mewarvivek project f

8/3/2019 Mewarvivek Project f

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Strategic Analysis of Resource Mobilization

in Power Finance Corporation Limited

SUMMITTED BY

VIVEK SINGH MEWAR

2nd

YEAR MBA

from

Amrapali Institute,Haldwani(Nainital) Uttarakhand

Carried out during

Summer Internship Programme

At

POWER FINANCE CORPORATION LTD.,

URJANIDHI, 1, Barakhamba Lane, Connaught Place, NEW DELHI110001

Under the guidance of

Mrs. Tabassum

Asstt.Manager (Finance)

Power Finance Corporation Ltd.

Start Date for Internship: 10th

June 09

End Date for Internship: 10th

August 09


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Strategic Analysis of Resource Mobilization in Power Finance Corporation Limited

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Self Certification by the Interns

I hereby certify that I, Vivek Singh Mewar have successfully completed my internship

with Power Finance Corporation. This is also to certify that this report is an original

product and no unfair means like copying etc have been used for its completion.

Vivek Singh Mewar

Signature:

Date:


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Certificate From the Summer Internship Providing

Organization

This is to certify that Mr.Vivek Singh Mewar has successfully completed his project on


during the period 10th June 2009 to 10th August 2009 for partial fulfillment of 2nd Year MBA

in Amrapali Institute,Haldwani (Nainital) Uttarakhand. We wish him all the best for all

his future endeavors.

Signature:

Date:


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ACKNOWLEDGEMENT

I express my deep sense of gratitude to our external guide Mrs. Tasbassum, Asstt.Manager

(Finance) Power Finance Corporation Ltd., for her valuable support and guidance given to

me through out the project. I consider myself lucky to have worked under her.

This project provided me a platform to increase my knowledge and empowered me with abetter understanding of concepts in the financial world scenario. And the most special thanks

to Power Finance Corporation who accepted me in spite of my inexperience in the field and

gave me the opportunity to work and learn with them.

Last but not the least I would like to thank my God and my ever loving and caring parents for

their ever encouraging words during my days of distress.

Vivek Singh Mewar

2nd

year MBA


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INDEX

I. Power finance corporation1.1 Introduction

1.2 Vision

1.3 Mission

1.4 Objectives

1.5Products & Services

1.6Borrowers profile

1.7Recent initiatives

1.8Accomplishments

1.9Future plans1.10Indian power sector

1.11Performance high lights

1.12Swot analysis

1.12.1 Strength

1.12.2Weakness

1.12.3Opportunities

1.12.4 Threats

1.13PFC business strategy

II. Structured debt instrument

2.1Step-up bonds

2.2Insured bonds

2.3Revenue bonds

2.4GARVEEs (Grant Anticipation Revenue Vehicles)

2.5Capital indexes bonds

2.6Range Notes

2.7Modifying the coupon of a bond

2.8Zero coupon bonds

2.9Floating rate bonds

2.10Inflation linked bonds

2.11Subordinated bonds

2.12Unsubordinated bonds

2.13Other variation

2.14Modifying the term to maturity of bond

2.14.1 Callable bonds

2.14.2 Puttable bonds


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2.14.3 Convertible bonds

III. Resource Mobilization Unit

3.1Introduction

3.2Rupees resources(Domestic)

Issue of bonds on Pvt. Placement basis

Pre issue activities

Post issue activities

3.3 Foreign currency resources (International)

3.4 PFCs Resource Mobilization

IV. Commercial Paper

V. Loans

5.1.1 Mibor Linked Loans

5.1.2 FCNR Bank Loans

5 .1.3 Short term loan (STL) &Medium term loan (MTL)

5.1.4 International Bonds

VI. Indian Debt Markets: as profile

6.1 Primary corporate debt Market

6.2 Secondary corporate debt Market

VII. Bench markets Reference Rate

7.1 LIBOR

7.2 EURIBOR

7.3 CCBOR

7.4 MIBOR


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VIII. Quarter wise analysis of investor category in PFCs borrowings (Bonds)

Year 2008 09

8.1 Quarter 1

8.2 Quarter 2

8.3 Quarter 3

8.4 Quarter 4

IX. MIBBOR interest rate scenario

X. External Commercial Borrowing

10.1 Introduction

10.2 External Commercial Borrowings (ECB) policy

XI. Suggestions & RecommendationsXII. Summary & conclusion

XIII. References


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Chapter I

POWER FINANCE CORPORATION (PFC)

1.1INTRODUCTIONPFC was incorporated in 1986 as a Financial Institution (FI) dedicated to Power Sector

financing and committed to the integrated development of the power and associated sectors.

The Corporation was registered as a Non Banking Financial Company by RBI in 1997. PFC

was declared as a Navratna PSE on 22nd June, 2007 by the Govt. of India, the highest

honour and recognition that any PSE aspires for in the country.

1.2 VISION

To be the leading Institution in Financing for substantial development of Indian Power

Sector and its linkages, with an eye on global operations.

1.3 MISSION

To become the most preferred Financial Institution in Power and Financial sector providing

best products and services; promote efficient investments in Power Sector to enable

availability of required quality power at minimum cost to consumers; reach out to global

financial system for financing power development; act as a catalyst for reforming Indias

Power Sector of tomorrow.

o To provide financial resources and encourage the flow of investments in power and

allied sectors

o To work as a catalyst to bring about institutional improvement in streaming the functions

of borrowers in the areas of financial, technical and managerial to ensure optimum

utilization available resources.

o To mobilize various types of resources viz. domestic and international

o To strive for up gradation of skill in power sector for efficient and effective growth in

power sector


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1.4 OBJECTIVES

To maximize the rate of return through efficient operations and introduction of innovative

financial instruments and services in power sector.

PFC was established with the sole objective of providing necessary funds in time at

competitive rates for implementation of power projects vis--vis development of various

power utilities and overall power sector. During the course of two decades of its journey,

PFC has developed extensive power knowledge, skills and expertise to provide solutions to

various problems faced by power utilities.

1.5 PRODUCT & SERVICES

PFC offers financial assistance through a range of products and services. Term loans,

however, continues to be the principal product. Over the years, PFC has been broadening its

product range, both in the power sector and financial services. While the financial services

include both fund based and non fund-based activities, the portfolio of power sector schemes

has been expanded to cover Non-Conventional energy projects.


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PFC, through regular interactions with the borrowers, understands their specific requirements

and develops suitable products. The new products/ services developed during the recent years

include the following.

Rupee Term Loans & Foreign Currency Loans/ Bridge Loans/ Short Term Loans ;

Reform-Linked Transitional Loans ;

Bill Discounting ;

Equipment Leasing ;

Buyers Line of Credit ;

Loans to Equipment Manufacturers ;

Line of Credit for the import of Coal ;

Debt Refinancing ;

Letters of Comfort ;Non-Fund Based Products Viz. , Deferred Payment Guarantees ;

Consultancy and Advisory Services

CONSULTING AND ADVISORY SERVICES

PFC is providing consulting and Advisory Services in the power and financial sectors to cater

to State Power Utilities / Electricity Regulatory Commissions, which also includes

Restructuring and Reform activities

Financial Management of resources

Project Management

Selection of Developers through Tariff based competitive bidding guidelines

HRD, MIS etc

Ultra Mega Power Project (UMPP) The government of India mandated PFC as nodal

agency to select the developer through competitive bidding

Consultancy Services Unit is providing assistance to over 35 Clients spread across over 20

States. Some of the assignments are repeat orders which exhibit the Clients satisfaction with

the services provided in the past. To augment the consultancy business, PFC separated its

consultancy unit as subsidiary company under name PFC Consulting Pvt. Limited .


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1.6 BORROWERSS PROFILE

State Power Utilities

State Power/ Electricity Departments

Central Power Utilities

Joint Sector Power Utilities

Private Sector Power Utilities

Co-operative Societies

Municipal Bodies

Power Equipment Manufacturers

1.7 Recent Initiatives:

Exploring possibilities of faster capacity addition through Special Purpose Vehicles.

Made a foray into renewable energy sector.

