19 August 1996 00:00 [Source: ACN]
Raising project finance has been a greater issue in India than elsewhere in Asia. Yet companies and analysts say funds are available for good projects by respected companies, reports Naresh Minocha
ECONOMIC reforms in India, started in 1991, have removed physical controls on the petrochemical industry. Most industries are now deregulated. And for the few remaining regulated petrochemical products, securing a letter of intent that can later be converted into a licence is not a problem. Companies can import feedstock or capital goods, including second-hand equipment, without knocking at the door of any government agency. And it is much easier to secure approvals for technology collaborations. Applications for foreign equity participation are in most cases cleared promptly.
The reforms also paved the way for greater access to foreign finance. In 1992 a new source of project finance was opened with the scheme for portfolio investment by foreign institutional investors. Euro-issues for financing of projects were approved in November 1993.
Restrictions on external commercial borrowings have also been relaxed. Project promoters continue to have the option of securing 11-25% equity participation by state industrial development corporations. And they can also tap a wider choice of equity and debt instruments through the Indian capital market, the most recent being the non-voting shares proposed by Finance Minister Palaniappan Chidambaram in his budget speech in June.
The only negative move in recent years, from a project promoter's view, has been the ban on short-term project finance from banks - effectively a bridging loan - to cover an operation until it is able to enter the capital market. This was enforced last year after an entrepreneur in a non-chemical business ran into problems when a public equity issue flopped.
Financial experts agree that debt and equity financing is not a problem for viable projects promoted by companies which have a good track record. 'There are several instruments available in the international market,' says Reliance Industries' senior vice-president Tony Jesudasan. 'We tap into the right source.' The company raised US$600m in debt from international capital markets last year.
Even the recent poor performance of the Indian stock market is not necessarily a barrier, according to Prithvi Haldea, managing director of respected primary capital market databank Prime Database. Though the market is passing through a bad patch, it can still respond well to a good quality issue from a chemical company, he says.
At the moment, chemical industry attention is riveted on the financing of Modern's US$461.11m integrated aromatics-to-PTA project. The polyester and textile producer's attempt to raise funds is seen as a test of the primary capital market response to a large-scale petrochemical project.
Modern Threads (India) is awaiting approval from the Securities and exchange Board of India for a US$166.67m rights and public issue of fully convertible debentures for the project. It already holds Finance Ministry approval to raise US$125m from abroad as external commercial borrowings and has secured in principle approval from financial institutions and banks to secure the US$168.45m balance as term loans in local currency. The loans are expected to be sanctioned once the outcome of the rights and public issue is clear.
An apparent setback to the company's fund-raising plan came with the recent statement by Indian Petrochemical Corp Ltd (IPCL) that it had abandoned plans to build DMT and PTA capacity because of the intense competition expected in Indian markets following sharp reductions in import tariffs.
IPCL chairman and managing director KG Ramanathan confirmed to ACN that the project, planned to form part of the company's expansions under India's Ninth Five-Year Plan (1997-2002), has been shelved. However, Modern Group chairman HS Ranka is quietly confident of a favourable response to the issue. He says the integrated project is viable and will put the Modern Group on a strong footing.
The Modern Threads issue is expected to influence the primary capital market entries of Haldia Petrochemicals (HPL), for its US$1.41bn olefins complex, and National Organic Chemical Industries (Nocil), for its US$1.27bn olefins expansion. Both projects have been delayed for several years because of problems in raising finance, particularly equity funding.
HPL has finally overcome the barriers by securing three co-promoters - the West Bengal government, Tatas and P Chatterjee, a US-based non-resident Indian. They will put in the equity capital stipulated by financial institutions which have reluctantly agreed to provide term loans following repeated appraisals of the project in the last five years.
Nocil vice-chairman and managing director NM Dhuldhoya says Nocil will complete the process of tying up funds for the Thane cracker expansion project within a month. Asked whether Nocil has finalised equity and debt financing with the International Finance Corp, he said the company is looking at various alternatives including offering global depository receipts to investors in European capital markets.
