A Summer Internship Project Report on Project finance as an instrument for outgrowth Submitted in partial fulfillment of the requirements for

the degree of Post Graduate Diploma in Management (Finance)

by

Sumit Tanwar
(F1F-29) Under the guidance of

Sanjay kumar A Study Conducted for Surya Nestbuild Ltd.

at Indira School of Business Studies, Tathawade, Pune 411033

(2012-14)

CERTIFICATE

STUDENTS UNDERTAKING
I undertake that the project entitled Project financing as an instrument for outgrowth is submitted to Indira School of business studies as a summer training Project for Masters of Business Administration 2012-14 . All the data for the project has been collected and analyzed by me. I hereby declare that the project is an original work carried out by me. Further, this project has not been previously submitted.

SUMIT TANWAR F1F-29

ACKNOWLEDGEMENT

The satiation and euphoria that accompany the successful completion of the project would be incomplete without the mention of the people who made it possible. I would like to take the opportunity to thank and express my deep sense of gratitude to my corporate mentor Mr. Sanjay kumar and my faculty mentor Prof. Diksha Johri. I am greatly indebted to both of them for providing their valuable guidance at all stages of the study, their advice, constructive suggestions, positive and supportive attitude and continuous encouragement, without which it would have not been possible to complete the project. I would also like to thank Mr. Amar Maunder who I am thankful to Mr. Sanjay kumar for giving me the opportunity to work with Suriya nestbuild ltd. and in spite of busy schedule has co-operated with me continuously and indeed, his valuable contribution and guidance have been certainly indispensable for my project work. I owe my wholehearted thanks and appreciation to the entire staff of the company for their cooperation and assistance during the course of my project. I hope that I can build upon the experience and knowledge that I have gained and make a valuable contribution towards this industry in coming future.

EXECUTIVE SUMMARY
The project is about to understand how company manages to integrate the functions of various departments. It explains specifically how finance department works in the company and what major role it plays in the functioning of the company. Further it describes how company manages to reduce its cost of borrowings by availing different products available with banks. It also describes in detail how company implements and introduces various checks and controls for controlling its major operating costs. This project also helps me understand the accounting procedures adopted by the company. This will help in gaining knowledge about the surviving strategy that a company may use in today cut throat competition and cost cuttings across

the board. This project enhances my skill of analyzing the financial position of the company, by making comparative analysis of the various expenses incurred and income earned. It explains how company manages its working capital cycle, what its aspects are and what the approaches to the working capital handling are. Also it describes the various factors that affect the working capital decisions to be taken in the company and the various sources of financing working capital requirements. This project further helps me in understanding the inventory management, cash management, and debtors/ receivable management of the company and how effectively they work on it.In total, the project was a great learning experience about how a real estate concern deals with all its finances and systems.

Introduction
Astha green noida extension surya nestbuild limited is a professionally managed Real Estate company. They are earnestly involved in providing end to end solutions for housing to individuals of different income groups as per their needs and budget. They have been rendering an array of services related to Real Estate such as buying and selling of properties, building construction, landscaping etc. Their main focus is on the construction of multistoried apartments at Patna and Vaishali, Ghaziabad. They have successfully executed various projects of residential as well as commercial complexes. Samanpura Enclave, Sharda Villa, and Surya Enclave are some of our executed projects with world class amenities at par with any housing society in the country. By the virtue of their rich experience and domain expertise in the field of Real Estate. Aastha Greens is one of the popular residential developments in Greater Noida West, neighborhood of Greater Noida. It is among the ongoing projects of Surya Nestbuild Limited. Project Introduction: This project is about how project financing is used as an instrument for outgrowth. Construction projects do not require a large capital outlay but a large working capital to start up the project. Unfortunately, for small contractors there are very limited options available from the banks or other lending institutions to cover this large working

capital requirement in the absence of sufficient collateral. The Project Finance is recommended as the most effective method. One of the most pressing problems in construction projects is the working capital and liquidity required to support day-to-day activities. More construction companies go out of business due to lack of liquidity to support their day-to-day activities rather than lack of technical capability to perform the job. Objective of the Project The objective of the project is to understand and learn the work process of finance and accounts department in suriya nestbuild ltd. and to enhance my knowledge with a detailed study and,

To understand the major functions of finance & accounts department. To know the flow of work process through which these functions are carried out efficiently.

To understand the basics of finance & internal controls for a real estate concern.

To understand the basics as to how a company can reduce its cost of borrowings by availing different products available for banks

To understand the accounting procedures & implementing various checks & controls for operating costs.