Extended tenor of loans up to 20 years for Hydro and 15 years for other schemes.

Policy for short term financial assistance for import of coal introduced

Expense limit increased for reforming GENCOS.

Short-term loan extended to TRANSCOS against receivable from DISCOMS.

Aims to capture a share of 20-25% of the total investment to be made in the Power

Sector during the Xth and XIth Plan period.

1.8 Accomplishments

First Developmental Financial Institution to introduce Operational and Financial Action

Plans to improve efficiency in the State Power Sector.

Long term financial resources to the power sector from multilateral agencies channelized

through PFC.

Tapped international financial markets to raise ECBs, setting benchmark rates for Indian

corporate.


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Complementing the efforts of Govt. of India, for its sponsored programmes Accelerated

Generation & Supply Programme and Accelerated Power Development & Reform

Programme. Introduced new tailor-made products and services like debt re-financing, interest

restructuring, funding to equipment manufacturers, short term loans, buyers' line of

credit and loans for asset acquisition.

1.9 Future Plans

Aims to capture a share of 20-25% of the total investment to be made in the Power

Sector during the 10th and 11th Plan period.

To consolidate and expand present business.

To introduce new financial initiatives such as Universal Banking Services, Insurance,

Equity Participation and Merchant Banking.

To spread into allied sectors.

To make a foray into global markets.

Diversification in terms of forward or backward integration in the power sector

(financing for fuel tie ups and laying down of gas pipelines).

1.10 Indian Power Sector

In the recent past, Indian economy has decisively moved to a higher growth trajectory

marked by GDP growth of above 8% during the last 5 years. During the XI Plan Period

(2007-2012) a growth target of 9% has been set by National Development Council, which

requires commensurate infrastructure in power, roads, ports etc. PFC as the dominant player

in the power sector, has a key role to play not only in the power sector but also in the

associated infrastructure sector. We are all aware that the demand for power has consistently

outstripped the supply. In order to bridge this demand supply gap, Govt. of Indias National

Electricity Policy (NEP) stipulates Power For All by 2012 and aims to achieve a per capita

consumption of 1,000 Kwh by the end of XIth Plan, by adding a capacity of over 1,00,000


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MW. This requires massive investment of over Rs.10,00,000 crore during this Plan period

including establishment of requisite transmission and distribution system.

The initiatives of the Govt. of India for adding the requisite capacity, have already started

yielding the desired results. A testimony to this is the commissioning of over 9,250 MW

capacity during the 1st year of the XIth Plan period, compared to about 21,000 MW

commissioned during all the 5 years of Xth plan. In addition, over 66,000 MW is already

under construction and will be supplemented by about 28,000 MW from renewable energy

sources and captive power plants. The above capacity addition programme excludes capacity

addition of 12,000 MW through UMPPs which has already been awarded and necessary work

is under progress for their commissioning in a phased manner in the initial years of XII Plan.

To provide thrust to investment in power sector, Govt. of India has announced setting up of a

`National Fund for Transmission and Distribution Reform in the Budget for FY 2008-09.

The proposed fund is expected to facilitate higher inflow of investment for strengthening and

augmenting the T&D network commensurate with the capacity addition programme and also

targets T&D loss reduction by providing grants on achievement of loss reduction, thus

benefiting the ultimate consumer in terms of reliable and quality power.

1.11 PERFORMANCE HIGHLIGHTS

With a glorious history of over two-decades, underscored by tangible accomplishments in

Indian power sector, PFC has firmly entrenched itself as a leading Financial Institution

through its knowledge, skills and expertise by providing innovative solutions to power

utilities. PFCs catalytic role in growth of the sector has catapulted it to the centre stage. This

has paved the way for its active involvement in a host of Government-sponsored initiatives

which include:

Ultra Mega Power Projects for economies of scale and deployment of Super Critical

Technology

Accelerated Power Development & Reform Programme (APDRP) for reduction of

AT&C losses

Merchant Power Plants to achieve the targeted capacity addition Assisting State Power Utilities in preparation of CDM projects for R&M of old


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Thermal and Hydro generation plants to enhance their life at rated capacity, Delivery

through Decentralised Management (DDM) to showcase model of

excellence in distribution primarily in rural areas,

Distribution, Reform, Upgrades & Management (DRUM) for commercially viable

distribution system for reliable and quality power etc.

Company had sanctioned Rs.1,86,419 crore and disbursed Rs.92,065 crore, by the end of

FY2007-08. It had supported a capacity addition of over 70,000 MW and about 33,000 MW

capacity has already been commissioned which is about 23% of the total installed capacity in

the country.

The Corporation witnessed yet another year of sterling performance and established new

benchmarks in various areas of its operation. The loans sanctioned for various projects

reached a figure of Rs. 69,498 crores, an increase of 123% over last year which shall pave the

way for higher disbursements in the years to come. The disbursement made during the year

reached a level of Rs. 16,211 crore, an increase of 15% over previous year. The Total Income

rose to Rs. 5,040 crore compared with Rs. 3,928 crore during the previous year representing

an increase of 28%. The Net Profit is up by 22% at Rs. 1,207 crore from Rs. 986 of previous

year. The Recovery Rate stood at 99.11% in respect of principal amount due and the net

NPAs have reduced to a record low of 0.01% of Net Loan Assets as on 31.3.2008.

PFC has been supporting reforms for overall improvement in the performance of State Power

Utilities. The Utilities are categorized based on the reform status, operational and financial

performance parameters which enable PFC to determine its credit exposure and differential

loan pricing mechanism. Quarterly Performance Research Report and the Annual Report on

Performance of State Power Utilities published by PFC is acknowledged as authoritative

source of information by various stakeholders in the Power Sector and also by State Power

Utilities who take corrective measures on the key issues flagged in the report to improve their

performance. The fact that PFC is a dominant player is amply substantiated by its market

share of over 20% in Indian Power Sector in terms of investment in the X Five Year Plan.

The Corporation is poised to take full advantage of the emerging opportunities in the power

sector.


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RECENT POLICY INITIATIVES

In order to keep pace with the emerging market requirements, the Company has taken several

new initiatives during the year under review. Some of the key policies introduced during the

year relate to financing of initial project development expenditure including land acquisition,

financing of grid-connected solar PV power generation projects, funding of energy saving

projects. In addition to this, policy and guidelines pertaining to lease finance scheme for wind

power projects, extent of funding for T&D projects, and payments terms for short-term loans,

were revised during the year.

1.12 SWOT ANALYSIS

1.12.1 STRENGTHS

o Indias leading power finance company catering to diverse needs of the high growth

power sector

o Govt. of India undertaking

o Good quality management

o Well established, Long standing relations in the power industry

o Implementing agency for Government schemes like AG &SP and APDRP

o Highest credit rating for domestic debt and capped by the sovereign rating for long-term

foreign debt

o High collection efficiency with implementation of Operational and Financial Action Plan

to ensure SEB discipline

o Strong financials with high net margins.

1.12.2 WEAKNESSES

o Poor asset quality with most of the lending to SEBs, whose loan repayment capabilities

in the long run is doubtful

o Concentration risk attributed to lending in single sector


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o Significant shortages in the supply of crude oil, natural gas or coal could adversely affect

the Indian economy and the power sector projects to which PFC has exposure, which

could adversely affect PFC

1.12.3 OPPORTUNITIES

Power sector presents significant investment opportunities

Sector expertise for consultancy and providing investment gateways for domestic and

external financial agencies

New business opportunities to cover the entire range of activities in the Power sector

1.12.4 THREATS

o REC has also been allowed to disburse funds to whole power sector whose operations

were, hitherto before, were restricted to rural areas. It diluted PFCs competitive edge.

o With increasing exposure to SEBs, their weak balance sheet may affect PFCs

creditworthiness

o Currently, borrowers of PFC are unable to attract other sources of funding. If the reform

program is successful, and these entities become creditworthy, PFCs ability to lend

against quality assets would be weakened.


