMENTED BY SPV ............................................................................................................ 10 2.4.1 SPV PROMOTED BY ONE OF THE OMC INITIALLY AND JOINED BY OTHERS AT LATER STAGE ..................... 10 2.4.2 SPV INCORPORATED AS JV COMPANY WITH PARTICIPATION OF ALL THE OMCS ....................................... 10
3. COMMON USER FACILITY IMPLEMENTATION BY SPV .................................................................. 12
3.1 CONSTITUTION OF ENTITY ......................................................................................................................... 13 3.1.1 GOVERNMENT V/S NON-GOVERNMENT COMPANY .................................................................................... 13 3.1.2 OTHER ASPECTS OF SPV FORMATION ........................................................................................................ 15 3.1.3 PRIVATE SECTOR PARTICIPATION IN THE SPV ........................................................................................... 16 3.2 BUSINESS MODEL OF THE ENTITY .............................................................................................................. 17 3.2.1 AWARDING BUSINESS TO SPV COMPANY .................................................................................................. 17 3.2.2 REVENUE SOURCES FOR SPV ..................................................................................................................... 18 3.2.3 LIABILITY OF THE SPV .............................................................................................................................. 19 3.2.4 PROJECT IMPLEMENTATION METHODOLOGY ............................................................................................. 19 3.2.5 TAXATION ASPECTS ................................................................................................................................... 20 3.2.6 RETURNS FROM PROJECTS ......................................................................................................................... 20 3.3 CAPITAL STRUCTURE & FUNDING OPTIONS ............................................................................................... 21 3.3.1 EQUITY FUNDING OPTIONS ........................................................................................................................ 21 3.3.1.1 EQUITY INFUSION BY PROMOTERS ........................................................................................................ 22 3.3.1.2 PRIVATE EQUITY PLACEMENT ............................................................................................................... 22 3.3.1.3 INITIAL PUBLIC OFFERING ..................................................................................................................... 23 3.3.2 DEBT FUNDING OPTIONS ........................................................................................................................... 23 3.3.2.1 KEY CONSIDERATION FOR DEBT FUNDING: ............................................................................................ 23 3.3.2.2 DEBT FINANCING - OPTIONS .................................................................................................................. 23 3.4 SEPARATION OF MANAGEMENT & CONTROL ............................................................................................. 24 3.5 STRUCTURE OF JV COMPANY .................................................................................................................... 25
4. THE SPV COMPANY FORMATION ........................................................................................................... 28
4.1 KEY STEPS IN SPV FORMATION ................................................................................................................. 28 4.2 KEY TERMS OF REFERENCE FOR STEERING COMMITTEE............................................................................ 28 4.3 KEY STEPS FOR JV INCORPORATION .......................................................................................................... 30
5. SUMMARY OF OMCS DISCUSSION ON CUF IMPLEMENTATION .................................................. 31
5.1 POL FACILITIES CONSIDERED FOR IMPLEMENTATION UNDER CUF ............................................................ 31 5.2 OPERATIONALIZATION OF CUF: ................................................................................................................ 31
ANNEXURE –I: FUNDING CONSIDERATIONS ............................................................................................... 34
ANNEXURE II: BOOT AND BOO PROJECTS ................................................................................................... 37
ANNEXURE –III: FUNDING OPTIONS .............................................................................................................. 39
ANNEXURE IV: SUMMARY OF DISCUSSION ON CUF IMPLEMENTATION BY SBU’S ....................... 45
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Definitions/Abbreviations AoA Articles of Association
BOO Build - Own - Operate
BOOT Build - Own -Operate - Transfer
BOT Build - Operate - Transfer
BPCL Bharat Petroleum Corporation Ltd
CAG Comptroller and Auditor General of India
CCD Compulsorily Convertible Debenture
CCEA Cabinet Committee on Economic Affairs
CCPS Compulsorily Convertible Preference Share
DPE Department of Public Enterprises
ECA Export Credit Agency
ECB External Commercial Borrowing
HPCL Hindustan Petroleum Corporation Ltd
IOCL Indian Oil Corporation Ltd
IOTL IOT Infrastructure and Energy Services Limited
IPO Initial Public Offering
JBIC Japan Bank for International Co-operation
JPY Japanese Yens
JV Joint venture
K-Exim Korea Exim bank
MLA Funding and Multilateral Agencies
MoA Memorandum of Association
O&M Operations & Maintenance
OMCs Oil Marketing Companies
POL petroleum/oil/lubrication
POL Infrastructure facilities Terminal /Depots/LPG Bottling Plant/AFS
PSE Public Sector Enterprises
PSUs Public Sector Undertakings
RoC Registrar of Companies
RTL Rupee Term Loans
SBICAP SBI Capital Markets Limited
SPV Special Purpose Vehicle
USD US Dollars
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1. BACKGROUND
The public sector Oil Marketing Companies (OMCs), viz. Indian Oil Corporation Ltd. (IOCL), Bharat
Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL) are primarily
responsible for the marketing and distribution of petroleum products in India. OMC’s requires a robust
supply chain to cater to the growing energy requirement of Industries as well as domestic. OMC’s set up
POL Infrastructure facilities (Terminal /Depots/LPG Bottling Plant/AFS) across India to manage supply
of products. POL infrastructure forms the backbone of Oil Marketing Companies energy supply chain.
Presently most of the POL facilities are owned and operated by OMCs and at each of the major demand
centers, each OMC establishes their own infrastructure to cater its market demand. Typically these
facilities stores similar products and are located in the same vicinity/city/town. This leads to duplication
of facilities of similar nature at a single demand center. Additionally in the current industrial scenario of
increased concern over the maintenance and Fire and Safety, duplication of facilities also leads to
increased capex as well as maintenance cost
Currently the OMC’s share the infrastructure facilities through a Bi-lateral Product Exchange & Product
Purchase arrangement (Hospitality Arrangement) where one OMC can use the POL facilities of another
OMC based on bilateral agreement. The key limitations for this arrangement are as:
These facilities are planned as per OMC’s own demand requirements and may lead to supply
issues during peak season due to capacity constraints
It’s under a bilateral arrangement and there is no formal mechanism at industry level
Duplication of facilities leads to underutilization of infrastructure/resources on industry level.
To address these concerns, a cohesive approach is needed while planning future expansion/creation of
new POL infrastructure facilities and OMCs proposes to develop the same as common user facilities
(Terminals/Depots/LPG Bottling Plants). The key motivation is to rationalize the Capex requirements for
developing these facilities as well as operating the same in most cost effective & efficient manner. These
facilities would be primarily for captive usage by three OMCs and surplus capacity would be available to
all the industry players on payment of rentals for infrastructure usage.
To optimize the utilization of refining and marketing infrastructure by developing CUF will help in
eliminating wasteful duplication of investment. In this regard, the OMCs are looking for various options
for implementing such arrangement including forming a Special Purpose Vehicle company (SPV) for the
purpose.
Consortium has appointed SBI Capital Markets Limited (“SBICAP” or the “Financial Advisor”) on
assisting the consortium to take the process forward.
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1.1 Scope of Work for SBICAP
SBI Capital Markets Limited (SBICAP) envisages the following scope of work for providing advisory
services to the OMC consortium with IOCL as the coordinator:
Evaluate various options for creating of Common User Facility Infrastructure
Preliminary analysis of JV/SPV Structure
Suggest Terms of Reference for OMC’s implementing CUF structure
Outline the Capital Structure & Funding Options for the agency implementing CUF
Assist in creation of JV company
Develop the Business Plan for SPV, evaluate funding requirement, suggest funding plan for the
same
The above broadly outlines the scope of work and one or more steps may not be required during the
course of action. The deliverables based on above would be dependent on the information provided by
the OMC’s.
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2. COMMON USER INFRASTRUCTURE FACILITY
This chapter review the existing arrangements for sharing POL infrastructure facilities and provide
overview of various options available for implementing the Common User Facility (CUF). The structures
suggested in the chapter have also been deliberated during the joint meeting of OMCs.
2.1 Existing Bilateral Product Exchange & Product Purchase Arrangement
Presently this arrangement is used for meeting OMCs product supply requirement in the markets where
they do not own infrastructure facility. This is a bilateral arrangement between the facility owner and
offtaker OMC and as such its’ not mandatory/ no centralized arrangement is there for the same. One such
option is to formalize the same at industry level and continue with it.
The merits of the option are:
No new infrastructure is required to be set up and smooth control can be established through a central
cell with representative of three companies.
Improved utilization of currently under-utilized facilities
The key limitations of the same are as follows:
Existing facilities were planned based on individual Company’s demand projections. Thus limited
Infrastructure availability limits the additional free capacity available in future years.
In case of old installations where the capacity utilization is nearing peak and future demand growth
for owner may result into supply constraints for the hospitality partners.
In view of above it may not be a reliable mechanism from long term perspective and may lead to
duplication of facilities in future.
2.2 New facility constructed as CUF by one of the OMCs
To address the capacity constraints mentioned in above case, new facilities may be set-up by one of the
OMC as CUF i.e. with surplus capacity for catering other OMCs demand. Other OMCs may use the same
by payment of Terminalling charges.
Operationally this would be similar to the existing hospitality arrangement but at the same time will
remove supply uncertainties faced by other OMCs due to discretions exercised by facility owner and in
rationalizing capex requirements for a particular location. This arrangement would require the off-taker
OMCs to enter into binding agreement with the owner OMC for ensuring minimum utilization of
Infrastructure facilities (Minimum Guaranteed Volume (MGV)). Limitations of the above arrangement
are as:
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Timing difference in the individual OMCs demand projections and timing facility implementation
coupled with absence of any centralized arrangement makes it difficult to implement.