To study the fundamental analysis. To study real estate industry and its impact on Indian economy.

Company overview

Profile:Surya Nestbuild Limited was incorporated on 27th June 2005. The firm is located at Patna, Bihar. Under the inspiring leadership of our Head Mr. Mani Kant, the organization has set new paradigm in the real estate market of Patna and surroundings. The company is patron member of Builders Association of India since 1996, and its one of the Directors is office bearer of the Patna Center since then. Surya Nestbuild Limited is a renowned real estate company, operating in and around Bihar for almost two decades now. The company has planned and developed several prestigious projects of group housing dwelling units. Surya Nestbuild Limited, under the leadership and guidance of Ch. Manikant, has revolutionized construction in the national capital region and in Patna. The company, with its innovative construction techniques and unique craftsmanship, has set inimitable benchmarks for its competitors. . Origin:In the year 1993, a team of highly energetic, dynamic and young professionals teamed up to form M/s Surya Constructions with an aim to provide housing solutions to people of different income groups according to their budget. The first dream project was undertaken at Kankarbagh Colony in Patna for the medium income group clients in the year 1994. The name of project was Laxmi Apartment (area 20 katha built up area 82000 sq. ft.). After completing several multistoried apartments at Patna & Vaishali, Ghaziabad (total built up area 464000 sq. ft. in 134 katha land) the promoters with the objective of extending area of working formed a Limited Company named M/s Surya Nest build Limited in 2005. Kinds of Property:Company deal in the following kinds of property: Residential Property

Residential land/plot Flat/Apartment Builder Floor Commercial Property Commercial land Commercial shop/space Shopping complex/mall Office space Godown/Ware house Showroom Hotel/Guest house

Completed Project:

Laxmi Apartment Kankarbagh, Patna Janki Apartment Kankarbagh, Patna Laxmi Villa,Mahesh Nagar, Patna Surojit Villa, Exhibition Road, Patna

Up Coming Project:

Surya Shivambika Villa,Boring Road, Patna Surya Digha Compound,Digha, Patna Surya Pushpanjali Apartment, Boring Road, Patna Surya Asha Villa, Punaichak, Patna

OVERVIEW OF THE REAL ESTATE SECTOR IN INDIA

The Indian Real Estate industry grew at a rate of 20% per annum in the five-year period prior to 2010 to become the second highest employment provider after agriculture.1 The real estate sector in any country plays a significant role in shaping the infrastructure. The importance of the sector can be noted by the fact that a HUDCO-IIM, Ahmedabad study recently observed that for every Rupee invested in this sector, the addition to the GDP of the State is 78 Paise. Residential real estate is witnessing a continuous growth due to various factors like growth of population, migration, growth in income etc. The real estate sector in India suffers from inherent entry barriers. Initially acquiring land is a difficult task for developers and even after that a number of issues like litigation, court orders and cancellation of allotment of land are faced by the builders.

The Indian Real Estate Sector is widely unregulated. Though there is some regulation in the form of the various approvals mandated by the law for the developers, there is specifically no regulator for the sector. According to a study carried out by FICCI and E&Y: On the Regulatory index amongst the countries surveyed India ranked last along with Russia amongst ten countries surveyed namely - China; US; UK; Singapore; Germany; Brazil; UAE; Russia; and India. Due to their developed real estate markets and streamlined regulatory environment, developed nations such as the US, UK and the Singapore closely follow China on the index. India ranks fifth on the overall index, as it scores better on the country economy development index and the real estate market index, but fairly low on the regulatory index. In developed countries, the regulatory framework is typically well-established, organized and transparent. As such, the regulatory environment in such countries serves as an effective watchdog. In contrast, the regulatory scenario in developing nations is at a nascent stage. Consequently, developed countries lead the regulatory index. The need for a regulator in the real estate sector has been said to be more than that of a regulator of stock exchange since real estate per se affects more consumers. The Real Estate Bill is a novel step and has the potential to curb the menace that has ensued in the Real Estate Sector in the recent times, if proper implementation is ensured. The Bill seeks to establish the Real Estate Regulatory Authority to see that the real estate sector functions

properly. It contains provisions for disclosures by developers on the estimated time by which they will complete the projects, compulsory uploading of the preform Builder Buyer agreements on the Regulatory Authorities website, online declaration of all project details. There are various other provisions like equal rate of interest payable by the developer and the buyer in case of any default, prohibition of false and misleading advertisement, undertaking of clear title over land. It also provides that the real estate developer shall be required to deposit at least 70% of the funds received from end customers into a dedicated project account, which can be utilized only for the purposes of the project. CCI has a holistic approach and focuses on functioning of the markets through increasing efficiency through competition. In fact their roles are complementary and to each other and share the objective of obtaining maximum benefit for the consumers.