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1.13 PFC BUSINESS STRATEGY

Figure 2-2 PFC BUSINESS STRATEGY

IMPLEMENTATION OF GOVERNMENT POLICIES AND PROGRAMMES

PFC, a Government Company, occupies a key position in government plans for the growth

and development of the Indian power sector. PFC had played and will continue to play a key

role in the implementation of government policies and programmers. PFC is acting as a

nodal agency to implement various policies and programmers of the GoI such as Accelerated

Power Development & Reform Program (ARDRP), Accelerated Generation & Supply

Programmers (AG&SP), Distribution Reform, Upgrades and Management (DRUM),

Delivery through Decentralized Management (DDM), Rural Electrification Initiative.

PFC had also provided value to its clients by improving their operational and managerial

capabilities and also by assisting them in their reform and restructuring programmes.


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PROMOTING REFORM & RESTRUCTURING OF STATE POWER UTILITIES BY PFC

State Entity Action Plans - Reform Operational and Financial Action Plans (R-OFAP) are

formulated in consultation with utility concerned for developing a scheme for

improvement of the entities technical and financial performance; preparing a financial

package where funding is linked to the entity reaching specified targets and goals, it

also focuses on self-sustainability of the sector in the long run.

Initiative towards Reforms and Restructuring - PFC has been acting as a catalyst and

promoting reforms for over all improvement in the financial and technical performance

of the State Power Utilities.

It brings out a research report containing key operational and financial performance

parameters, reform status, implementation of Electricity Act 2003, areas of concern and

conditions for improvements on quarterly basis and is sent to the stakeholders flagging the

key issues for review and corrective measures.

GROWTH STRATEGIES

State Sector financing to continue to be mainstay with focus on enhanced funding of

Private Sector

Loan Syndication for Large projects

Expansion of borrowers portfolio to cover various fuel suppliers for power generation

like coal, lignite, oil & gas companies etc

To focus on non-Conventional Energy Sources like Wind Power, Biomass etc and

Energy Conversation and Energy Efficiency projects.


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Chapter II

STRUCTURED DEBT INSTRUMENTS

Debt instruments represent contracts whereby one party lends money to another on pre-

determined terms with regard to rate of interest to be paid by the borrower to the lender, the

periodicity of such interest payments, and the repayment of the principal amount borrowed.

The terms of lending can be varied to arrive at innovative debt instruments to attract wider

investor base.

2.1 Step-up Bonds

In this kind of bonds the coupon rate increases over time. The bond structure could be so

designed where in the coupon rate would be x % for first few years and then x + y % for the next

few years and so on. It provides incentive to the investors to hold on to the bond for a longer

duration. (Ex: IDBI Growing Interest Bond (1999-2000)).

2.2 Insured Bonds

In this kind of instrument principal and coupon interest is insured by an insurance company. The

deal is so worked out that the bond holder is paid by the insurance company in case of default or

delay in payment.

2.3 Revenue Bonds

These kinds of bonds are issued for enterprise financing that is secured by the revenues generated

by the completed projects themselves. These bonds can be typically linked to each most secured

project/proposal available.

2.4 GARVEEs (Grant Anticipation Revenue Vehicles)


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These bonds are issued by large transportation/infrastructure projects where cost of debt is lesser

than cost of delay.

2.5 Capital Indexed Bonds

These kinds of bondshave two components of Coupon Rate. First is the base coupon rate and

latter part is linked to some benchmark rate, which could be rate of inflation. This benchmark

could be anything inflation, crude oil prices etc. Typical advantage of this kind of bonds is that

they reduced the uncertainty related to the benchmark rate. Ex: RBI issued first ever 5 yr Capital

Indexed Bonds on Dec 29, 1997 for Rs. 704.52 Cr having a base coupon of 6%..

2.6 Range Notes

These are those securities which have floating rate bound within a specific range. If the reference

rate crosses a particular range the coupon rate becomes zero. (Reference rate is LIBOR).

2.7 Modifying the Coupon of a Bond

In a plain vanilla bond, coupon is paid at a pre-determined rate, as a percentage of the par value

of the bond. Several modifications to the manner in which coupons/ interest on a bond is paid are

possible.

2.8 Zero Coupon Bond

In such a bond, no coupons are paid. The bond is instead issued at discount to its face value, at

which it will be redeemed. There are no intermittent payments of interest. When such a bond is

issued for a very long tenor, the issue price is at a steep discount to the redemption value. Such a

zero coupon bond is also called a deep discount bond.

2.9 Floating Rate Bonds

Instead of a pre-determined rate at which coupons are paid, it is possible to structure bonds,

where the rate of interest is re-set periodically, based on a benchmark rate. Such bonds whose

coupon rate is not fixed, but reset with reference to a benchmark rate, are called floating rate

bonds. Some floating rate bonds are also have caps and floors, which represent the upper and

lower limit within which the floating rates can vary. A ceiling or a cap represents the maximum


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interest that the borrower will pay, should the benchmark rate move above such a level. Most

corporate bonds linked to the call rates, have such a ceiling to cap the interest obligation of the

borrower, in the event of the benchmark call rates rising very steeply. Floating rate bonds,

whose coupon rates are bound by both a cap and floor, are called as range notes, because the

coupon rates vary within a certain range.

2.10 Inflation linked BondsIn these bonds the principal amount is indexed to inflation. The interest rate is lower than for

fixed rate bonds with a comparable maturity. However, as the principal amount grows, the

payments increase with inflation. The government of the United Kingdom was the first to issue

inflation linked Gilts in the 1980's. Treasury Inflation-Protected Securities (TIPS) and I-bonds are

examples of inflation linked bonds issued by the U.S. Government.

2.11 Subordinated Bonds

These have a lower priority than other bonds of the issuer in case of liquidation. In case of

bankruptcy, there is a hierarchy of creditors. First the liquidator is paid, then government taxes,

etc. The first bond holders in line to be paid are those holding what is called senior bonds. After

they have been paid, the subordinated bond holders are paid. As the expectation that you get

paid back is lower, the risk is higher. Therefore, subordinated bonds have a lower credit rating

then senior bonds. The main examples of subordinated bonds can be found in bonds issued by

banks, and asset-backed securities. The latter are often issued in tranches. The senior tranches

get paid back first, the subordinated tranches later

2.12 Unsubordinated Bonds

In addition to the credit quality of the issuer, the priority of the bond is a determiner of the

probability that the issuer will pay you back your money. The priority indicates your place in

line should the company default on payments. If you hold an unsubordinated security and the

company defaults, you will be first in line to receive payment from the liquidation of its assets.
http://en.wikipedia.org/wiki/Inflation_linked_bondhttp://en.wikipedia.org/wiki/Inflation_linked_bond


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2.13 Other Variations

The structures that enable the borrowers to defer the payment of coupons can also be created.

Some of the more popular structures were : (a) deferred interest bonds, where the borrower

could defer the payment of coupons in the initial 3 to 7 year period; (b) extendible reset bond,

in which investment bankers reset the rates, not on the basis of a benchmark, but after re-

negotiating a new rate, which in the opinion of the lender and borrower, represented the rate of

the bond after taking into account the new circumstances at the time of reset.

2.14 Modifying the Term to Maturity of a Bond

2.14.1 Callable Bonds

Bonds that allow the issuer to alter the tenor of a bond, by redeeming it prior to the original

maturity date, are called callable bonds. The inclusion of this feature in the bonds structure

provides the issuer the right to fully or partially retire the bond, and is therefore in the nature of

call option on the bond. Since these options are not separated from the original bond issue,

they are also called embedded options. A call option can be an European option, where the

issuer specifies the date on which the option could be exercised. Alternatively, the issuer can

embed an American option in the bond, providing him the right to call the bond on or anytime

before a pre-specified dated.

2.14.2 Puttable Bonds

Bonds that provide the investor with the right to seek redemption from the issuer, prior to the

maturity date, are called puttable bonds. The put options embedded in the bond provides the

investor the right to partially or fully sell the bonds back to the issuer, either on or before pre-

specified dates. The actual terms of the put option are stipulated in the original bond indenture.

2.14.3 Convertible Bonds

A convertible bond provides the investor the option to convert the value of the outstanding

bond into equity of the borrowing firm, on pre-specified terms. Exercising this option leads to

redemption of the bond prior to maturity, and its replacement with equity. At the time of the

bonds issue, the indenture clearly specifies the conversion ratio and conversion price.