This arrangement can primarily be applied only for the new locations to be developed.
One of the key requirements for such arrangement would be determination of Terminalling charges to be
paid by the user. Currently there are defined charges which are being paid by the OMCs under hospitality
arrangements. However this being a new facility with specific capacity being created for the defined uses,
the charges may differ from those being paid under hospitality arrangement.
2.3 Bilateral arrangement for implementing CUF under BOO/BOOT
Two or more OMCs can come together and establish a common user facility for a specific
location/requirement. Either the OMCs can share resources and build it the CUF themselves or the same
can be awarded on BOO/BOOT contract. Under this arrangement, OMC would be owner of the product,
transfer the custody of product at the facility boundary to the CUF operator, use services for of the
facility, pay Terminalling charges and take back custody of the product in the desired parcel size at the
facility boundary. In other words BOO/BOOT contractor shall act as custodian for the product and
provide storage, safety and security services for the products and in consideration receives Terminalling
charges from OMCs. One such example is IOCL & BPCL jointly developing Raipur POL facility by way
of engaging IOT Infrastructure and Energy Services Limited for developing the Common User Terminal
on Build Own Operate (BOO) basis.
The key advantages of this arrangement are as:
Reduction in (upfront) investment/capex requirements and optimum utilization of POL infrastructure.
Land acquisition for the facility is generally a time consuming process, can be expedited by the third
party offering BOO/BOOT services.
Operationally this would be similar to Hospitality arrangement except that during the contract period,
ownership & operatorship of the facility would be with third party and all the user(s) would be
paying rentals for facility usage.
The limitations of this arrangement are as:
In absence of centralized planning and this being only a bilateral arrangement, duplication of
facilities cannot be avoided. Such arrangement would be on case to case basis and shall result into a
localized model for each and every location.
In case the facility is being set up using BOO/BOOT model by two users, the capacity limitation
would restrict the third party usage of terminal in future, similar to capacity constraints in the
Hospitality Arrangement.
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In case of more than one companies is involved, difficulties would be faced in arriving at consensus
location for establishing the infrastructure facility
Thus the above model may be particularly useful in case where more than one OMCs POL facilities need
resitement or more than one company want to set-up such facilities in a new area. In the resitement cases,
one of the key challenges to be addressed while opting for above arrangement would be redeployment of
existing manpower.
At the same time, in absence of formal mechanism, this option doesn’t fully address the issue of
duplication of facilities.
2.4 CUF to be implemented by SPV
In order to overcome the above mentioned limitation of centralised planning the facilities, CUF may be
implemented by a Special Purpose Vehicle (SPV), incorporated for the purpose and promoted by OMCs.
The same can be implemented under two options:
2.4.1 SPV Promoted by one of the OMC initially and joined by others at later stage
Under this model, a Special Purpose Vehicle Company is incorporated initially as subsidiary of one of the
OMC. SPV implements the project based on requirements of owner and other OMCs who later also takes
equity stake in the SPV.
The key advantage of above approach is implementation of Project by a third party incorporating needs
of all the participants/users and centralised control over the implementation and documentation by one
agency. However the approach would have following limitations:
SPV is initially incorporated as subsidiary of one of the OMC, which may affect the independent
decision making for the SPV
Choice of upcoming CUF location may not be optimum
For OMCs’ joining at a later stage, equity premium and management control rights will have to be
decided
Further implementation of CUF under this business model will have to wait for success of pilot
project
Being a 100% subsidiary of OMC, the SPV shall be a government company and would be subject
all operational advantages and limitations faced by a government company.
2.4.2 SPV incorporated as JV company with participation of all the OMCs
This business model partly overcomes the limitation posed by above structure. Under this option, a SPV
company with equity participation of all the OMCs shall be incorporated. SPV shall develop new POL
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facilities as CUF meeting OMCs infrastructure requirements and would enter into a “Use or Pay”
arrangement with users (OMCs) wherein a Minimum Guaranteed Volume (‘MGV’) would be committed
by each user. Key advantage of this structure over the single OMC promoted SPV as mentioned in
previous section are as:
Ownership/Equity participation by all OMCs will help in assuring cohesive decision making
Centralized planning helps in speeding up the location selection & hence implementation
Clearly carved out roles and responsibility of SPV & its promoters helps in smooth functioning of
SPV company as well as separation of Management and Control
The capital structure and constitution of the SPV may be structured so as to achieve the
government/non-government company structure
The only limitation of this model would be a possible procedural delay in formation of SPV compare to a
single OMC taking control over the SPV formation due to multiple layers of decision making. However
this limitation can be overcome by forming an empowered ‘Steering Committee’ with representatives
from all the OMCs s which can take independent operational decisions. A brief overview on the key
Terms of Reference for such Steering committee is provided given in Section 4 of this report.
In view of above discussions, in may be concluded that the formation of a new SPV company with
participation from OMC’s would help in meeting the objectives of developing Common User Facility.
However the following points for should be considered while outsourcing the POL installations to the
SPV:
Reliable supply chain is among the most critical success factors for OMCs business. Outsourcing
the Supply Chain infrastructure would also require development of proper control mechanism to
ensure their competitive position.
Under SPV model, if all the Projects are being executed through same SPV, diversity of supply
chain sources would reduce. Thus adequate control should be built in to avoid any risk of
disruption in supply chain on account of the same.
From above discussion, it may be concluded that either implementation of Projects on BOO/BOOT basis
by more than one OMC on bilateral basis or implementation by SPV with participation of all the OMC’s
may help in rationalization of capex and achieve operational efficiencies. Further due to Economies of
Scale, CUF will result in savings in capex requirements or equity contribution requirements of OMC as
compared to implementing the POL facility on standalone basis. An illustration of the same is given in
Annexure –I.
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3. COMMON USER FACILITY IMPLEMENTATION BY SPV
This chapter discusses various aspects related to implementation of CUF through SPV route with
participation of all the OMCs.
The key function of the SPV would be to aggregate the POL infrastructure requirements of OMCs, plan
project implementation, develop and operate CUFs’ at various locations spread across India. The
following would be the key consideration for incorporating the SPV:
Constitution of the SPV
The OMCs have pan India operations catering to POL product demand across the country. These
CUFs needs to be integrated with the distribution chains of the OMCs. The entity should be
capable efficiently developing CUFs at any given location across India. The SPV may be
incorporated either as a company incorporated under Companies Act, 2013 or as a Limited
Liability Partnership. As per information available in public domain, from Income Tax perspective
a LLP structure is better than the others. However LLP business model is country is in initial stages
and not have been tested by many companies. In contrast, for a company incorporated under new
Company’s Act 2013, governing laws and structure of any company makes it easier for infusion of
stake-holders/investors and professionals in the company. Additionally companies enjoy better
credibility and investor confidence due to stringent compliance requirements of Company’s Act
and other laws in force. Thus LLP is better suited for small scale businesses as compared to current
requirements of pan India operations.
Thus in the current situation, considering OMCs’ as the promoters, the corporate structure i.e. SPV
Company incorporated under Companies Act, 2013 has been considered. The same can be
incorporated as Government Company/Non-Government Company. The key consideration for this
decision would be relative ease of SPV securing business from OMCs, degree of freedom to take
decisions (investments, mode of operation, flexibility in awarding contracts, hiring, etc.),
applicability of CAG audit and presidential directives, etc.
Business model of the SPV
Key factors governing choice of a particular business model inter alia includes:
Type of project to be implemented through SPV i.e. single user facility or facility where more than one user are interested
Revenue model
Mode of operations i.e. in-house operations v/s outsourcing
Roles and responsibilities of the SPV w.r.t the product handled, quantum of risk and liabilities to be taken by the Promoters/SPV
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Taxation aspect, etc.
The business model adopted by the SPV shall also impact its financing and manpower
requirements.
Capital Structure & Funding options
Capital structure describes how a corporation finances its assets. This is usually through
combination of equity, quasi-equity, debt in various forms, etc. The returns for the promoters can
be maximized with right mix of debt and equity.
The quantum of SPV’s funding requirements shall depend on the business model adopted by the
SPV i.e. in-house operations/outsourcing. The equity is to be funded by OMC/private equity
placement/ undertaking fund raising through capital markets. In case of debt funding, the same can
be raised from Banks/FIs.
Separation of Management and Control
For efficient functioning of the new entity, separation of management and control is necessary.
Accordingly the new entity should be having sufficient authority to take independent decisions
related to capital investments, operations, recruitment, etc.
3.1 Constitution of Entity
This section gives brief description on the constitution of the Company. The same is based on the primary
readings of various sections of the Company’s Act and past experience. However it is suggested that
legal/tax opinion, wherever required, should be taken on various discussion points highlighted in the
section below.
The key criteria to decide constitution of business entity are:
3.1.1 Government v/s Non-Government Company
As per sub-section (45) of Companies Act 2013, Definition of Government company states:
“Government company” means any company in which not less than fifty-one percent of the paid-up share
capital is held by the Central government, or by any State Government or Governments, or partly by the
Central Government and partly by one or more State Governments, and includes a company which is a
subsidiary company of such a Government company.
