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Development Financial Institutions
Presented to: Prof. K. K. Jindal, MFI
Group Members
Ankur Konwar, N-12
Chirag Sapra, N-18
Kavita Sharma, N-33
Mayank Jain, N-41
Mukesh Kumar, N-43
Vijay Kumar Gupta, N-80
2
Development financing
Risky business
Involves financing of industrial and infrastructure projects
Long gestation period
Repayment of the long term project loans depends on performance
of the project and cash flows arising from it
Reasons for project going wrong
Technological obsolescence
Market competition
Change of Government policies
Natural calamities
Poor management skills
Poor infrastructure
Averseness of markets and banking institutions
Uncertain outcome
Do not possess enough information and skills to predict with any
certainty the outcome.
Cost considerations associated with such risky ventures.
The long term loan comes with a higher price tag.
Renders the project financially unviable.
DFIs were established with the Government support for
underwriting their losses
Making available low cost resources for lending
At a lower rate of interest than that demanded by the market for
risky projects.
worked well in the initial years of development
Financial system moved higher
on the learning curve and acquired information and skills necessary
for appraisal of long term projects.
It also developed appetite for risk associated with such projects.
Banks and bond markets
became sophisticated in risk management techniques
They wanted a piece of the pie in the long term project financing
Distinct advantages over the traditional DFIs such as low cost of
funds
And benefit of diversification of loan portfolios
Government support to DFIs waning
For fiscal reasons or
In favour of building market efficiency.
Following the recommendations of the Narasimham Committee II,
the Reserve Bank’s annual policy statement of April, 2000
suggested that any DFI intending to transform into a bank, could
approach RBI or convert itself into an NBFC.
Definition
A DFI is defined as "an institution promoted or assisted by Government mainly to
provide development finance to one or more sectors or sub-sectors of the
economy. The institution distinguishes itself by a judicious balance as between
commercial norms of operation, as adopted by any private financial institution and
developmental obligations.”
An efficient and robust financial system acts as a powerful engine of economic
development by mobilizing resources and allocating the same to their productive
uses. It reduces the transaction cost of the economy through provision of an
efficient payment mechanism, helps in pooling of risks and making available long-
term capital through maturity transformation. By making funds available for
entrepreneurial activity and through its impact on economic efficiency and growth,
a well functioning financial sector also helps alleviate poverty both directly and
indirectly.
DFIs in India
1. The first government sponsored DFI was created in Netherlands in 1822.
2. The first DFI established in India in 1948 was Industrial Finance Corporation of India (IFCI) followed by setting up of State Financial Corporations (SFCs) at the State level after passing of the SFCs Act, 1951.
3. Financial Institutions set up between 1948 and 1974:
ICICI Ltd. was set up in 1955,
LIC in 1956,
Refinance Corporation for Industries Ltd. in 1958 (later taken over by IDBI),
Agriculture Refinance Corporation (precursor of ARDC and NABARD) in 1963,
UTI and IDBI in 1964,
DFIs in India Contd…
• Rural Electrification Corporation Ltd. and • HUDCO Ltd. in 1969-70,• Industrial Reconstruction Corporation of India Ltd.
(precursor of IIBI Ltd.) in 1971 and GIC in 1972
Note:-It may be noted here that although the powers toregulate financial institutions had been made available to RBI in 1964 under
the newly inserted Chapter IIIB of RBI Act, the definition of term ‘financial institution’ was made precise and comprehensive by amendment to the RBI Act Section 45-I (c) in 1974.
DFIs set up after 1974 and Notification of certain institutions as Public Financial Institutions
Another important change that took place in 1974 was the insertion of Section 4A to the Companies Act, 1956
NABARD was set up in 1981,
EXIM Bank (functions carved out of IDBI) in 1982,
SCICI Ltd. in 1986 (set up by ICICI Ltd. in 1986 and later merged into ICICI Ltd. in 1997),
PFC Ltd. and IRFC Ltd. In 1986,
IREDA Ltd. in 1987,
DFIs set up after 1974 and Notification of certain institutions as Public Financial Institutions Contd.