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Chapter III

Resource Mobilization Unit

3.1 Introduction

Resource Mobilization Unit (RMU) is responsible for raising fund resources both in domestic

for further disbursement as financial assistance to its customers. RMU also undertakes

various activities like appointment for various agencies like RTA, Trustees, IPA, Collecting

and Paying Banker for coordinating the resource mobilizing process. It is also responsible for

listing for various debt instruments on NSE.

The main objective of the RM department is to mobilize resources/raise funds at the

minimum cost and the easiest terms and conditions keeping in mind the requirements,

objectives and the financial position of the company.

The fund requirement for carrying out disbursement varies from year to year. In 2000-2001,

the disbursement was amounting to Rs. 3230 Crores. In the year 2005-2006 PFC achieved a

disbursement level of as high as 9870 Crores, a three-fold increase. Thus, in order to keep

pace with the increasing level of disbursement needs, the RMU has to keep itself occupied

and vigilant to tap the markets for smooth operations of the company.

It generally funds assets, comprising loans to the power sector, with borrowings of various

maturities in the international and domestic market. Market borrowings include bonds, short

term loans, medium term loans, long term loans, and commercial papers. Since 1999, all

funds raised, both domestic and international, have been raised on an unsecured basis and we

have no outstanding secured loans as on March 31, 2008 The following table sets forth debt-

funding operations for total indebtedness classified by rupee denominated and foreign

currency source at March 31, 2002, 2003, 2004, 2005,2006,2007 and 2008. The Rupee

equivalents of foreign currency debts are based on the bank- selling rate at the end of each

fiscal year.


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The company segments the market into two:

Domestic and

International

3.2 Rupee resources (Domestic)

In terms of the domestic resource, a significant proportion of Rupee funds are raised through

privately placed bond issues in the domestic market and term loans. It has a diverse investor

base of banks, financial institutions, mutual funds, insurance companies, provident fund trusts

and superannuation trusts. The bonds issued are unsecured, redeemable, non-convertible,

non-cumulative and taxable and are listed on the wholesale debt market segment of the NSE.

The bonds are rated LAAA by ICRA and AAA by CRISIL, the highest safety domestic

ratings.

In fiscal 1988, the ministry of finance authorized public sector issuers that were infrastructure

oriented to issue tax-exempt bounds. The corporation historically has been given a large shareof this annual allocation and a large portion of the funds were raised through tax-exempt

bounds. From fiscal 2001 onwards, it became part of governments overall policy to reduce

funding support to companies that had became financially independent and that could raise

resource at competitive rates at their own. After this time, direct support from the

Government of India for raising debt reduced. As on march 31, 2007, corporation had

Rs.2,800 million in tax-exempt bonds outstanding.

In addition as on march 31, 2007, corporation had Rs. 1015000 million in non-exemptbounds and Rs. 350000 million in term loans from Indian banks and financial institutions.

In fiscal 2006, PFC issued Rs. 1,340 million worth of infrastructure bounds, on a private

placement basis, which were issued with tax benefit under section 88 of the income tax Act,

1961. These tax benefits made the bonds attractive to individuals and Hindu Undivided

Familys.


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Portfolio during 07-08

During the Financial year 07-08 the RMU was able to mobilize enough funds to meet the

disbursement targets. However it raised lesser amount of funds as compared to the amount of

funds which were estimated in the borrowing plan for the financial year due to the revised

disbursement targets. The majority of the funds in the financial were raised by the bonds

(unsecured, non-convertible). The RMU was also able to mobilize around 50% of the funds

requirement by the way loans having maturities ranging from 6 months to 5 years.

Borrowings during

FY 2008-09 (in %age) Commercial

Paper

10%

Short Term

Loan

6%

Long Term

Loan25%

Bonds

59%

Commercial Paper

Short Term Loan

Long Term Loan

Bonds


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Issues of bonds on private placement basis.

a) Pre issue activity

Statutory Guidances

in r/o issue of bonds

on Private placement

Preparation of

information

Memorandum

presentation of

financial and

market data

Forward lookingstatements

Risk factors

Board approval and

uploading on NSE Web

site on WDM Segments

A. Registrar and Transfer Agent

B. Trustees

C. Collection Bankers

D. Merchant Bankers

E. Issuing & Paying agent


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b) Post Issue Activities

Fig 2.3: Post Issue Activities

Borrowing Plan/ Fund

Requirement from TMU

Analysis of liquidity

and market scenario

Assessment of AL&RM positionfor fixation of tenure

Decision on type of

Bond Issue

Tenor Coupon RateFixed/

Floating

With/ Without

Arranger

Plain Vanilla

/Swap

Launch of Bond Issue

Receipt of Funds/

Application Forms

Closure of issue

Allotment of Bonds


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3.3Foreign currency resources (International)

PFC began accessing foreign currency loans from multilateral, bilateral and export credit

agencies in fiscal 1991 when it obtained funds from the French government, which were

guaranteed by the government of India. Subsequently, it obtained a complementary financing

loan from the Asian Development Bank in fiscal 1991, which was denominated in US Dollars

and Japanese Yen. Traditionally, major foreign currency borrowing has been from

multilateral institutions such as the World Bank and the ADB. These funds were routed

through government of India, were the foreign exchange risk was borne by government of

India.

PFC first accessed commercial foreign currency borrowings that were not guaranteed by the

Government of India in January 1997 with the establishment of a syndicated loan facility.

Since then, corporation has borrowed funds in the international commercial markets in the

form of syndicated loans as well as fixed and floating rate note/bonds issues. This has

enabled PFC to diversify the investor base.

At present the corporation is borrowing directly from these agencies, where foreign exchange

risk is borne by the corporation. PFC has a US$50 million line of credit facility with the ADB

that has a 20 year tenure. This line of credit facility is guaranteed by the government of India.

Projects in the states of west Bengal and Maharashtra for strengthening the transmission and

distribution systems of state Power utilities and for the renovation and modernization of

thermal power plant are being funded this line of credit facility.

The 3 main decisions taken by Resource Mobilization department are:

i. When to raise Funds and for what tenure.

ii. Instruments to be used for raising these funds.

iii. Pricing of the debt raised.


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i ) When to raise funds

The RM Unit has to decide when will it be most conducive to raise funds for the company so

as to ensure there is:

a. Timely availability of funds.

b. Lowest Cost at which funds can be raised.

c. Least pressure for obligations.

The amount of funds to be raised is normally decided by the Treasury Management Unit. The

RM Unit prepares a Liquidity Statement to find out the time for raising funds when there is

least pressure for obligations for the company. Liquidity Statement shows the funds inflows

and outflows of the company. The following factors are taken into consideration while

preparing it:

Amount ofDisbursement that has to be made.

Interest Payments.

Repayment of loan taken by the company.

Taxes, Dividends, etc.

Funding Sources:

PFC generally fund their assets, comprising loans to the power sector, with borrowings of

various maturities in the international and domestic markets. Their market borrowingsinclude bonds, short term loans, medium term loans, long term loans, and commercial papers.


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ii) Instruments to be used for raising funds:

Debt instruments are obligations undertaken by the issuer of the instrument as regards certain

future cash flows representing interest and principal, which the issuer would pay to the legal

owner of the instrument. Debt instruments are of various types. They are:

a. Money Market Instruments: The term money market refers to the market for

short-term requirements and deployment of funds. Money market instruments are

those instruments, which have a maturity period of less than one year. The most active

part of the money market is the market for overnight and term money between banks

and institution (called call money) and the market for repo transactions. The main

traded instruments are commercial papers (CPs), certificate of deposits (CDs) and

Sources of Funds

Debt Equity

Short Term

Domestic International

Commercial Paper

FCNR (B)

Loan

ICD

ECB

Multilateral Loans

ECAs

Taxable & Non

Taxable Bonds

FCNR (B) (Fixed &

LIBOR Linked)

MIBOR

Linked

Fixed

Rate

Loans

Long Term to

Medium Term


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treasury bills (T-Bills). All of these are discounted instruments i.e. they are issued at a

discount to their maturity value and the difference between the issuing price and the

maturity/face value is the implicit interest. These are also completely unsecuredinstruments. One of the most important features of money market instruments is their

high liquidity and tradability. A key reason for this is that these instruments are

transferred by endorsement and delivery and there is no stamp duty or any other fee

levied when the instrument changes hands. Also there is no tax deducted at source

from the interest component.

b. Long term Debt Instruments: These are the instruments having a maturity

exceeding one year. The main instruments are Government of India securities

(GOISEC), State Government securities (state loans), Public Sector bonds (PSU

bonds), corporate debentures, etc.