The government-owned corporations are also commonly termed as Public Sector Undertakings (PSUs) in
India. However this term is not defined under the Company’s Act specifically but is defined under SEBI
guidelines as “Public Sector Undertaking means a company in which the Central Government [or a State
Government] holds 50% or more of its equity capital or is in control of the company”
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Thus from the above reading, in case if any one of the OMC’s doesn’t hold 51% or more paid up capital
of the SPV Company directly or indirectly, SPV would be a non-government company in-spite of three
OMC’s out together 100% paid up capital of the Company. Other aspects of the above explanation are as
follows:
Meaning of "holding company" and "subsidiary" as defined in The Companies Act 2013:
As per sub-section (87) of Section 2 of Companies Act 2013, the term subsidiary is defined as:
“Subsidiary company” or “subsidiary”, in relation to any other company (that is to say the
holding company), means a company in which the holding company—
(i) Controls the composition of the Board of Directors; or
(ii) Exercises or controls more than one-half of the total share capital either at its own or together
with one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have
layers of subsidiaries beyond such numbers as may be prescribed.
Thus from the above reading, till the time any of the OMC individually:
(i) Control the composition of board of directors (‘Board’) of SPV, or
(ii) Exercise or control more than 50% of Share capital of SPV
The SPV would not be classified as a subsidiary company of any Government Company and hence
would be a non-government company. Further in case of management control, the Memorandum
and Articles of Association of the company may give control to appointment management to any
shareholder despite holding than the minority of the share capital. Thus while incorporating the
SPV the same should be taken into considered and right to control the appointment of Board of
Directors, etc. should be accordingly decided.
The based on above, the constitution of SPV may be summarized in the following figure:
Constitution of JV
Government Company (Single OMC’s
shareholding is more than 51%)
Non-government Company
Jointly OMC’s hold more than 51%
Jointly OMC’s hold less than 51%
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3.1.2 Other Aspects of SPV formation
Formation of JV Company by PSE entities
Joint venture (JV) is a contractual arrangement whereby two or more parties carry an economic
activity under joint control. In the present case, three OMCs propose to participate in the SPV
Company and hence it would be Joint Venture of OMCs or CPSEs.
Sub-section (6) of Company Act 2013 recognizes JVs as:
“Associate company”, in relation to another company, means a company in which that other
company has a significant influence, but which is not a subsidiary company of the company having
such influence and includes a joint venture company.
Explanation.—For the purposes of this clause, “significant influence” means control of at least
twenty per cent of total share capital, or of business decisions under an agreement
Government Policy on JVs formation by PSE
With a view to granting managerial and commercial autonomy to successful profit making Central
PSUs operating in a competitive environment, the Department of Public Enterprises (DPE)
enhanced the delegated powers of the Board of Directors of Navratna PSUs in August 2005 to
enter into technology or strategic alliances, to establish financial JVs and wholly owned
subsidiaries in India or abroad. All the proposals involving investment over and above the
delegated powers are to be submitted for approval of the Cabinet Committee on Economic Affairs
(CCEA).
In the present case, IOCL is presently a Maharatna Company and BPCL and HPCL are Navratna
companies. Thus from the above, the OMCs’ are free to take decision w.r.t. participating in the
SPV which would be a Joint Venture Company. However the investment decision is governed by
the applicable delegated limits and should be given due consideration while deciding on the capital
structure of the Company.
CAG Audit
The Comptroller and Auditor General of India (CAG) audits government companies. In respect of
government companies, CAG has the power to appoint the Auditor and to direct the manner in
which the Auditor shall audit the company's accounts.
The audit of Government companies is governed by sub-section (5) of Section 139 of the
Companies Act, 2013.
Notwithstanding anything contained in sub-section (1), in the case of a Government company or
any other company owned or controlled, directly or indirectly, by the Central Government, or by
any State Government or Governments, or partly by the Central Government and partly by one or
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more State Governments, the Comptroller and Auditor-General of India shall, in respect of a
financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under
this Act, within a period of one hundred and eighty days from the commencement of the financial
year, who shall hold office till the conclusion of the annual general meeting.
Hence, for the applicability of this provision, it must either be a Government company, or a
company owned and controlled, directly or indirectly by the Central Government, or by any State
Government or Governments, or partly by the Central Government and partly by one or more State
Governments, and includes a company which is a subsidiary company of such a Government
company.
Thus in case the majority of the OMCs’ put together holds 51% of more stake in the SPV
company, the same would be subject to CAG audit as per Company Act 2013.
Applicability of Presidential Directive
Department of Public Enterprises clarifies this through ‘DPE/Guidelines/I/3 Power of President to
issue directives—Provisions in the Articles of Association—regarding’, where it says:
“…the Articles of Association of the public enterprises contain an article to the effect that the
President may from time to time issue such directives or instructions as may be considered
necessary in regard to conduct of business and affairs of the company and in like manner may vary
or annul any such directive or instruction.”
The same is applicable in case of all the Public Sector Enterprises (‘PSE’). Thus in case the SPV is
constituted with any one of the OMC holding more than 50% capital of the Company, the same
shall have to follow the Presidential Directives.
Land Acquisition for setting up facilities
Land acquisition has been a major concern in setting up POL infrastructure. The constitution and
the business model should be finalized after taking future requirement of land into consideration.
In case of a Government company, the help from the government can be sought. Whereas in case
of a private company the land can be acquired from market directly or it can be outsourced to a
third party (BOO/BOOT contractor).
Based on above the OMCs may suitably deliberate and decide on the shareholding of the SPV
Company. In case the OMCs decide not to have a non-government company structure, it should be
ensured that none of the OMC’s individual shareholding in the SPV exceeds 50% any point of time. Also
the constitution of board and voting rights should be such that none of the OMC fully controls the
management of the SPV Company.
3.1.3 Private Sector Participation in the SPV
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One of the options available w.r.t. shareholding of SPV is private sector participation in the SPV.
However the following may be noted w.r.t. the same:
Primary users of the facility shall be OMCs and facilities shall be developed primarily based on
the OMCs product throughput requirements.
The SPV would receive predetermined fix returns on the investment made and would have
limited upside potential from the perspective of returns on investment.
Financial investors look purely at the returns from project where as strategic investors also look
for other aspects of the Project including EPC contracts, O&M. etc. Typical minimum return
expectation for equity investors for such projects is 14-18%.
Return expectation of financial investors would reflect in increased terminal tariff payable by
OMC, while that of strategic investors may influence the decision making process w.r.t. terminal
operations including award of various contracts.
In view of above, it would be difficult to attract private players for participation in the SPV other than
infrastructure companies and infrastructure funds.
In case of private participation involving infrastructure companies, adequate safeguards should be
considered to avoid conflict of interest in case the same firm is also involved in implementing
downstream projects.
3.2 Business Model of the entity
The constitution of the SPV company would also have a key impact on the business model of the SPV.
The same has been discussed in the following sections:.
3.2.1 Awarding Business to SPV Company
Each CUF to be set up by SPV company would be primarily be utilized by OMCs. Thus
constitution of SPV company should enable the same.
In case the SPV is constituted as a non-government company, the same would fully restrict the
ability of OMCs to award repeated contracts to SPV on a nomination basis. In such case SPV will
have to compete with private players for the award of job from OMCs and the same would defy the
purpose of setting up of SPV as the centralized nodal agency for implementation of Infrastructure
facilities by OMC..
A framework for awarding the projects needs to be formulated, to decide on which type of projects
should be awarded to the SPV. There are various possible scenarios like
o Facilities for captive usage (e.g. marketing terminals attached to the refinery)
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o Strategic locations like import terminals, etc.
o Facilities which are not required by all of the three OMCs, viz. only two OMCs, only one
of the OMC
o Facilities which are common for all three OMCs etc.
o Resitement cases and merging of existing POL infrastructure
The motivation behind setting up the SPV is to realize operational synergy and save on capital
expenditure by aggregating requirements of all three OMCs. Awarding all the projects to SPV
without competition may also result into inefficient operations. Thus the control mechanism to be
built in the framework for awarding Projects to the SPV company
3.2.2 Revenue Sources for SPV
The SPV would provide Terminalling services based on pre-determined facility sharing schedule by users
and would earn revenue in the form of Terminalling charges. Also to make a particular project viable and
arrange funding for the same, the users shall be required to enter into a “Use or Pay” with Minimum
Guaranteed Volume (MGV) type of agreement with the SPV.
The charges paid to SPV should be based on the Capex incurred and O&M services provided. The
determination of such Terminalling charges can be as follows:
a. Capex recovery charges/Tariff: Capex Recovery Charges comprising the following
components:
Recovery of capital investment made by SPV towards the development of the terminal
Reasonable Return on total investment
Capex Recovery Charges will depend upon investment in the project, recovery period and required post-
tax rate of return on total investment. Thus one of the key decisions for OMCs’ would be fix the fair rate
of return and agree on the parameters used for determination of capex recovery including time period of
contract.
Considering the projects can be implemented with varying capital structure i.e. D/E ratios, the Project
IRR method may be adopted to make the process independent of the capital structure. The fair rate may
be decided in line with the policy or benchmark rate for investments require by the OMCs for similar
projects undertaken. From a financing perspective as well, project IRR of around 14% may be considered
reasonable.
The Project IRR of 14% should be analyzed over a sufficient time frame. In case of CUFs which has
operational life of around 25 years, IRR needs to be computed with for the contract period. Too small
time-frame would enhance the required IRR and vice-versa.
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b. Opex Recovery Charges/Tariff: This includes recovery of operating expenses of facility (both
fixed and variable)
O&M activity could be undertaken either in-house or can be outsourced to a third party. The
determination of O&M component recovery for Terminalling charges should be based on:
If the O&M services are outsources by SPV, the Opex Recovery Charges and Maintenance
charges should be determined though a competitive bidding by interested O&M providers.