RCTC Ltd. and TDICI Ltd. (later known as IFCI Venture Capital Funds Ltd. and ICICI Venture Funds Management Ltd.) in 1988,
NHB in 1988,
TFCI Ltd. (set up by IFCI) in 1989,
SIDBI (functions carved out of IDBI) in 1989,
NEDFi Ltd. in 1995 and
IDFC Ltd. in 1997.
Categories of DFIs
DFIs can be broadly categorised as all-India or state / regional level
institutions depending on their geographical coverage of operation.
Functionally, all-India institutions can be classified as
(i) term-lending institutions (IFCI Ltd., IDBI, IDFC Ltd., IIBI Ltd.) extending
long-term finance to different industrial sectors,
(ii) refinancing institutions (NABARD, SIDBI, NHB) While most of them
extend direct finance, some extend indirect finance and are mainly
refinancing institutions viz., SIDBI, NABARD and NHB which also have
a regulatory / supervisory role.
Categories of DFIs Contd…
Section 4(A), which was inserted in the Companies Act in 1974, defines the
term Public Finance Institution (PFI).
Besides certain FIs regarded in terms of the said Section as PFIs, Central
Government by notification in the official Gazette may notify other
institutions as PFIs. As on date there are 46 PFIs which have been so
notified by the Central Government.
Identification of DFIs
(i) ICICI Ltd. and SCICI Ltd.: After merger of the latter with it, ICICI Ltd has
since converted to a bank.
(ii) UTI, which is regulated by SEBI.
(iii) LIC, GIC and other insurance companies viz., NIA, NIC, OIC and UII, which
are regulated by IRDA.
(iv) The two Venture Capital Funds viz., IFCI Venture Capital Funds Ltd. and
ICICI Venture Funds Management Co. Ltd., which need not be regulated by
RBI as DFIs as size wise they are too small to be of systemic significance.
Identification of DFIs Contd..
(v) HUDCO Ltd., which, being a housing finance company, is being regulated
by NHB.
(vi) National Co-operative Development Corporation and National Dairy
Development Board recently notified by GOI as PFIs: they do not appear to
be financial institutions in the classical mould.
The first category is the all India DFIs established by statute viz., NHB, SIDBI,
NABARD and EXIM Bank.
The second is the state level institutions set up by statute viz., SFCs. The third
is the DFIs that have been constituted as companies under the Companies
Act, 1956 and hence are, by definition.
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Infrastructure Development Finance Company Ltd. (IDFC) Vision
To build a diversified portfolio of viable infrastructure projects of national importance and to imbue the projects with best practices in
development, management, design, construction and operation while maintaining the highest regard for service, safety and environment.
History (1997-2009)
1997 IDFC was founded on the recommendations of the 'Expert Group on
Commercialization of Infrastructure Projects' under the Chairmanship of Dr.
Rakesh Mohan.
IDFC, a Public Private Partnership, incorporated in Chennai. Government
holds 40% of the company, 40% is held by foreign shareholders and the
rest by domestic entities.
IDFC commences business operations with a mission to lead private capital
to commercially viable infrastructure projects.
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2004 IDFC successfully raises $200 million for the India Development Fund,
the first infrastructure focused private equity fund.
2005 IDFC goes public through a successful public offering that is oversubscribed
38 times. Shares issued at Rs. 34 a share. Lists on the National and
Bombay Stock Exchanges.
Government shareholding reduces from 40% to 26%.
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2006
IDFC successfully raises $450 million for its second infrastructure focused private equity fund .
Acquired controlling stake in SSKI
♦ IDFC successfully raises $930 million India Infrastructure Fund (IDFC
Project Equity)
2007
IDFC raises additional capital of USD 500 million through a Qualified
Institutional Placement at Rs.
127 a share. Government shareholding reduces to 23%.
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2008 Acquired controlling stake in SSKI
IDFC successfully raises $930 million India Infrastructure Fund (IDFC
Project Equity)
IDFC successfully raises $700 million for its third infrastructure focused
private equity fund .