Most of these are coupon bearing instruments i.e. interest payments (called coupon)

are payable at pre specified dates called coupon dates. At any given point of time,

any such instrument has a certain amount of accrued with it i.e. interest which has

accrued (but is not yet due) calculated at the coupon rate from the date of the last

coupon payment. E.g. if 30 days have elapsed from the last coupon payment of a 14%

coupon debenture with a face value of Rs.100, the accrued interest will be

100*0.14*30/365 =1.15

Whenever coupon-bearing securities are traded, by convention, they are traded at a

base price with the accrued interest separate. In other words, the total price would be

equal to the summation of the base price and the accrued interest.

iii) Pricing of the Issue: The unit has to keep a number of factors into consideration to

decide upon the price of the instruments and loan facilities it wish to avail.


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The factors considered by the company normally are:

Liquidity Position of the company

Present Benchmark Rates

Primary / Secondary Market Conditions

Timing of issue or raising

Quantum of funds to be raised

Liquidity in the debt market

Other Economic and market consideration

3.4 PFCs Resource Mobilization

PFC has initially made forays into the debt market to raise long-term funds through Tax-free

Bonds / SLR Bonds / Taxable Bonds. With the gradual withdrawal of budgetary support from

Govt of India and to keep up the high growth rates of disbursement, PFC diversified and looked

at the other long term sources like Rupee Term Loans from Term Lending Institutions/Banks/

Other Financial Intermediaries and Vanilla / Structured Taxable Bond Issuances. The preferred

mode of issuance has been private placement.

As the resource requirement for PFC is growing to keep up its disbursement growth rate it

needs to penetrate into the market by diversifying its investor base and also issuing innovative

debt Instruments to attract wider investor base. Some of the alternatives to diversify investor base

and debt instruments, PFC can look at the following strategies: -

Investor Base

The typical Investors in PFCs Paper have been the investors as detailed below. PFC can look at

penetrating into these segments more exhaustively and comprehensively

Banks FIs


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Mutual Funds

Provident Funds

Insurance Companies

PFC can also look at the other potential Investors as detailed below to diversify and add to its

investor base.

Regional Rural Banks

State Co-operative Banks & Scheduled Urban Co-operative Banks

State Financial Corporations

State Industrial Development Corporations

State Small Industries Development Corporations

Housing Finance Corporations

NBFCs

FIIs

Charitable Institutions, Trusts and Societies

Autonomous Bodies/Local Authorities

Primary Dealers

Corporates High Net worth Individuals

PFC has already written letters to most of the untapped investor base mentioned above to

indicate their interest in investing in PFC. Further, to build relations with Investors we are in

touch with them to handle any queries if any and have been sending information about PFC like

annual reports, intermediate financial results etc.


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Chapter IV

COMMERCIAL PAPER (CPs)

Commercial paper (CP) is an unsecured debt instrument of up to 365 days' maturity issued by

investment-grade corporations. CPs are issued by corporations/banks to finance their short-term

credit needs such as account receivables and inventories, to provide bridge financing in

connection with various transactions, and for day-to-day cash management. Despite this active

new-issue market, secondary trading is thin, consisting primarily of trades between the major

dealers and investors who wish to liquidate their holdings. In addition to having limited liquidity,commercial paper is subject to default. Hence, the difference in expected returns between a long-

term position in commercial paper and a strategy of rolling over shorter-term paper will reflect

not only the usual premia that compensate investors for interest-rate risk, but also premia to

compensate for default risk.

Chapter V

5.1 LOANS

5.1.1 MIBOR LINKED Loans

The benchmark index incase of these kinds of short terms instruments is Mumbai Inter-bank

Offer Rate (MIBOR). This instrument typical involves linking of interest rates to MIBORX

basis points. These kind of loans are one of the most cheapest source of finance

5.1.2 FCNR Bank Loans

FCNR (B) loans are a low cost, short-term funding source available to Indian Corporates.

Banks have been permitted to provide foreign currency denominated loans to their

customers from the resources mobilised under the FCNR (B) scheme. RBI granted this

permission to help banks to deploy their FCNR funds in a more commercially viable manner

and make available a better avenue of credit at cheaper interest rates to resident

borrowers. No special permission is required from the regulatory authorities for availing


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FCNR (B) loans and the existing rupee credit limits can be converted into a foreign currency

loan. The interest rates and the tenor of the loans are left free to be decided by negotiation

between banks and borrowers. They are generally granted for periods Upto three years.

Normally, loans under this scheme are not given for an amount less than USD 100,000.

Loans are generally denominated in the four currencies in which FCNR deposits are

accepted viz. US Dollar, Euro, Japanese Yen and Pound Sterling, the US Dollar being the

most popular currency of choice. In recent times, FCNR (B) loans have been the preferred

route for many Corporates especially with regard to their working capital requirements.

Even though Commercial Paper (CP) can be used to raise low cost funding, it is not possible

for all corporates to issue CPs due to the requirement of an acceptable credit rating for the

purpose. While the introduction of the scheme has placed a low cost funding option at the

disposal of Indian corporates, they have to deal with two types of risks when they avail such

loans.

Foreign exchange risk - risk of rupee depreciation against the currency of loan as the

principal and the interest have to be repaid in the foreign currency in which the loan is

denominated.

Interest rate risk - risk of the benchmark interest rate (LIBOR) being reset higher

e.g. one year loan with interest rate fixing (reset) every three months).

Therefore, the borrower has to take note of the fact that the loan is an advantage only

when the overall cost of borrowing (cost of forward forex cover + interest cost) in foreign

currency is less than the rupee cost of funds.

5.1.3 SHORT TERMS LOANS (STL) & MEDIUM TERM LOANS (MTL)

STLs & MTLs are loans which are available from banks. These kinds of loans normally carry a

prepayment clause but are hardly ever exercised. Typical advantage of STLs & MTLs is that it

can be drawn in tranches and according to requirement and constitutes no carrying costs. These

loans are to be repaid on a monthly basis and annualized cost is slightly higher than the indicative

cost of the Term Loan.


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Apart from the above sources of finance PFC can look into tapping the funds from other sources

such as Mutual funds, Insurance firms etc. In this regard process has been initiated with Life

Insurance Corporation (LIC) of India Limited for tapping their funds.

4.1.4 INTERNATIONAL BONDS

a) Euro bonds

b)Foreign bonds

a) Euro Bonds

Euro bond refers to the bonds issued and sold outside the home country of the currency of

issue. For e.g. a dollar bond issued in Europe is called euro dollar bond. Euro bonds are

simultaneously sold in many countries other than the country of currency in which the issue

is denominated. These bonds are issued in international market and denominated in hard

currency i.e. dollar, yen, pound, euro. Euro bonds in particular are bearer securities, the

names of the bearer are not registered anywhere. Euro bonds generally unsecured debt

securities maturing atleast a year after launch. Euro bonds are long-term loans usually having

a maturity period between 5 years to 30 years. Nowadays euro bonds have a maximum

maturity period of 10 years. The euro bonds may be fixed or floating rate bonds. Eurobonds

are suitable sources of finance for operations, which require:

Large capital sums of money for long period

Borrowing not subject to domestic regulations especially exchange controls, which may

limit their ability to export capital gains.

b) Foreign Bond

A bond issued in a particular country by a foreign borrower (or) a bond sold by a foreign

borrower, denominated in the currency of country in which it is sold and is underwritten &

syndicated by national underwriting syndicate in the lending country .Foreign bonds are

floated in the domestic capital markets (and are in the domestic currency of those markets) by


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non-resident entities. These bonds are different from Euro bonds in the sense that they are

governed by the regulations of the country in which they are issued whereas Euro bonds are

not. The bonds are generally named on the basis of the\ capital markets in which they arefloated. Some of the well-known foreign bonds are as follows:

Yankee Bonds: Yankee bond is a dollar denominated bond issued in U.S by a non-

U.S. borrower in the U.S. market. The advantages of Yankee bonds are that the longer

maturities of bonds place them outside the ECB ceiling. Yankee bond markets are

extremely deep and liquid market and funds are available at low interest rates for long

maturity periods. The US markets are not bound by rigid syndicates and fee

structures.