In case of SPV providing O&M services itself, the charges paid to SPV should be sufficient
to cover its operating expenses.
The escalation factor in the O&M tariff may be based on established benchmarks such as
relevant WPI/CPI.
c. Maintenance Charges
Maintenance Charges are towards the recovery of Repair and Maintenance expenses of facility
including foreseeable replacements. As the maintenance cost would increase with the age and
usage of the facility, the charges may be fixed depending on the contract time slabs e.g. 1-3
years, 4-10 years, etc.
3.2.3 Liability of the SPV
In the present case the SPV would only be acting as service provider. The services would include
custodian, storage, safety and security for the product. Thus the insurance for the products stored should
be taken by owner of the products. Further the liability of the SPV should be limited to its role and
suitable indemnity should be provided to the SPV.
Similarly in case of product handling the role of SPV should be clearly defined and its responsibility
should be limited to receipt of product in the facility premises and supply on Ex-MI basis.
3.2.4 Project Implementation Methodology
Implementation methodology would impact the capital structure and hence equity funding requirements,
manpower requirements, etc. Each of the projects can be implemented by the SPV on its own or
outsource or a mix of both. The outsourcing can be for construction of the facilities as well as O&M
activities.
In-house project implementation: In this case SPV would require sufficient capitalization to
enable SPV to raise debt for funding the project. In addition to capital, in house project
implementation would require building complete organization with capabilities to handle the
multiple projects. The merit of the above option is development of in-house expertise. At the
same time execution of multiple projects would result in huge manpower requirements. Further
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during the initial years, the SPV Company may not have sufficient internal accruals to meet
equity requirements of the projects and the same has to be contributed from the Promoters.
Outsourcing model: In this case the construction contract can be outsource on various model
including outsourcing EPC work, O&M or complete project work under BOOT/BOO model. A
brief note on BOOT/BOO model is given in Annexure-II. As against In-house development, this
would require limited manpower including key management personal would be required with
expertise in specific fields such as engineering, contracting, project management, finance, legal,
etc. Also in case of BOO/BOOT contract, the capitalization requirement of the SPV reduces and
it could be a low capitalized company. This model also facilitates quick replication and
implementation of projects. The limitation of this model would be dependence on the external
contractors for all the activities being carried out by the SPV. At certain locations, the expertise
with the contractors might not be available and would have to be developed by the SPV.
Considering above, it may be considered to adopt a balanced approach on project to project basis. It
should be left to the SPV‘s management to decide on the same on case to case basis.
3.2.5 Taxation Aspects
SPV would be a service provider & Service Tax shall be applicable on the Terminalling charges.
Presently the applicable rate for the same is 12.36%. OMCs would not be able to avail full credit of the
same in the form of CENVAT credit due to limited Cenvatable downstream operations.
Income tax shall be applicable on the profits earned by the SPV. The current applicable rate for Corporate
Income Tax and Minimum Alternate Tax (MAT) are 33.99% and 20.96% respectively.
Further in case dividend is being declared by SPV for repatriating its profits to shareholders, then
dividend distribution tax shall be applicable, current applicable rate for the same is 16.995%. However
the funds can be infused in the SPV in the form of Promoter Loans and surplus funds, if any, can be
remitted to Promoters/shareholders in the form of loan repayment and interest.
However considering the benefits of CUF, tax implications may not considered a deal breaker. A
formal opinion on the taxation aspects can be taken separately on the same.
3.2.6 Returns from Projects
The SPV’s only business is to implement and operate CUF facilities. The facilities shall be constructed
based on given demand projections and this is not expected to drastically change from the actual demand.
Thus each project would have limited upside potential. Moreover, the SPV business model should be
self-sustaining and after equity contribution by Promoters for initial years, the SPV should have sufficient
accruals to fund its own capital requirements. In the present case, returns for the Promoters would be in
the form of:
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Savings in capital cost on account of shared capital cost in case more than one user using the
terminal
Dividends from SPV: In case any distributable surplus amount is available. In case a dividend is
to be distributed, Dividend distribution tax (currently effective 16.22%) would be applicable on
the dividend declared, however the same would be tax free in the hands of shareholders.
Capital appreciation on investments - Once SPV establishes a portfolio of assets, the Promoters
may unlock the value through a part stake sale (either IPO or private placement). Capital
appreciation would give a much higher returns compare to dividend income.
Saving in the opex, as the combined throughout requirement from more than once user would
result in savings on account of distribution of fixed operating cost over higher volumes of
product handled.
However, it may be noted that the profitability of SPV and the returns to Promoters would be dependent
on the terminalling charges which is a cost for OMC/ CUF users.
In the present case, source of the SPV’s revenue are Promoters and the returns from SPV’s are being
ploughed back to Promoters in the form of dividend/interest paid on Promoter Loan with an element of
taxation and, the same should be considered while constituting the JV and inducting any one as the
partner in the JV.
3.3 Capital Structure & Funding Options
Capital structure describes how a Company obtains the financial resources with which it operates its
business. Various capital structures can be adopted to meet both internal needs for capital and external
requirements for returns on shareholders investments.
The SPV’s capital requirement would primarily depend on the capex requirement of each project, timing
of implementation and mode of execution. Typically POL storage and handling infrastructure projects of
such nature can be funded with a D/E ratio of 60:40 or 70:30.
3.3.1 Equity Funding Options
To meet the SPV’s initial funding requirements including those for meeting administrative cost, equity
has to be infused by SPV promoters. One way to determine the equity requirement would be to club the
infrastructure requirement of OMCs for the next 2-3 years and sufficiently capitalize the SPV to the
extent it is sufficient to meet SPV’s equity funding requirement. Alternatively efficient method would be
to infuse funds in phased manner based on project to project basis. Once the cash inflow would start
flowing from the operational facilities into the SPV, the future requirement of equity to fund projects
would be met from through internal accruals. Other Equity Funding Options are IPO, PE placement,
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Loan from promoters, etc.
3.3.1.1 Equity Infusion by Promoters
Equity infusion from the SPV promoters can in the form of equity (equity shares, preference share
capital) or hybrid instruments (Compulsorily Convertible Debenture (‘CCD’), Compulsorily Convertible
Preference Share (‘CCPS’), etc.)
A CCD is a debt instrument mandatorily and automatically convertible into equity at a specified time, or
on happening of specified events, into equity. In the present context the key advantage of CCD would be
ensuring a fixed rate of return with an upside on conversion, deferring the issuance of equity, tax
advantages as interest/coupon paid are tax deductible. However the coupon paid on the CCD would be
treated as interest income in the hands of recipients and would be taxed accordingly. A brief note on CCD
instruments is given as Annexure-III.
In case of CCPS, dividends can only be declared out of profits; hence, no tax deduction in respect of
dividends on CCPS is available. Secondly, any dividends can be paid by the company only after company
has paid dividend distribution tax. In addition, unlike conversion of CCDs into equity, which is not
regarded as a transfer under the provisions of the Income-tax Act, 1961, conversion of CCPS into equity
may be considered as a taxable event and long term or short term capital gains may be applicable.
In the present case, it may be noted that profitability for the company is derived from the Usage charges
paid by user/Promoters. Thus relative merits and limitation of using hybrid instruments should be
evaluated in reference to this.
3.3.1.2 Private Equity Placement
The equity funds can be raised using private equity placement route. The same can be to financial
investors/strategic investors. This option is applicable only if the consortium proposes to induct private
player as partner. A brief note highlighting the typical Private Equity Placement is given as Annexure III.
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3.3.1.3 Initial Public Offering
Fund raising through Initial Public Offering (‘IPO’) is a relatively extensive process and requires
established business model to command good valuations. Thus this option is not recommended in the
initial phases. A brief note on IPO process is given in Annexure III.
3.3.2 Debt Funding Options
Debt funding shall be arranged by SPV on a case to case basis for various projects to be undertaken. In
case SPV proposes to implement projects on BOOT/BOO basis, the SPV contractual structure should
facilitate the debt funding requirements of the BOO/BOOT contractor.
There are various debt Funding options like Rupee Term Loan, Foreign Currency Loan (ECB/ECA/MLA
funding), debentures, etc.
3.3.2.1 Key consideration for debt funding:
Each project undertaken by the SPV would have construction period of about 2-3 years
depending on the size of project. Debt repayment obligations should be structured as per the
Project cash flows; lower repayment obligations during initial years till project operations are
stabilized.
Currency of Funding – Rupee Term Loan v/s FC Loan: Mix should result in minimum funding
cost including interest & hedging costs while meeting long tenor requirements
Financial Covenants: Should not be restrictive on project’s operations and provide for curative
provisions.
Deviation in Project Schedule on account of unseen circumstances: Flexibility to modify
drawdown schedule is required in sync with Project progress with minimal or no commitment
charges /penalties is required. Also, No Carry cost should be there on account of funds undrawn.
3.3.2.2 Debt Financing - Options
The various debt fund raising options available to SPV are:
Rupee Term Loans (RTL)
Debentures/Bonds issuances
External Commercial Borrowing (ECB) funding
Export Credit Agency (ECA) Funding and Multilateral Agencies (MLA)
A comparison of these options is summarized in the following table and details of the same are given in
Annexure III.