As the negotiations with prospective financiers are at a delicate stage, he declined to disclose details of the financing plans. However, he confirmed that Nocil is committed to implementing the project. Nocil is also awaiting the waiver of financing restrictions imposed on it in 1989 when the initial letter of intent was issued for the cracker expansion.
The letter of intent states: 'The company shall not approach the financial institutions for capital requirements, but there could be no objection to raising funds from the capital market subject to necessary approvals. The company will finance its foreign exchange requirements for import of capital goods, import of knowhow, servicing of foreign equity, foreign exchange loan and import of feedstock, if any, through foreign exchange obtained by way of foreign equity participation, non-resident Indian equity on non-repatriable basis, and commercial borrowings as may be permitted by the government according to a financing plan that may be approved...'
The conditions were imposed because India was suffering an acute shortage of funds and a worsening balance of payments. They are redundant in the more liberalised environment of the mid - 1990s, Dhuldhoya believes.
Similar conditions have been waived for other projects approved at the same time, and Dhuldoya is confident Nocil too will succeed in getting the restrictions withdrawn. Finance Minister Chidambaram has already announced the removal of the 1991 Industrial Policy stipulation that equipment imports should be financed by foreign equity contribution in the case of projects covered by the automatic approval mechanism.
IPCL is also confident of completing the financing of its projects as proposed in the Eighth Five-Year Plan, which ends next March. It has not yet assessed its requirements for funds under the Ninth Five-Year Plan, now being settled.
Ramanathan told ACN the company had planned to arrange US$1.25bn for its Eighth Five-Year Plan projects. Of this, US$416.66m was to come from internal sources, and the balance of US$833.34m from domestic and foreign capital markets as both debt and equity.
IPCL has already raised 65% of its anticipated equity funds and will raise another US$175m through its proposed foreign currency convertible bonds (FCCB) issue, now awaiting Cabinet approval. The outstanding funds will be tied up in the near future, he says.
Similarly, Hindustan Organic Chemicals (HOC) does not foresee a problem in raising the US$611.11m it needs under the Ninth Five-Year Plan beginning April next year. HOC chairman and managing director Reena Ramachandaran told ACN the company's debt-to-equity ratio is highly favourable and would underpin debt raising in Indian and foreign capital markets. The company is in the process of raising US$27.7m through the private placement of public sector bonds with institutional investors including banks.
The company will also seek foreign equity, Ramachandaran says. Cabinet approval for 20.4% equity participation by Sweden's Chematur has been secured for HOC's US$111.11m investment in a 20 000 tonne/year MDI plant.
Funds will also come into India through direct investment by multinationals. Several multinationals have already established wholly owned subsidiaries or joint ventures as a prelude to setting up projects in India. Most have revealed their long-term investment plans and intentions to the Foreign Investment Promotion Board, but are proceeding cautiously with firm investment commitments.
The only firm project by this route is the medium-sized US$173.6m nylon 66 plant planned by DuPont in joint venture with Thapars.
Others likely to follow include Unilever, Bayer, Rohm & Haas, Lurgi, General Electric Silicones, BASF, Monsanto and Continental PET. Neste and Sabic have set up subsidiaries which will focus primarily on marketing and customer care.
Like most of the Indian companies, these multinationals are waiting and watching for the economic reforms to stabilise. The programme to reduce import duties is expected to be completed by March 1997, in line with recommendations of the 1992 Chelliah Tax Reforms committee.
The Indian government is also working on a policy package to provide a competitive investment environment, as recommended by the official Rakesh Mohan Committee on Petrochemicals. If this is attractive, multinational investment will follow.
The Rakesh Mohan Committee was constituted by the Department of Chemicals and Petrochemicals. It concluded: 'If we analyse the factors that contribute to high cost of production in India, it is seen that besides small plant sizes, customs duty on capital goods, excise levy on indigenous equipment, cost of inputs like feedstock, catalysts and chemicals, interest rates on term loans, and working capital and energy costs contribute to making the domestic industry internationally uncompetitive.
'There is a need to take a fresh policy initiative in each of these areas if the Indian industry is to become a significant player in the global market.'
Since its findings were published, interest rates have risen. Levels have been driven up by the government's decision to meet most of its borrowing requirement at market rates, coupled with high interest rates on savings and the deregulation of interest rates in the banking industry without any reduction in the cost of operation of banks and financial institutions.