Samurai bond: Samurai bonds are yen denominated bonds issued in Japan by a

non-Japanese borrower.

Bulldog bonds: Bulldog bonds are pound denominated bonds issued in U.K.

domestic market by a non U.K. borrower.


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Chapter VI

Indian Debt Markets: A Profile

Indian debt markets, in the early nineties, were characterized by controls on pricing of assets,

segmentation of markets and barriers to entry, low levels of liquidity, limited number of

players, near lack of transparency, and high transactions cost. Financial reforms have

significantly changed the Indian debt markets for the better. Most debt instruments are now

priced freely on the markets; trading mechanisms have been altered to provide for higher levels

of transparency, higher liquidity, and lower transactions costs; new participants have entered

the markets, broad basing the types of players in the markets; methods of security issuance, and

innovation in the structure of instruments have taken place; and there has been a significant

improvement in the dissemination of market information.

Regulator's

SEBI,RBI,DCA

MARKET SEGMENT ISSUER INSTRUMENT INVESTOR

SOVERIGN ISSUE

PUBLIC SECTOR

PRIVATE SECTOR

Central Govt.

State Govt.

Comm Banks/DFIs

PSUs

Govt. Agencies &Stat. Bodies

Corporates

Pvt. Sector Banks

GOI dated security,T-Bill, State Govt.

Security, Index Bond,

Zero Coupon Bond

Govt. Guaranteed Bonds/Debentures

PSU Bonds,Debenture, CP

CD, Bonds,Debenture

CD, Bonds,Debenture,CP

PCDs, Bonds,Debenture, CP, SPN,Floating Rate Notes

RBI

DFI

BANK

PENSION FUND

FIIs

CORPORATES

INDIVIDUALS

PROVIDENT FUND

INSURANCE Co.,TRUST, MUTUAL

FUND


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6.1 Primary Corporate Debt Market

Market structure consists of issuers, instruments, processes, investors, rating agencies and

regulatory environment.

A. Issuers - Indian Debt Market has almost all possible variety of issuers as is the case in

many developed markets. It has large private sector corporate, public sector undertakings

(union as well as state), financial institutions, banks and medium and small companies.

B. Instruments - Till recently Indian debt market was predominantly dominated by plain

vanilla bonds. Over a period of time, many other instruments have been issued. They

include partly convertible debentures (PCDs), fully convertible debentures (FCDs), deep

discount bonds (DDBs), zero coupon bonds (ZCBs), bonds with warrants, floating rate

notes (FRNs) / bonds and secured premium notes (SPNs).

C. Processes - There are several processes that are in vogue in India as well as in other

markets. The more popular ones are public issue and private placement routes. The

dominance of private placement in total issuances is attributable to the following factors -

Under private placement, the deals can be tailor made to suit requirements of both the

issuer and the investor.

The mandatory lengthy issuance procedure for public issues, in particular, the

information disclosure requirements, was not applicable to private placement.

It is observed that private placement route generally involves lower issuance costs.

D. Intermediaries - Two classes of intermediaries required for the proper development of

debt market are broker and investment banker/ merchant banker. Most of the brokers as

well as merchant bankers in India are inadequately capitalized and their professional

knowledge also needs further improvement.


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E. Investors - For the development of Corporate Debt Market / Fixed Income Securities

Market, it is necessary and sufficient to have a large as well as diverse number of

sophisticated / institutional investors.

F. Rating agencies - India has a well developed Credit Rating Agency system and rating

agencies are well experienced and regarded. By and large, their ratings do carry

confidence in the market.

6.2 Secondary Corporate Debt Market

Appropriate micro-structure of secondary market is vital for trading, clearing and

settlement. The present infrastructure has its own merits and demerits. Some of the micro

structure features are discussed below:

A. Trading PlatformCorporate debt instruments are traded either on bilateral agreement

between two counterparties or on a stock exchange through brokers. Worldwide, the

majority of transaction in corporate bonds is conducted in the over-the-counter (OTC)

market by bilateral agreements. In India corporate bonds are traded (ANNEXURE 1),

mostly, on WDM segment of NSE. The National Stock Exchange (NSE) introduced a

transparent screen- based trading system in the whole sale debt market, including

government securities in June 1994. The wholesale debt market (WDM) segment of NSE

has been providing a platform for trading / reporting of a wide range of debt securities.

The WDM trading system, known as NEAT (National Exchange for Automated

Trading), is a fully automated screen based trading system, which enables members

across the country to trade simultaneously with enormous ease and efficiency.

B. Clearing and Settlement Mechanism - Primary responsibility of settling trades

concluded in the WDM segment rests directly with the participants and the exchange

monitors the settlement. Mostly these trades are settled in Mumbai. Each transaction is

settled individually and netting of transactions is not allowed.


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C. Investors in WDM - large investors and high average trade value characterize this

segment. Till recently the market was purely an informal market with most of thetrades

directly negotiated and stuck between various participants. The commencement of this

segment by NSE has bought transparency and efficiency to the debt market, along with

effective monitoring an surveillance to the market.

D. Regulatory Environment - listed corporate debt is under the regulations of SEBI. SEBI

is involved whenever there is any entity raising money from individual investors through

public issue/private placement. It regulates the manner in which such money are raised

and tries to ensure a fair play for the retail investor.


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Chapter VII

Benchmarks Reference Rate

A good benchmark reference rate provides the pulse and direction of the market for the day

as it is collated in early market hours from important market participants who Weigh their

options on various factors that would likely to drive their lending and borrowing business

during the course of the day. The important factors include, among others, information on

liquidity condition in the market, demand and supply condition, central banks likely support

to the market, money flows in and out of the market, general rates prevailing in the short term

markets, inflation rate updates, important policy directives, etc. A good benchmark rate

should garner the respect of the market participants and used widely in. LIBOR (London

Inter Bank Offer Rate) disseminated by British Banks Association is one of the most

important and widely used benchmark reference rate in the world. Many central banks also

disseminate reference rates like Repo/Reverse Repo rates. A dynamic benchmark reference

rate is a very important infrastructural support to the market participants in financial markets.

This is important as all derivative pricing is done on the basis of the reference benchmark

rates. The benchmark reference rate is an interest rate closely followed by market participants

in pricing their products and using the same while executing various other transactions. An

ideal benchmark rate plays a useful role not only in the short term market but also helps inpricing of complex products like derivatives. Some of the most followed benchmark rates are

-

7.1LIBOR - The London Interbank Offered Rate is a daily reference rate based on the

interest rates at which banks offer to lend unsecured funds to other banks in the London

wholesale money market (or interbank market). LIBOR will be slightly higher than the

London Interbank Bid Rate (LIBID), the rate at which banks are prepared to accept deposits.

During 1984 it became apparent that an increasing number of banks were trading actively in a


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variety of relatively new market instruments, notably Interest Rate Swaps, Foreign Currency

Options and Forward Rate Agreements. Whilst recognizing that such instruments brought

more business and greater depth to the London Interbank market, it was felt that futuregrowth could be inhibited unless a measure of uniformity was introduced. In October 1984

the British Bankers' Association working with other parties such as the Bank of England

established various working parties, which eventually culminated in the production of the

BBAIRS terms - the BBA standard for Interest Swap rates. Part of this standard included the

fixing of BBA Interest Settlement rates, the predecessor of BBA LIBOR. From 2 September

1985 the BBAIRS terms became standard market practice. BBA LIBOR fixings did not

commence officially before 1 January 1986, although before that some rates have been fixed

for a trial period commencing in December 1984. LIBOR is published by the British Bankers'

Association (BBA) after 11:00 am (and generally around 11:45 am) each day, London time,

and is a filtered average of inter-bank deposit rates offered by designated contributor banks,

for maturities ranging from overnight to one year. There are 16 such contributor banks and

the reported interest is the mean of the 8 middle values. The shorter rates, i.e., up to 6 months,

are usually quite reliable and tend to precisely reflect market conditions. The actual rate at

which banks will lend to one another will, however, continue to vary throughout the day.