Table 3-1: Debt Funding Options
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Parameters RTL ECB ECA MLA Domestic Bonds Tenor (in years) 10-12 7-10 10 – 15 10 - 15 7-10 Availability High Medium Low Low Medium/Low Risk of Interest basis Bank’s Base Rate LIBOR LIBOR LIBOR Fixed Risk - FX risk Nil Yes Yes Yes Nil - Interest rate Yes Yes Yes Yes No Drawdown Flexibility Yes Limited Limited Limited Nil Time for tie-up (month) 2-3 3-6 6-12 6-12 1
Covenants Standard Stringent Equipment/ EPC
linked Stringent Credit Rating
Suitability for Financial Closure
High Medium Low Low Low
In the present case, considering that the revenues of the SPV are denominated in INR, the flexibility in
drawdown required (on account of project uncertainties) with nil/minimum commitment charges, and
loan tenor & structured repayment obligations, RTL is a recommended option for the financial closure.
3.4 Separation of Management & Control
The most important aspect of business model would be separation of management and control. This
should provide sufficient authorization to the management for taking decisions related to efficient
functioning of such organization. Decisions related to investments, operations, recruitment, compensation
etc. should be free from Promoter influence. Since each OMC has existing in-house capabilities in
developing POL facilities, key management personals & workforce can be deputed from promoters in the
initial phase. Also, organization should be designed with a focus on:
Strategy: Vision & Mission, Corporate Governance, Competitive Advantage
Structure: Organizational role, Information flow, Power & Authority
Business Process: Key vertical, Identified Role & Responsibilities
Human Resource: KRA, Performance Management, Recruitment
Reward System: Compensation, Reward System
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3.5 Structure of JV Company
Based on the above discussion, a basic structure is given below:
The Mandate from OMC’s for building up POL infrastructure facilities (Depots/Terminals/LPG Bottling
plants) would be given to the new entity. The funding of capex requirement for these CUFs would be
through a mix of Debt and Equity. The entity can either build the infrastructure itself or contract it to an
EPC contractor, similarly for the operations and maintenance (‘O&M’) of the facility, it can be carried
out by the SPV/JV itself or it can be contracted to a O&M operator.
Summary
Based on above discussions, the comparative analysis of various transaction structures is summarized in
the table below:
A. Type of Company
Structure # Shareholding Type of Company
Structure1
Any one OMC shareholding in SPV not to exceed 50% but aggregate shareholding of the OMCs’ put together is more than 50% (This will also apply in case all the OMC’s hold 1/3 of the share capital)
Non-Government company
Structure2 Aggregate shareholding of OMC’s is 50% or less and balance shares held by private companies including Financial Institutes
Non-Government company
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Structure # Shareholding Type of Company
and Strategic investors
Structure3 One of the OMC individually holds is more than 50% shares of the SPV (thus OMC’s aggregate shareholding more than 50%)
Government Company
B. Comparative Analysis for various structures
Key Consideration Structure 1 Structure 2 Structure 3
Appointment of Directors OMCs to
decide
Shareholders to
decide
As per DPE guidelines – through
PESB
Land Purchase Option to directly purchase through
negotiations - hence faster
Government Land or through
Govt. acquisition - time
consuming and abnormal delays
Manning/ wage structure/
IR issues
DPE guidelines not applicable -
contract manning/ optimal cost/ low
risk on IR issues
DPE guidelines to be followed -
higher wages/ permanent work
force/ high risk on IR issues
Award of contract CVC guidelines not applicable –
flexible
CVC guidelines
Writ jurisdiction No No Yes
RTI applicability No No Yes
CAG audit/ review Yes Yes, unless
OMCs have no
control in Board
decisions**
Yes
Strategic Partners/
Investors
Optional Required Not applicable
Lenders' relative perceived
project risk
Low- medium
level interest
rates
Moderate- higher
interest rates
Lowest - easy funding, lower
interest rates
** as per the legal opinion1 received from M/s Amarchand Mangaldas & Suresh A Shroff & Co (AMSS),
as per Companies Act, 2013, in cases where "direct/ indirect control by the Central Government" exists,
CAG may also have the authority to appoint the Auditor. In case the constitution of SPV provides any
special rights by virtue of which the OMC’s individually of acting together can control SPV’s
management/key decisions then Structure 3 shall also come under the ambit of CAG.
Additionally, considering no significant advantage of Structure 3 over Structure 1, OMC’s decided to
examine Structure 1 and Structure 2 and also sought legal opinion from AMSS on: 1 AMSS legal opinion is attached as Appendix
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a. Applicability of CAG audit and relative flexibility in operationalization of SPV under Structure 1
and Structure 2
b. Applicability of Section 188 of Companies Act, 2013 in relation to the relative part transaction
especially in respect of awarding repeated business to SPV on nomination basis.
As per Legal Opinion sought by AMSS on the same:
CAG Audit will be applicable for Structure 1 whereas the same depends on rights provided to
OMC by virtue of SPV’s constitution as mentioned above
On related party transaction, AMSS recommends “OMCs to ensure that appropriate (domestic)
transfer pricing studies are carried out and independent reports procured from one or more
reputed independent consultants stating that the proposed transactions are on Arm’s Length basis.
Further, in light of the possible recurring nature of such transactions, such reports may clearly
state that such transaction arrangements based on any particular method or principle, such as
‘cost plus pricing’ shall qualify as an arms Arm’s Length transaction.”
Additionally the Legal Opinion mentions that “any transaction which qualifies as Related Party
Transaction would require the approval of the Board as well as prior approval of shareholders
(minority shareholders will have a major say for approval).” However in case the OMC’s are able
to established the transaction in Ordinary Course of Business and the same being an Arm’s length
transaction, the said approvals may not be required.
Further AMSS opined that there is not significant advantage in opting for Structure 2 as compared to
Structure 1 unless it offers substantial business/operational advantages. The same was also agreed by
SBICAP and OMC officials in previous meetings.
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4. THE SPV COMPANY FORMATION
4.1 Key Steps in SPV formation
The following are the steps involved in the incorporation of a JV Company:
4.2 Key Terms of Reference for Steering Committee
A steering committee should be formed comprising of representatives from OMCs’ for deciding on the
course of action for implementing CUF facility through the SPV company. The key terms of reference for
Steering Committee could be inter alia:
Defining objective of the SPV: Implementation of POL infrastructure facilities
Guidelines on award of projects to SPV: Guidelines needs to be formulated for Projects to be
awarded by OMC’s to SPV (i.e. single Sponsor requirement, multiple Sponsor requirements,
dedicated/captive facilities (e.g. refinery locations), etc.). For framing these guidelines, the specific
requirements, capabilities and commitments should be evaluated for each facility type. This should
also guide on criteria for finalising the location in case of preferred locations by different OMC are
not same and are in the vicinity of each other. Decision in such cases may be based on committed
sales volumes, cost of project under various scenarios, etc. This should also include the guidelines
on prioritisation of projects to be awarded by the SPV, i.e. new projects, resitement cases, existing
locations, etc.
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Suggesting Constitution of SPV Company: This includes recommending on being a private or
public company, inclusion of non-OMC investors, etc.
Equity contributions: Mechanism for equity infusion, i.e. against cash call, advance, etc. Forms of
equity contribution i.e. equity shares, promoter loan, hybrid instruments, etc., remedies in case of
default in equity contribution. Further in case where an OMC offers land or existing location, the
contribution of the same towards equity or mechanism to compensate the OMC should also be
discussed.
Shareholding pattern: Shareholding pattern of the SPV, i.e. OMCs’ holds equal stake or have
disproportionate shareholding & participation of other investors, exit options available to OMC’s
and restrictions on the same.
Constitution of the Board: The representation of SPV’s on the board along with voting rights
should be clearly defined. This should include minimum shareholding required for being eligible
for the board representation, rights w.r.t. appointment of Chairman and other key officials, if any.
Further in case the nominee director ceases to be on rolls of the nominee company due to any
reasons like superannuation, etc., then the interim arrangements in such situations should be
defined.
Commitments of each JV partners: This includes commitments in the form of “Use or Pay”
agreement as well as providing management and technical expertise during initial years. In case of
deputation of officials from JV partners to SPV, terms of such deputation should be clearly
defined. Further understanding between the promoters to be developed on treatment of the payment
made due to revocation of “Use or Pay” agreement, i.e. in the form of advance to SPV, to be
adjusted later during period of excess usage, penalty, etc. In case of treatment as advance, allowed
time period and restrictions on adjustments should also be discussed.
Transaction between Promoters and SPV: The nature of transaction between the JV partners and
SPV, particularly in the business area of common interest should be clearly defined as Arm’s
Length Transaction.
Special rights of Promoters: The key decisions related to SPV, where the promoters proposes to
have minimum consent of consortium or voting quorum or veto rights of one or more members
should be discussed and defined.
Commercial Framework: The Promoters should clearly define the roles and responsibility of SPV
i.e. operations boundary (E.g. who takes the insurance, product pilferage, etc.). Further guiding
principles forming the basis of determining the returns for the SPV in the form of usage charges,
e.g. minimum Project IRR, etc. should be discussed. In additions it is suggested that other issues
related to recruitment by SPV, compensation, etc. should be discussed by the steering committee.
The above list is indicative and not exhaustive. Further in the process, the steering committee may be
required to appoint external consultants and should be empowered to do so.
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Once the key terms of reference for JV are formulated, the JV agreement may be signed and the same
would pave the way for incorporation of the JV.
4.3 Key Steps for JV Incorporation
The following section gives brief process of incorporation of JV Company.