Review of literature
The various journal articles and project finance books generally agree that project finance creates values to projects and the sponsoring organizations. This view is supported by the observation that project finance has been increasing its popularity in recent decades. There are not too many publications focusing on the area of project finance, despite of its rapid growth in popularity and transaction size for the last four decades (Esty, 1999). Particularly, the literatures mostly focus on project finance in relation to other issues, such as financial synergies (Leland, 2007), term structure of credit spreads (Sorge and Gadanecz, 2004), and principal-agency risk (Farrell, 2003). Other literatures emphasise heavily the practice of project finance in developing markets due to its popularity and suitability for those markets. For example, Kleimeier and Megginson (1998), Wang et al. (1999), Griffith-Jones and Fuzzo de Lima (2004), Hainz and Kleimeier (2004), and Vaaler et al. (2008) discuss a great deal on project finance in Asia and Latin America, and therefore, emphasise the ability of project finance to mitigate corresponding political risk. Only Esty (1999, 2003, 2004) and Esty and Christov (2002) focus on the effective use of project finance and discuss to a certain extent the benefit of project finance, such as reducing information costs, incentive conflicts, cost of financial distress, and corporate tax. Some studies propose that project finance creates values by improving risk management of the projects (Esty, 1999; Leland, 2007). In their

research paper, Kleimeier and Megginson (2001) identify several determinants of project finance loan pricing by running multiple regression models on the spreads of 90,784 loans (worth $13.2 trillion), of which 4,956 loans (worth $634.4 billion) have a loan purpose code of Project Finance, from a database. These determinants include loan size, loan term, guarantee, currency risk, and collateral assets. The review of literature starts by introducing the issues in the sources of project funding by means of internal capital, financial intermediaries, and arms length capital markets. Consequently the practice of project finance as a source of project funding and its development are introduced. The attributes and characteristics of project finance which distinguish it from other means of loans are then discussed. Apart from the project finance practice, project risk management is also explored by identifying some typical risk factors in projects and project management practices principles and its practices in various contexts. Finally, project finance and project risk management are brought together to examine how project finance improve risk management of the projects. When a project is to be carried out, it requires some financial resources which are funded by one source or a combination of several sources among internal capital and external sources, such as bank loans, syndicated loans, project finance, venture capital, and arms length capital markets (e.g. securitization or bond issuance). One typical source of project funding is internal capital of a firm, where usually projects have to compete for corporate resources against other projects. The firm bears the responsibility to efficiently allocate the resources across projects to create values. Stein (1997, p.129) demonstrates in his model that internal capital market will be most effective sort of financial arrangement for projects when external markets are underdeveloped where the sense of information and agency problem prevails, and the accounting and auditing technology and legal protection for investors are weak. The headquarter of a firm perform a winner-picking function on projects with strong control rights (Stein, 1997, p.130) Some projects related to the public sector may also have access to government subsidies and loans. For example, public private partnership projects are long-term contractual agreements between the public and the private sector to realize public infrastructure and services more cost effectively and efficiently than under conventional procurement, and are characterized by an optimized risk allocation and a holistic life cycle approach. Usually such projects are funded by project finance or non-recourse forfeiting of installments model (Daube et al., 2008, p. 376).

If the capital market is frictionless where information concerning the quality of the borrowing firms and the quality of the project is symmetric between borrowers and lenders, projects with positive net present value (NPV) are always able to be funded because the project returns exceed the cost of capital. Financial intermediaries in the financial markets are specialized in collecting information about borrowers and projects, and they may be able to partially alleviate the information asymmetry by such interaction with borrowers (Faulkender and Petersen, 2006, p.47). Such financial intermediaries, including banks, have some advantages over other lenders such as the debt capital markets by closely monitoring the projects and enforcing efficient project choice. Nevertheless, the effort for monitoring by financial intermediaries incurs substantial costs which must be transferred back to the borrowers in the form of higher interest rates, implying that the cost of capital for firms in such an imperfect market depends not only on the risk of their projects, but also on the resources needed to verify the viability of their projects (Faulkender and Petersen, 2006, p.48; Manove et al., 2001, p.728). Manove et al. (2001) compare the roles of collateral in lending for projects and project screening. On one hand, creditors can be protected by obtaining collateral from the borrowers, enabling more abundant and cheaper credit. On the other hand, due to the extensive experiences with similar projects in certain industries, and the expertise in the economic features and general economic trends, banks and other financial intermediaries tend to be more knowledgeable about some aspects of project quality and more capable of appraising the potential performance of the projects. According to the evidence by Reid (1999, cited in Manove et al., 2001, p.727) and Cooper et al. (1988, cited in Manove et al., 2001, p.728) bankfinanced firms have higher survival rates then firm funded by family investor, and entrepreneurs often overestimate the profitability of their own projects. Although collateral and project screening are substitutes from the point of view of the banks, only the latter enhances the values of the projects from the society point of view, while the former one is just a form of wealth transfer from the borrowers to the banks. Apart from internal capital and financial intermediaries, projects may obtain funding from arms length capital markets, such as bonds markets and structured loans. Structured finance, such as asset securitization and project finance, is a means to separate an activity from the originating or sponsoring organization (Leland, 2007, p.795).