7.2EURIBOR - The Euro Interbank Offered Rate is a daily reference rate based on the

averaged interest rates at which banks offer to lend unsecured funds to other banks in the euro

wholesale money market (or interbank market). EURIBOR rates are used as a reference rate

for euro-denominated forward rate agreements, short term interest rate futures contracts and

interest rate swaps, in very much the same way as LIBOR rates are commonly used for

Sterling and US dollar-denominated instruments. They thus provide the basis for some of the

world's most liquid and active interest rate markets. Domestic reference rates, like Paris'

PIBOR or Frankfurt's FIBOR merged into EURIBOR on EMU day on 1 January 1999. A

representative panel of banks provide daily quotes of the rate, rounded to two decimal places,

that each panel bank believes one prime bank is quoting to another prime bank for interbank

term deposits within the Euro zone, for maturity ranging from one week to one year. Every

Panel Bank is required to directly input its data no later than 10:45 a.m. (CET) on each day

that the Trans-European Automated Real-Time Gross-Settlement Express Transfer system


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(TARGET) is open. At 11:00 a.m. (CET), Reuters will process the EURIBOR calculation and

instantaneously publish the reference rate on Reuters pages 248-249, which will be made

available to all its subscribers and to other data vendors. The published rate is a rounded,truncated mean of the quoted rates: the highest and lowest 15% of quotes are eliminated, the

remainder are averaged and the result is rounded to 3 decimal places. EURIBOR rates are

spot rates, i.e. for a start two working days after measurement day. Like US money-market

rates, they are Actual/360, i.e. calculated with an exact day count over a 360-day year.

EURIBOR was first published on 30 December 1998 for value 4 January 1999.

7.3CCBOR - CCIL released its Collateralized Benchmark Reference Rates

(CCBID/CCBOR) with effect from March06. The rates were derived out of orders placed in

the Collateralized Borrowing and Lending Obligations (CBLO) market. CBLO segment has

been in the forefront of the short term market for a long time and it leads the other short term

markets like Repo and call in setting up the rates. It is the largest short term market in terms

of volume. The CCBID/CCBOR rates are leased at 10.10AM on the basis of the orders

received in CBLO market by 10.00AM.

7.4MIBOR - It is one of the most widely used benchmark reference rate, MIBOR (Mumbai

Inter Bank Offer Rate), is disseminated by National Stock Exchange since 1998 and has been

most widely accepted benchmark rate. The MIBOR has been widely used in the IRS (Interest

Rate Swaps) contracts. The same is popularly known as FIMMDA-NSE-MIBOR/MIBID.

Many banks, finance companies and financial institutions have issued MIBOR-linked

deposits/papers. NSE MIBOR has been designed to give the overnight clean reference rate

and generally tracks the call market. The basic design behind the said rate is the polling

methodology. Rates are polled from the traders over phone as to what rate they would quote

to borrow or lend Rs.500 million in the overnight call money market. Thirty three banks and

primary dealers are polled on daily basis at 9.30 AM for overnight rate and at 11.30 AM for

term rates. The average rate with lowest standard deviation is taken as the reference rate for

the market. However, a boot strapping is used if there are sufficient rates polled in order to

derive multiple average rates with their respective standard deviations. However, the traderscan wrongly quote the rate as there is no compulsion on the polled trader to correctly give a


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quote and do a deal on the said rate. NSEIL disseminates 4 MIBOR/MIBID rates daily:

overnight, 14-day, 1-month and 3-month (ANNEXURE). However, only overnight

benchmark is relevant and widely used while other rates are not relevant as most of the days,it receives very few rates from polled members.

Characteristics of MIBID/MIBOR

Unbiased -The function of forecasting is more meaningful as the information comes

from a source, which is not only reliable but has no vested interest of its own in the

market movements.

Market Representation - It is based on rates polled by NSE from a representative

panel of 33 banks/ primary dealers.

Transparent - The reference rate is released to all the market participantssimultaneously through various media, making it transparent with the aspiration of the

market. Ensuing transparency helps the market participants to judge the market mood

and the probable rate one is likely to encounter in the market.

Reliable - The high level of co-relation between actual deals and the reference rate

gives an indication of its reliability. The bootstrapping technique guards against the

possibility of cartelisation and of extreme observations influencing the mean.

Scientifically Computed - The methodology of "Polling" with "Bootstrapping" is

scientific and the values are generated through a system that has been extensively

tested. The technique involves generating multiple data sets based on the rates polled

with a dynamically determined number of iterations, identification of outliers,

trimming the data set of its extreme values and computation of the mean and its

standard deviation.


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Elimination of Noise - The trimming procedure is vulnerable to market manipulation

of the rates due to the amount of sampling noise. Excessive trimming may lead to loss

of information whereas no trimming may lead to excessive influence of the extreme

values. To derive a true representative benchmark for the market NSE ensures that

after trimming at least 14 data points should remain in observation for the bid and for

the ask rates.

Consistency - The Exchange ensures that everyday the FIMMDA-NSE MIBID

MIBOR along with the respective standard deviations are disseminated.

Panel of Participants

Call Money Market

The major parties in the call money market are :

RBI - It regulates the call money market by changing the various reserve requirements

which has to be maintained by the banks and also by way of injecting and absorbing

money from the market (Liquidity Adjustment Facility).

Banks - These are the major players of the call money market. They borrow and lend

money in this market to meet their money demands and park the excess funds.

Primary Dealers - A primary dealer is a bank or securities broker-dealer that are

appointed by Reserve Bank of India. They are required to make bids or offers when the

RBI conducts open market operations. At present there are around 18 primary dealers

appointed by RBI (ANNEXURE).

NSE - It disseminates the benchmark reference rate which is the most widely used

benchmark reference rate, MIBOR (Mumbai Inter Bank Offer Rate), is disseminated

since 1998 and has been most widely accepted benchmark rate.


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CBLOs - CBLO segment has been in the forefront of the short term market for a long

time and it leads the other short term markets like repo and call in setting up the rates. It is

the largest short term market in terms of volume.

Parties in Call Money Market

RBI

PRIMARYDEALERS

CBLOs

NSE

BANK

CALL MONEYMARKET


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Chapter VIII

Quarter wise analysis of investor category in PFCs

borrowings (Bonds) Year 200809

8.1 Quarter I of Financial Year 200809

RBI has undertaken various measures, to curb the money supply and credit growth in the

economy and in turn ease the demand side pressures on inflation. However, the measures

didnt dampen the credit deployment activity. The various measures announced by RBI have

only increased the cost of borrowing for banks. As regards the availability of funds/liquidity

is concerned, there exists a cushion in form of the LAF Repo window. Under this window the

RBI continues to provide liquidity to the market on a daily basis. The RBI has hiked CRR by

125bps since April 2008. This has roughly amounted to a total absorption of Rs 47,000 cr

from the system. This roughly matches the amount infused in money markets through the

LAF Repo window. It implies that measures undertaken by RBI, largely in form of CRR

hikes, have only raised borrowing cost of banks and not reduced the availability of liquidity.

The banks are funding their loan books by, borrowing under the LAF window at a higher cost

and submitting securities from their existing portfolios as collateral. The

Any one of the measures considered above will no doubt increase the cost of borrowing

substantially for all the market participants. It had the desired impact on banking systemthrough rise in both deposit and lending rates and decline in availability of funds for credit.

But at the same time, it had impacted the primary dealers severely, through rise in their cost

of funding.