A. Name: The proposed name of the JV Company would have to be reserved by filing Form 1A with
the Registrar of Companies (“RoC”). Six proposed names for the JV Company are required to be
provided, with significance of the key or coined word(s), if any, in the proposed names(s) (in
brief).2 Further, the appropriate nature of the JV Company should be chosen (i.e., public or private)
and an appropriate place for the registered office of the JV Company is to be chosen. In this regard,
stamp duty friendly states such as Delhi and Tamil Nadu may be preferred. Please note that it takes
approximately 6-8 weeks to incorporate a company after filing the relevant forms and documents
with the relevant RoC.
B. Authorised capital of the JV Company - The amount of authorized capital enables a company to
issue shares up to the authorized amount. The authorized capital of a company should be higher
than the amount of capital that a company would require in the near term, so that such amount may
be infused by way of contribution to the share capital. It may be noted that the registration charges
and stamp duty payable for incorporating a company are calculated with reference to its authorized
share capital and the stamp duty rates vary from one state of India to another. The minimum paid
up capital of a private company must be Rs. 100,000.
C. Constitutional Documents – Drafting and filing the Memorandum of Association (“MoA”) and
the Articles of Association (“AoA”) of the JV Company. The main objects of the JV Company
would have to be specified in the MoA. Further the terms and conditions of the joint venture will
also need to be incorporated
D. Incorporation- A JV company is required to have at least 2 shareholders. The board of directors
of the JV Company must consist of a minimum of two directors. There is no need for the directors
to be Indian residents.
2Please note that a higher authorized share capital is required if the proposed name contains certain words, such as “Corporation,” “International”, “India”, “Products”, “Udyog”, “Industries”, “Global/Globe”, “Worldwide”, “Universal”, “Continental”, “Inter Continental”, “Asiatic/Asia”, “Manufacturing” or “Enterprises”.
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5. Summary of OMCs Discussion on CUF Implementation
Implementation of CUF facilities through a Special Purpose Vehicle (‘SPV’) route was found to be the
preferred option to operationalize the CUF. Further the following points were concluded during the
meeting held between OMC representatives:
5.1 POL facilities considered for implementation under CUF
New POL facilities shall initially be considered for implementation as CUF facilities; later, once
CUF model is established, existing location can be considered later under the same.
Due to specific requirements at each of the airport location, Aviation Fuelling Stations shall be
handled shall be developed as CUF by suitably forming separate JVs as per the requirements in the
individual airports in line with Delhi Aviation Fuel Facility Private Limited or Mumbai Aviation
Fuel Farm Facility Private Limited
Similarly the facilities at strategic locations such as refinery evacuation facilities, extended storage
facilities connected through cross-country pipelines, Coastal Locations (such as POL/LPG Import
Terminals), etc. shall be kept out of the purview of CUF.
SBICAP in consultation with OMCs’ have identified 15 POL locations, where 2 or more OMCs
have facilities with common boundaries. A committee of OMCs is set up to study 2 sample
locations from the above and explore the possibility to bring them under CUF.
The key considerations for the same would be operational feasibility, compliance of OISD
standards, manpower requirement and redeployment needs, alternate supply sources in case of
emergency requirements, etc. The study will help in identifying key challenges and possible
solution for the same and help in guiding implementation for other locations in future.
The SBU-wise identified locations and discussion on CUF implementation for the same has been
presented in Annexure IV.
5.2 Operationalization of CUF:
The SPV’s revenue would primarily from the Terminalling Charges/Tariff for facility usage paid by
users (primarily OMCs). The same would be based on the principle of recovery of cost (for the
capex incurred and O&M services provided) and reasonable return on investment.
Participating OMCs can also consider inviting other interested users on a case to case basis, subject
to availability of capacity. The same will help in sharing infrastructure by larger base and thereby
help in reducing tariff.
Initially to implement CUF facility, the SPV can consider awarding initial projects on BOO/BOOT
basis to reputed parties. This will help the SPV in establishing business model with low
capitalisation and manpower recruitment. Subsequently, the SPV can decide on various other
options like construction and operation by SPV, construction by SPV & operation through
outsourcing, etc.
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Since the OMCs would be awarding contract to SPV for implementing CUF on nomination basis,
they will be required to establish the same as an ‘Arm’s length’ transaction. Accordingly a
procedure for awarding contracts on ‘Arm’s length’ basis needs to be in place and the same may
be undertaken through reputed consultants.
OMCs/Users would be required to enter into “Use or Pay” arrangement for a minimum level of
facility utilisation (Minimum Guaranteed Volume)
Based on the deliberations held, OMCs may consider adopting SPV route for CUF implementation and
take necessary approvals for the same.
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Annexure –I: Funding Considerations
A. Illustration of Savings in Capital Cost
OMCs have conducted an internal study to evaluate the savings with CUF model on account of reduced
terminals. Capital outlay for implementation of CUFs vis a vis individual POL infrastructure is given
below:
Capital Outlay Required: Individual Projects
Head Metric Unit
Time period 5 years
No. of Terminal/Depot / AFS 30 Nos
Core Cost per installation 100 Crore
No. of LPG BP 30 Nos
Cost per LPG BP 60 Crore
Debt Equity ratio 0.6 Nos
Head INR Crore
Cost of Terminal 3,000
Cost of LPG Plant 1800
Core Project Cost 4,800
Financing Charges 508
Total Fund Required 5,308
Head Year 1 Year 2 Year 3 Year 4 Year 5
Total Project Cost 1,062 1,062 1,062 1,062 1,062
Cumulative Project Cost 1,062 2,123 3,185 4,247 5,308
Debt 637 637 637 637 637
Equity 425 425 425 425 425
Cumulative Equity 425 849 1,274 1,699 2,123
Capital Outlay Required: combined Projects
Head Metric Unit
Time period 5 years
No. of Terminal/Depot / AFS 15 Nos
Core Cost per installation 140* Crore
No. of LPG BP 15 Nos
Cost per LPG BP 84* Crore
Debt Equity ratio 0.6 Nos
* 40% increase in capex has been considered on account of increased throughput, land and other
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facilities, whereas total no. of locations are reduced
Head INR Crore
Cost of Terminal 2,100
Cost of LPG Plant 1,260
Core Project Cost 3,360
Financing Charges 356
Total Fund Required 3,716
Head Year 1 Year 2 Year 3 Year 4 Year 5
Total Project Cost 743 743 743 743 743
Cumulative Project Cost 743 1,486 2,229 2,973 3,716
Debt 446 446 446 446 446
Equity 297 297 297 297 297
Cumulative Equity 297 595 892 1,189 1,486
Total equity requirement from OMCs comes out to be significantly lower (Rs. 2123 Cr) when OMCs
develop the projects through CUF compare to individual implementation (Rs. 1486 Cr).
B. Illustration of Equity Requirement
Initially the projects implemented by SPV shall require funding support from the shareholder’s, i.e.
OMC. For illustrating same, it was assumed that SPV shall be implementing two terminals (“Projects”).
Each of the Projects envisages 24 months of construction period and timelines for implementing Projects
is as given below:
Project Timelines:
Terminal 1 Terminal 1 Terminal 2
Construction start date 01-Jul-14 01-Jan-15
Construction period (months) 24 24
Commencement of Operations 01-Jul-16 01-Jan-17
Project Cost (Rs Crore) 250 200
D/E Funding 1.5: 1 1.5: 1
For the purpose of simplicity, it is assumed that the said Projects caters to each OMC’s requirements
equally and alternately to meet market requirement, each OMC would have to set up its own terminal of
lower capacity at aggregate cost of Rs 450 crore.
The construction timelines for both the Project is as follows:
Quarter from the Construction Start Date
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Total
% Capex 10% 10% 10% 10% 15% 15% 15% 15% 100%
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In addition to core Capex, there would be Interest During Construction (IDC) which is an additional cost.
Considering above the as built cost for Projects works out as given in following table:
(Rs Crore)
Project Core Cost IDC As Built
Project Cost Equity
Funding Debt
Funding Terminal 1 250 16.55 266.55 106.62 106.62
Terminal 2 200 13.24 213.24 85.30 85.30
Based on above timelines the, the equity investment requirement of OMC’s is estimated to be as
follows:
(Rs Crore)Project/FY ending 31 March 2015 2016 2017 Total
Terminal 1 (Rs Crore) 31.99 58.64 15.99 106.62
Terminal 2 8.53 38.38 38.38 85.30
Total 40.52 97.03 54.38 191.92
Each OMC’s share (33.33%) 13.51 32.34 18.13 63.97
Thus with above, the estimated share of each OMC for two Projects works out to be Rs 63.97 crore as
compared to Rs 191.92 crore estimated to be incurred by each OMC if they implement the terminal to
meet only own requirements individually.
The equity contribution will be in the form OMCs’ and debt can be arranged from Banks’/Financial
Institutions. Further in case SPV implements the Project through BOO/BOOT contracts, the BOO/BOOT
contract would be incurring the capex. The will reduce SPV’s capitalization requirements but at the same
time may marginally increase the Terminalling charges.
Further in order to secure debt funding for the Project:
OMCs/Users would be required to enter into “Use or Pay” arrangement for a minimum level of
facility utilisation so as to achieve the debt serviceability of the Project i.e. achieving a Debt Service
Coverage Ratio of 1.
Viability of each project to be examined on case to case basis and minimum commitment from the
OMC’s as mentioned above to be decided for each of project individually.