IDFC enters into asset management by acquiring the AMC business of
Standard Chartered Bank in India.
2009
IDFC becomes part of Nifty 50. CMP is 143.
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Goals
Investment: USD 1 bn in 5 years.
Forging Partnerships: National and international developers,
contractors and operators.
Values
Fairness
Integrity
Trust
Professionalism
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Strategic Directions
Leverage core strengths
Develop large and complex projects
Build partnerships
Enhance in-house expertise
Establish credibility
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Infrastructure Investment (in Billion Dollar)
28
Stakeholder pattern(march 31,2010)
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20.20%
9.60%
3.00%5.50%16.40%
45.40%
GoI
Retail
Corporate Bodies
MF
Fis/Insurance/BanksFII/FDI
Core Team Rajiv Lall - Managing Director and Chief Executive Officer Vikram Limaye - Executive Director, member of the Board of Directors
L.K. Narayan - Group Chief Financial Officer
Animesh Kumar - Group Head Human Resources, Corporate Communication
Rajeev Uberoi - Group Head Legal and Compliance
Naishadh Paleja - CEO Broking
Veronica John - President & CEO IDFC Capital, Singapore
Cherian Thomas Group Head of PPP Initiatives
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SUBSIDIARIES
IDFC has ten direct wholly owned subsidiary companies
IDFC Private Equity Company Limited
IDFC Trustee Company Limited
IDFC Project equity Company Limited
IDFC FINANCE Limited
IDFC Securities Limited (earlier known as IDFC-SSKI Securities
Limited)
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IDFC Capital company Limited
IDFC PPP Trusteeship Company Limited
IDFC Projects Limited
IDFC Asset Management Company Limited
IDFC AMC Trustee Company Limited
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JOINT VENTURES
IDFC has three joint ventures:
Infrastructure Development Corporation(Karnataka Limited)
(iDeC) in the state of Uttaranchal.
Delhi integrated Multi Modal Transit System Limited (DIMTS) in Delhi.
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Partnership PLUS Expressways Berhard
Indian Renewable Energy Development Agency Ltd. (IREDA)
Gujarat Urban Development Corporation (GUDC)
DP World
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Sectors of Operations
Infrastructure Development
Power
Transport
Real State
Water
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38%
20%
24%
8%
2%7%
Project Finance
EnergyTransportTelecomIndusrial & CommercialTourismOther Misc
36
New sectors Opportunity
Exploration of four new frontiers
Urban services, Rural Infrastructure, HealthCare and Education.
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IFCI
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Background
Services ProvidedServices Provided
Regional Offices 11
Satellite Offices 6
IFCI: Nationwide ReachIFCI: Nationwide Reach
Iron & Steel21%
Infrastructure12%
Textiles11%
Chemicals6%
Synthetic fibres6%
Refinery5%
Fertiliser4%
Cement3%
Electronics2%
Others30%
Sectoral PresenceSectoral Presence
Project Finance Project Finance
IFCI : Corporate AdvisoryIFCI : Corporate Advisory
Corporate Finance & Investment BankingCorporate Finance & Investment Banking
The ongoing economic reforms in India have created a need for restructuring businesses to remain competitive, acquire businesses or merge existing ones for competitive advantage and economies of scale, spin-off or divest to remain efficient and effective.
Infrastructure AdvisoryInfrastructure Advisory
Infrastructure Financing & Advisory Infrastructure Financing & Advisory
IFCI: Monitoring Agency for Public IssuesIFCI: Monitoring Agency for Public Issues
Oil India
Indian Hotels
Institutional Positioning of IFCIInstitutional Positioning of IFCI
Debt
Take-Out Finance
Risk Participation Facilities
Guarantees
Advisory Services PROJECTS
Banks
Financial Institutions
External
Mutual / Pension Funds
IFCICapital Markets
• Direct Finance• Mezzanine Capital• Equity• Advisory Services• Financial Structuring
Other Functions
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Bid Process Management
Empanelment with PSUs for Investment/Financial Appraisal
Management Advisory