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During the said quarter PFC had enough liquidity to match the required liquidity. As PFC

was not desperately need of funds and market looked uncertain about the interest rate PFCventured in to the market with innovative structure which PFC which PFC had never tried

before. PFC launched floating MIBOR based bonds for the limited period of 3 years. The

MIBOR based bond was a huge success and PFC could mobilize good amount of funds. As

PFC had a long borrowing programme during the FY 2008-09 PFC had launched a proper

vanilla type bond issue in multiple segment of 3,5 and ten years at the market benchmark

rate. The issue too was a great success. PFC had mobilized 17.19% of the total funds

mobilized through bonds during FY 2008-09.

Qtr 1 Distibution

Limited

Company

18%

Mutual Fund

5%

Co operative

Bank

3%

Bank

21%Pension/Provid

ent/Superannua

tion/retirement

Fund

28%

Insurance

Companies

25%


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8.2 Quarter II of Financial Year 200809

The second quarter of 2008-09 (July-September) commenced with easing of liquidity

conditions mainly on account of a decline in the cash balances of the Central Government.

Accordingly, the call rate declined sharply and moved within the informal corridor of reverse

repo and repo rates in the first week of July 2008. Subsequently, the call rate edged above the

repo rate on most of days of the month, reflecting the two-stage CRR hike of 25 basis points

each (effective from the fortnights beginning July 5 and July 19, 2008, respectively) to 8.75

per cent. The average call rate was 8.76 per cent during July 2008. On a review of the

macroeconomic and monetary conditions, the First Quarter Review of the Annual Statement

on Monetary Policy for 2008-09 announced a 50 basis points hike in the repo rate (to 9.0 per

cent) effective July 30, 2008 and 25 basis points hike in the CRR (to 9.0 per cent) effective

the fortnight beginning August 30, 2008. The liquidity conditions mostly remained in a

deficit mode during July-August 2008 and accordingly the call rate hovered around the repo

rate. The average call rate was 9.10 per cent during August 2008.

During the second quarter of 2008-09 (up to September), scheduled commercial banks

(SCBs) increased their deposit rates for various maturities by 25-150 basis points. Interest

rates offered by public sector banks (PSBs) on deposits of maturity of one year to three years

increased from the range of 8.25-9.50 per cent in June 2008 to the range of 8.75-10.25 per

cent in September 2008. Interest rates of private sector banks on deposits of maturity of one

year to three years increased from the range of 8.00-9.50 per cent to the range of 8.30-10.50

per cent, while the deposit rates of foreign banks on maturity of one year to three years

increased from the range of 3.50-9.75 per cent to the range of 3.50-10.50 per cent during the

same period


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Monetary

In the second quarter, the primary business i.e. disbursement of loans to the lenders gained

some momentum and more over the debt servicing requirement was huge hence, the need for

the funds was felt by Corporation. PFC came up with multiple bond issues for period of 3,5,7

and 10 years tapping all segments. PFC had mobilized and amount of Rs 6206.60 Crs during

the period which also includes the record issue maximum subscription received by anycorporation in India. The subscription received under the bond issues mobilized during the

period, Banks had topped the list subscribing 34% of the bond issues. Pension funds, gratuity

funds superannuation fund retirement funds had also participated largely in the said issues.

Corporation had mobilized around 48.46% of the total funds mobilized through bonds during

the FY 2008-09.

Qtr II Distibution

Limited

Company

14%

Mutual Fund

11%

Co operative

Bank

3%

Bank

34%

Pension/Provid

ent/Superannua

tion/retirement/

gratuity Fund

26%

Insurance

Companies

12%


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8.3 Quarter III of Financial Year 200809

This quarterly review is set in the context of a deteriorating global economic outlook and

heightened uncertainty about the global financial sector. In fact, there has been a rapid and

marked downturn in the global economic outlook since the Reserve Banks Mid-term Review

in October 2008. The continued bad news from large international financial institutions on a

regular basis renews concerns as to when the global financial sector might attain a semblance

of stability.

The initial hope that the crisis could be contained in the financial sector has been belied.

With all the advanced economiesthe US, Europe and Japanfirmly in recession, the crisishas fully transmitted from the financial sector to the real economy. The loss of confidence in

the global financial markets has set off a chain of deleveraging, declining asset values, falling

income, contracting demand and rising unemployment. Governments and central banks

around the world are responding to the crisis with bold and unconventional initiatives. Even

so, there is a contentious debate on whether these measures are adequate and appropriate, and

when, if at all, they will begin to have an impact.

RBI MONETARY POLICY 2008-09 REMAIN UNCHANGED IN THIRD QUARTER

The Bank Rate has been kept unchanged at 6.0 per cent.

The repo rate under the LAF has been kept unchanged at 5.5 per cent.

The reverse repo rate under the LAF has been kept unchanged at 4.0 per cent.

The Reserve Bank has the flexibility to conduct repo/reverse repo auctions at a fixed rate or

at variable rates as circumstances warrant.

The cash reserve ratio (CRR) of scheduled banks has been kept unchanged at 5.0 per cent of

NDTL.

Liquidity Facilities

The Reserve Bank has allowed banks to avail liquidity support under the LAF for the purpose

of meeting the funding requirements of mutual funds (MFs), non-banking financial

companies (NBFCs) and housing finance companies (HFCs) through relaxation in the


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maintenance of SLR up to 1.5 per cent of their NDTL. Second, a special refinance facility for

scheduled commercial banks (excluding RRBs) was provided by the Reserve Bank on

November 1, 2008 under Section 17 (3B) of the RBI Act, 1934 up to 1.0 per cent of eachbanks NDTL as on October 24, 2008. Both these facilities are currently available up to June

30, 2009. In order to ensure that banks continue to have flexibility in their liquidity

management operations in the current market conditions, it has been decided:

To extend both the refinance facilities up to September 30, 2009.

The Government and the Reserve Bank also initiated a host of measures to increase capital

inflows and improving liquidity conditions. On September 22, 2008, the limit for borrowers

in the infrastructure sector for availing external commercial borrowing (ECB) was increased

to US$ 500 million per financial year from the earlier limit of US$ 100 million per financial

year for rupee expenditure for permissible end-uses under the approval route. The all-in-cost

ceiling for ECBs over average maturity of seven years was increased by 50 basis points to

450 basis points over 6-month LIBOR. On October 8, 2008, ECB policy was further

liberalised by including development of the mining, exploration and refinery sectors in thedefinition of Infrastructure sector.

On a review of the liquidity conditions, particularly in the context of the deterioration in the

global financial environment, the Reserve Bank announced a reduction of the cash reserve

ratio (CRR) by 250 basis points to 6.50 per cent with effect from the fortnight beginning

October 11, 2008. The Reserve Bank decided to conduct 14-day repo under the LAF at 9.0

per cent per annum for a notified amount of Rs.20,000 crore on October 14, 2008 with a view

to meet the liquidity requirements of mutual funds. It was also decided to conduct this repo

every day until further notice to a cumulative amount of Rs.20,000 crore for the same

purpose. Furthermore, the restriction on lending against certificates of deposits (CDs) and

buy back of CDs was relaxed for a period of 15 days with effect from October 14, 2008, only

in respect of CDs held by mutual funds.


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In view of the continuing global financial market uncertainties and their indirect impact on

Indian financial markets, the Reserve Bank announced a host of measures on October 15,

2008. First, it was decided, purely as a temporary measure, that banks may avail of additionalliquidity support exclusively for the purpose of meeting the liquidity requirements of mutual

funds to the extent of up to 0.5 per cent of their net demand and time liabilities (NDTL). This

additional liquidity support would terminate 14 days from the closure of the special term repo

facility announced on October 14, 2008. This accommodation was made available in

addition to the temporary measure announced on September 16, 2008 thereby permitting

banks to avail of additional liquidity support to the extent of up to 1 per cent of their NDTL.

Second, the Reserve Bank instituted a mechanism of Special Market Operations (SMO) for

public sector oil marketing companies in June-July 2008 taking into account the then

prevailing extraordinary situation in the money and foreign exchange markets. The Reserve

Bank announced on October 15, 2008 t

mewarvivek project f

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