Reduction in interest rates for project finance will clearly take a long time, and is not guaranteed in a country whose financing requirements are huge for diverse activities - from providing food to launching satellites.
|Status of Indian cracker projects proposed since 1985|
|Haldia||West Bengal||400||1417||work started|
|Reliance-Assam||Assam||300||944||work not yet started|
|Nocil||Thane||+300||1277||work not yet started|
|1excluding downstream units
2 excluding downstream and power 3
export-oriented 4 no downstream units
Source: company announcements
Anticipating the persistence of high interest rates, the Rakesh Mohan Committee recommended: 'Financing charges should be low. For example, term lending should not be more than 3% over the inflation rate and the cost of working capital should be reduced. Accelerated depreciation rates should be offered to offset the disadvantage of investment made with high capital goods duties.'
For prospective industrial borrowers, this problem can be partly solved in the short term by resorting to external commercial borrowings (ECBs) which are available at interest rates of less than half the rates on domestic loans. Access to this concessional source of finance is, however, regulated by the Finance Ministry in order to keep the external debt burden within manageable limits.
The ECB guidelines give priority to infrastructure and core sector projects. Though petrochemicals is a core sector, it is not specifically named in the guidelines. Nor does the Finance Ministry give any priority to the chemicals sector.
In the current financial year, the ceiling on ECB is US$5bn for all industries. Chemical companies must therefore compete with firms from other industries to secure approval. Reliance Industries has been the most successful player in the ECB market, raising US$600m through long-term bonds over the last 12 months. IPCL recently raised US$35m through syndicated loans. HPL has been awaiting approval for more than a year to raise US$450m through ECBs.
And Reliance Assam Petrochemicals is still awaiting approval to raise US$300m through ECBs for its US$944.44m Assam gas cracker complex. Industry sources fear that high-cost debt will continue to plague industrial projects in India in the long term.
ECBs are easier to raise than equity finance or part equity/part debt finance through FCCBs. A dozen chemical companies have successfully raised funds through FCCBs and global depository receipts (GDRs), but it is not a route that all companies find attractive.
To launch a successful Euro-issue, a company must have a respectable market capitalisation in local stock exchanges and an economically sound project to attract foreign investors. Companies such as Parasrampuria Synthetics have shied away from entering the Euro-issue market.
In the fertiliser sector, deregulation has played havoc with investment ambitions. Subsidies and price controls have been partially removed. However, the inability of the government either to complete the process or to revert to the original system has created a virtual drought as far as setting up greenfield projects is concerned.
|Expansion projects in the Indian nitrogenous fertiliser industry|
|Kribhco||Hazira||3001||167||work not yet started|
|1 nitrophosphate 2
calcium ammonium nitrate 3 NPK complex fertiliser
4 ammonia only
Source: company announcements
Not one foreign investor has put a project proposal before FIPB despite the fact that India provides an assured market currently served predominantly by imports. Similarly, Indian private companies have shown virtually no interest in a greenfield investment.
'The pricing environment is not conducive to attract fresh investment in new fertiliser plants,' says executive director of the Fertiliser Association of India, Pratap Narayan. However, experts agree that the gap between local supply and demand is certain to increase for both nitrogenous and phosphatic fertilisers. The deficit is met by imports. It is expected to reach 1.2m tonne of nitrogen, equivalent to 2.6m tonne of urea, and 2.0m tonne of phosphates in the current financial year ending March 1997.
Only the established, profit-earning cooperative and public fertiliser companies are toying with the idea of greenfield projects. Already moving forward with expansions, these firms are able to cut costs because of existing infrastructure, and can absorb future losses from expansions by pricing together products from existing and new plants.
|Status of Indian aromatics and DMT/PTA projects proposed since 1985|
|JK Aromatics||Bharuch||140||150||--||na||proposed 1989|
|Bombay Dyeing||Vizag||90||--||--||125||proposed 1992|
|Reliance||Hazira||--||350||--||NA||startup Q4 96|
|1 excluding PTA||Source: company announcements|
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