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Annexure II: BOOT and BOO Projects
Traditionally end-users of any infrastructure facility including governments and state owned agencies
have themselves build infrastructure projects in most economies including India. But due to reason like
huge capital requirement and specific expertise required in implementing such project, many end-user
agencies have started involving the private sector to participate in infrastructure projects.
Unlike the conventional financing, third party investment in infrastructure projects, need to
comprehensively incorporate all aspects of risk and return on a project finance basis where there is
limited recourse or non-recourse financing. This is normally undertaken by establishing a Special
Purpose Vehicle (SPV) and justifying the return through the cash flows of these specific projects. The
same is commonly undertaken using three structures, namely, BOT (Build - Operate - Transfer), BOO
(Build - Own - Operate) and BOOT (Build - Own -Operate - Transfer). A brief discussion on each of
these arrangements is provided below:
The differences between BOT, BOO and BOOT arrangements can be seen through three phases of the
project viz. Development, Operation and Termination. The degree of third party involvement increases
correspondingly as we go from BOT to BOOT to BOO format.
A. Build – Operate and Transfer (BOT) format
In a typical BOT model, the government entity enters into an agreement with a third party company
(BOT contractor) to finance, design and build a facility at its own cost. The BOT contractor are then
given a concession, usually for a fixed period to operate that facility and obtain revenues from its
operation before transferring the facility back to the owner at the end of the concession period. This
enables the project company to receive sufficient revenues to service its debt during this period. A typical
example of implementation of the same is road projects, where the private company is also given the
responsibility of maintaining and collecting the toll during the concessionaire period. After the
completion of the period it transfers the operation to the government. It must be understood in the BOT
format at all times title to the assets of the concession (mainly land) will remain vested in the owner/
authority providing concession.
B. Build Own Operate (BOO) format
Under the BOO format, the ownership of the asset is retained in perpetuity by the third party or
concession holder or the developer. Typical example of the same is development of power plants, where
the private developers own the plant and are governed by a power purchase agreement, which is usually a
fixed term contract. The physical assets of the project do not revert to the state after the concession period
is over.
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C. Build Own Operate and Transfer (BOOT) format
In a BOOT project, the ownership is vested with the third party or the concession holder, albeit
temporarily & the same transferred to the concession provider at the end of concession period at a pre-
determined terminal amount or as per agreed payment formula.
In any project, the structure needs to be finalised keeping in mind the various related issues through a
techno-economic feasibility study. Additionally while structuring the project and involving the third
party/private sector to meet the huge demand of funds and provide technical expertise required for growth
should be considered.
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Annexure –III: Funding Options
A. Equity Funding Options
Equity Funding for the terminal project can be raised in various forms. The two commonly used methods
i.e. private equity placement and IPO are briefly given in the following section:
i. Private Equity Placement
Key Investor classes for the private placement are:
a. Banks, FII & FI’s: Consideration includes Govt. v/s Non Govt. company structure, stable
dividend income, long-term investment horizon, passive investors.
b. Strategic Investors: Brings business expertise along with funding, investment rationale includes
similarity of operations, diversifications, economies of scope, active investors with long term
investment horizon.
c. Private Equity Investors: Key considerations are valuation and Exit options, Focus on capital
gains, medium term investment horizon, active investors with focus on growth.
The Private Placement process would involve the following:
Outlining the process flow, including strategic assessment of the business, analysis of financing
alternatives, scope of potential due diligence, outlining key terms of the issue, etc.
Approval of Investors List by the company to be approached
Approaching Investors – Circulation of Brief Information Memorandum to gauge Investor
appetite
Circulation of Detailed Information Memorandum to potential Investors post receipt of EoI in
above stage and signing of confidentiality agreement.
Management meetings, Due Diligence by Investors
Discussion on transaction structure, Negotiations with the Investors
Receipt of Binding Offers and discussions
Preparation of Execution of Shareholders agreement and Other Documentation
The instruments used for equity investments can be structured e.g. in the form of equity shares,
preference shares, compulsorily convertible debentures (CCDs), etc.
Private equity placement is relatively less expensive and exhaustive fund raising exercise as compared to
IPO. In addition to access to capital, in case of strategic investors, it offers additional advantage from
having access to their knowledge. It also helps in building confidence among other stake-holders
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ii. Initial Public Offering (‘IPO’)
Fund raising through Initial Public Offering (‘IPO’) is a relatively extensive process and requires
established business model to command good valuations. Thus this option is not recommended in the
initial phases and could be utilised for unlocking the value once the business of the company has
stabilised.
IPO process requires extensive preparation on areas like – preparation of a business plan, amount of
capital expenditure required, portion of equity to be raised through the offer, capital structuring, issue
structuring, financial statements, litigation details, etc. The IPO process can be broadly classified into
following steps:
Preparation & Due Diligence
Filing and Marketing Strategy
Marketing & Bookbuilding
Closing
The entire process of IPO takes approx. 4-6 months and depends majorly on the capital markets outlook
and SEBI observations on the placement document. The IPO should comply with SEBI ICDR
Regulations& Listing Guidelines of Exchanges
B. CCD and CCPS
i. Compulsorily Convertible Debentures (‘CCD’)
CCDs are debt instruments which are automatically convertible into equity after a certain time. It is a
deferred equity instrument which is treated at par with equity from the equity investor’s points of view,
yet the legal nature of CCD is debt because of its superiority over equity holders during the time of
winding up of company. Another important aspect of CCDs is the redemption of obligation some form or
other (in the form of equity issuance rather than through cash payment), which further strengthens the
fact that legal nature of CCD is debt only.
There are several advantages for issuance of a CCD.
One of the advantages is that, it defers the issuance of equity.
Another advantage is the tax benefits as the interest paid provides tax benefit to the issuer.
For both investor and issuer, it provides an upside to current equity price because the conversion
is deferred.
To an investor, it is a way of ensuring a fixed rate of return with an upside on conversion,
whereas straight equity cannot promise any fixed rate of return.
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SEBI ICDR Regulations covers compulsorily convertible debentures, however, in case of CCDs, there is
parity with equity shares because, SEBI don’t grant exemption in terms of Reg29A of the Takeover
Regulations while computing the holding period of equity shares, if the equity shares have resulted out of
conversion of CCDs, the holding period of the two is reckoned together.
ii. Compulsorily Convertible Preference Share (‘CCPS’)
Compulsorily convertible preference shares are another type of securities which defers the conversion
into normal equity. Till the time of conversion a preference share dividend is paid to the holder. It has got
similar advantages compare to CCDs except:
Dividend doesn’t provide tax advantage as compare to interest paid on debt.
Lenders often put restrictions over dividend payment in the form of negative covenants.
Claim of CCPS holders would ranks below claim of CCD holders at the time of winding up of
issuer.
The legal nature of CCPS would be treated at par with equities because there is no obligation on
the issuer to redeem the CCPS at any point of time.
In view of the above, it can be inferred that both CCPS and CCD have many inherent advantages, but the
legal nature and tax advantages of the two are different, hence the issuance of such instruments would
depend on the specific requirements of issuer/investor on a case to case basis.
C. Debt Funding Options
Debt can be raised from various sources and in various forms. The debt instruments commonly used are
briefly described in the following sections:
i. Rupee Term Loans
SPV could raise debt funds in the form of Rupee Term Loan (RTL) which could be raised from a
consortium of domestic bank. In the present case the lenders will get the comfort from promoters and the
customers of SPV. RTL are available in the market linked to respective bank’s base rate.
Key aspects of funding through Rupee Term Loans
There would be good appetite for SPV borrowing for the project given the assured revenue and
promoter’s profile.
Longer tenors of up-to 10-14 years would be possible in this market since domestic lenders have
gained significant experience of long term lending to infrastructure projects over the past few
years.
Prepayment and cancellation options can be negotiated and covenants are relatively easy to meet.
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Flexibility is offered in terms of drawdown in line with the project progress and hence no or
minimum carry cost
Since the SPV has no running operations, the pricing of Rupee Term Loan in the initial few years
would be high compare to an entity already having some assets and operations. As the facilities
would start earning revenues, the pricing for later projects would become much more attractive.
ii. Debenture Issue (Rupee)
SPV could raise debt funds through a domestic issuance of debentures.
Key aspects of Funding through Rupee Bond Issue
As against borrowing through rupee term loans, Bond route provides a broader market since
mutual funds and provident funds may also participate in the placement.
This could be the fastest route for raising funds as against a syndicated loans, since the
investment decision would be taken by the treasury department of the banks and once the issue is
rated, the decision making process with all investors is much simpler and faster.
Another advantage would be relatively easier documentation unlike like comprehensive loan
agreements. The debentures can be secured or unsecured. However the same would impact the
pricing of the issue.
The funds would have to be drawn by SPV in one tranche as against the staggered requirement as
per project progress. This leads to additional costs in the form of carry cost.
The Bonds would be usually carrying a fixed coupon, resulting in a situation that SPV would not
be able to get any advantage if the interest rates fall and vice-versa.
Bond market in the country is maturing, relatively small market limited to good credit rating
companies; credit Rating for debenture issuances is mandatory and green-field Projects may
require credit enhancement to improve ratings for getting better price
Bonds are not pre-payable, except in a case where call option is built into the structure without
providing for a put option. However, market appetite for such issuance would not only be limited
but also the call option premium would result in an additional 10 to 30 basis points in terms of
option premium depending upon market conditions.
SPV could consider the Bonds option at a later stage after completion of the project by exercising
the prepayment option in respect of Bank’s Base Rate linked RTL, depending on the interest
rates at that time.
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iii. External Commercial Borrowing (ECB)
ECB facility is governed by ECB guidelines issued by RBI. While it is possible to raise ECB funds
denominated in US Dollars (USD), Pound Sterling, Japanese Yens (JPY), Euro or the Renminbi, the most
common currency use for ECBs is USD.
Key aspects of Funding through External Commercial Borrowing facility
Availability is more for ECB with 5 to 7 years average maturity, longer tenor ECB facility
availability is very limited; competitive pricing may not be possible.
Given promoters agreement for the services/use of facilities, the funds should be available at
attractive spreads over benchmark 6 Month LIBOR.
Since the borrowings would be in forex denominated, to the extent of the import component of
capex being funded by such borrowings, any variation in the Rupee- USD exchange rate will not
affect the quantum of funds required to be raised as debt by SPV for meeting the capex.
Limited appetite for green field projects to be executed on limited/non-recourse basis. Further
ECB lenders propose relatively stringent covenants and due-diligence as compared to RTL.
Longer construction periods and limited flexibility in drawdown schedule may lead to higher
commitment fees.
Suitable hedging mechanism to be in place depending on currency of Project cost and project
cash flow. In the present case since revenues for the SPV would be in INR, the same would be
requiring hedging and would be an additional cost.
Withholding tax implications for Foreign Bank may result in additional cost.
iv. Export Credit Agency Funding
ECA facilities are also governed by ECB guidelines issued by RBI. Export Credit Agencies (ECAs) are
the entities formed by various countries to promote export from their respective nations, e.g., Korea Exim
bank (K-Exim), US-Exim, Japan Bank for International Co-operation (JBIC), Export Development
Canada, etc. These agencies provide long term fixed and floating rate financing to companies that import
capital goods from their countries. However, subsequent to formation of Euro Zone, some of the
European ECAs expanded their role to include export support on a pan European basis.
In addition to direct funding, some of the ECAs provide guarantees, based on which the borrower can
raise cheaper funds in the international or Indian markets.
Key aspects of Funding through ECA facility
The advantages of availing ECA financing are the same as ECBs. In addition,ECA sources can
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offer longer tenor funds than ECB lenders and also offers attractive fixed rate funding options
ECA funding involves more elaborate assessment process
Tie-up is more time consuming than ECBs
Some of the ECAs require an Indian bank to provide counter guarantee against their funding
v. Multilateral Agency (‘MLA’) Funding
MLA funding is similar to ECA funding except, ECA is mostly Supplier’s country specific funding
where the quantum is restricted to the capex import component. A few MLAs are International Finance
Corporation (Investment Banking arm of World Bank) & Asian Development Bank. These ECB facilities
are similar to those offered by ECA lenders except these are usually supplier country agnostic.
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Annexure IV: Summary of discussion on CUF implementation by SBU’s
A. LPG Business
Existing Locations:
In case of existing LPG plants, locations where two or more OMCs are having their LPG Bottling Plants
were identified. There are 31 locations where bottling plants of more than one OMC are operating at
present. Out of 31 locations, at 22 locations, two OMCs are operating and at balance 9 locations, all three
OMCs are operating. However at none of the locations other than Kondapally the boundaries are shared.
Conclusion: Merger of the existing LPG Plants and its operation under CUF principle is not
recommended due to following reasons:
Investments have already been made in the respective infrastructure.
Different OMCs have different wage structure.
The staff required at state of the art plants is already optimized by OMCs. No further reduction in
manpower is expected in these plants. In case the plants are transferred to JV, it will lead to
idling of present manpower deployed at these bottling plants and re-deployment of this
manpower will be a major constraint.
OMC plants are located far from each other (except Kondapally) at any given one location.
Merger of these plants together will be practically difficult.
In case capacities are merged and higher capacity bottling plants are operated under CUF
principle, the following problems are envisaged:
o The cylinders of the three Oil Marketing Companies are not interchangeable and
therefore it will warrant proper segregation of cylinders for filling, dispatch of the
cylinders belonging to particular OMC to the distributors of same OMC.
o Segregation of defective cylinders for repairs and testing would become a major
operational constraint
o It would also lead to accounting issues.
Merging of capacities beyond a particular threshold may have repercussions on safe
handling/operations at such bottling plants and the risk perception with merging of facilities may
also undergo major change which may not find favors with Statutory Authorities.
The above Issues mentioned are complex issues and would need detailed feasibility study which will
bring about radical changes to make it implementable which is not possible on immediate basis. As per
current practice, the OMC plants are already working as CUF per se and at present, based on the spare
capacity as well as on logistic considerations, OMCs are having bottling hospitality exchange from 49
bottling plants to limited volumes. Regular meetings are held between OMCs to identify new locations
for such hospitality. In view of above, Industry feels that it will not be advisable to include existing LPG
plants under ‘CUF’ Concept.
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New Locations:
With respect to construction of new bottling plants under CUF principle, earlier 3 locations i.e. bottling
plants at Chitradurga (Karnataka), Agra (UP), Sirsa (Haryana) were identified for construction under
CUF principle.
However, consequent to capping of domestic cylinders, there has been a drastic dip in the demand of
LPG, resulting into underutilization of the existing plants. Therefore, during the Industry meeting held
on 24.05.2013, it was discussed that the proposals for setting up of bottling plants at the above 3
locations are not viable and therefore further progress on the same be kept on hold till the market
correction takes place and demand gets stabilized.
Notwithstanding the above, the issues as highlighted in conclusions would also remain very much
relevant to setting up of new bottling plants on Industry basis following CUF principle. It would need
further study to identify various possible changes after which only the proposal can be re-considered for
further evaluation for its implementation.
B. Aviation Business
During the meeting on 8th March, 2013, under the Chairmanship of Secretary (P&NG) and Secretary
Ministry of Civil Aviation to discuss the issues related to Open Access Facility for ATF at Airports,
Secretary PNG suggested:
That Feasibility of setting up ATF infrastructure and HRS facilities at major Airports, including
Chennai, Kolkata and Goa through JVs should be examined.
To ensure participation of various stake holders , including private players, in setting up and
managing ATF infrastructures at airports
Subsequently, on 23rd May, 2013, during meeting of Aviation SBU Heads, it was agreed by all three that
integrated Hydrant Refueling System (HRS) will be built at Chennai, Kolkata and Goa by a JVC/SPV of
IOCL, BPCL and HPCL and a working group of three companies will meet to work out the modalities.
For all existing locations Industry is of the view that:
JVC / SPV should be formed as an independent entity to operate under Open Access model
where ATF Infrastructure owner at Airport and ATF suppliers are at arms length to ensure that
there are none conflict of interests.
JVC /SPV should take ownership of existing ATF infrastructure of all 3 PSU companies and start
developing the requisite fuelling Infrastructure through the process of Integration of existing
facilities and development of additional facilities in line with the development and requirement
of Airport and ensuring that there is no loss to OMCs.
Issues to be resolved / under discussion:
During the Working Group meeting on 8th June 2013, for discussing the modalities to set up
Integrated Hydrant refueling facilities at Chennai, Kolkata and Goa under SPV / JVC
arrangement
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IOCL was of the opinion that integration of Hydrant pipelines and pits to be done at tarmac of
the airport only, whereas BPC and HPC recommended to integrate entire Hydrant refueling
system at the airport , i e. Fuel farm (i.e. tank farm with receipt facilities, filtration, pumping
system etc.) along with the pipelines and refueling pits at the tarmac.
Additionally, IOC opined that Transfer of assets of individual Oil Companies to the JV can be
discussed and finalized as a subsequent step.
List of existing locations under ‘CUF’ : - All existing locations under Phase-I are enlisted below, to
be considered under ‘CUF”:
PHASE-I LOCATIONS
Sr. No. AIRPORT OMCs present
1 CHENNAI IOC,BPC,HPC
2 GOA(CIVIL ENCLAVE) IOC,BPC,HPC
3 KOLKATTA IOC,BPC,HPC
Conclusion:
Industry is of the view that as per the directions of MOP&NG and MOCA , ownership of ATF
(ATF Suppliers) at the airports are to be segregated and Common User Facility (CUF) should be
created by an independent JVC/SPV, at existing locations through the process of integration of
existing facilities or additional / new facilities plus development of Hydrant at Tarmac
There will be rationalization of the existing infrastructure and avoid duplication of static and
mobile facilities
Unlocking of land will happen as the scattered infrastructure in various parts of airport will shift
to one place
This will create a level playing field for all market players desirous of supplying ATF to Airlines.
This will ensure that there is no clash of interest between ATF fuel infrastructure owner at the
airport and ATF supplier and will give access to other suppliers and fair competition
Certain issues as mentioned above, i.e. whether to integrate entire Hydrant refueling system at the
airport or only tarmac and issue of transferring assets to JV etc. needs to be resolved at Industry
level.
C. Retail Business
In Industry meeting held at IOC HQ on 3rd June 2013, the matter for merger of existing locations was
deliberated. Subsequently, during the Industry meeting held at IOC on 19th June, 2013, each company
provided the details of its existing locations. IOC as an Industry Coordinator is in the process of
compiling OMC’s list of existing locations for circulation amongst Industry members.
In the meantime, BPCL & HPCL has compiled list of BPCL’s existing locations along with relevant
details,
Conclusion (Merger of existing Retail locations): As per the existing locations identified by BPC /HPC,
it may be possible prima facie, to merge total 15 IOC/BPC/HPC locations, i.e. North -6 , East – 1,
West – 5 and South – 3, subject to On- Site feasibility study.