Typically assets or project generating cash flows are placed in a bankruptcy-remote special purpose entity (SPE) which raises funds to compensate the sponsor by selling securities which are collateralized by the cash flows generated. Structured finance is claimed to benefit projects with low-risk cash flows by asset securitization, and projects with high-risk cash flows by separate financing. Leland (2007, p.799) suggests that, instead of internally financed, large and risky investment projects can be financed separately as a spinoff or through project finance, which may result in greater total financing ability, cheaper financing for assets which remain in the firm, and preserving core firm assets from bankruptcy risk. Particularly, project finance may benefit the sponsor and the project by reducing information costs, incentive conflicts, cost of financial distress, and corporate tax (Esty, 1999, 2003, 2004). Kleimeier and Megginson (1998, p.60) summarise the characteristics of appropriate application of project finance as large capital costs, selfcontained cash inflows and outflows, and little ongoing need for research an development expenditures or capital investments. Despite of its enormous volume and its rapid growth in the last three decades, project finance has not attracted sufficient academic research. There is no single agreed definition of project finance. Ballestero (2000, p.183) describes project finance as a sound technique which involves performing a set of security arrangements to reduce risk in large infrastructure investments or capital intensive projects such as roads and highways, railways, pipelines, dams, electric power generating facilities, large scale fiber optic networks, mineral processing facilities, and many others in industrial areas and developing countries. These arrangements are made between the project sponsors and the clients or their agencies, a host government, a supplier, a constructor, an operator, a bank or lenders. Finnerty (1996, p.2, cited in Esty and Christov, 2002, p.2) defines project finance as the raising of funds to finance an economically separable capital investment project in which the providers of funds look primarily to the cash flow from the project as the source of funds to service their loans and provide the return of and a return on their equity invested in the project, while Nevitt and Fabozzi (2000, p.1) define project finance as a financing of a particular economic unit in which a lender is satisfied to look initially to the cash flow and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the economic unit as collateral for the loan. Recourse is important to the sponsoring organizations because it directly affects their balance sheet, debt-to-asset ratio, and risk (Farrel, 2003,

p.547). Similarly, Hainz and Kleimeier (2004, p.1) and Kleimeier and Megginson (1998, p.59, 2000, p.3, 2002, p.2) define project finance as the limited or non-recourse financing of a newly to be developed project through the establishment of a vehicle company or a special purpose entity. The vehicle company owns and operates the assets of the project, acquires funds from the lender group, and is exclusively responsible for the repayment of the debt obligations. Once the project is completed, the vehicle company is responsible for operating the project and allocating the cash flows so generated to lenders and equity investors. Apart from the vehicle company, there are other important groups involved in project finance, including lenders, sponsors, and the third parties. Usually the third parties are the host countries or multilateral agencies such as the World Bank, the European Investment Bank, and the InterAmerican Development Bank, who participate in or provide financial support, including guarantees, to project financings (Kleimeier and Megginson, 1998, p.59). Such supports from the third parties, typically in forms of direct or indirect guarantees regarding allowable project output prices, availability of foreign exchange, and indemnification for the political risks of the project, are particularly important since credit support from sponsors is limited or non-existent (Kleimeier and Megginson, 1998, p.60). Esty and Christov (2002, p.2) also recognise the criticality of the nonresource debt feature in defining project finance which means that loan repayment depends on the projects cash flow rather than on the assets or general credit of the sponsoring organizations (Esty, 1999, p.26), and propose that project finance involves a corporate sponsor investing in and owning a single purpose, industrial asset (usually with a limited life) through a legally-independent entity financed with non-recourse debt. It involves an explicit choice regarding both organizational and financial structure (Esty, 1999, p.26, 2004, p.216). There are three key decisions related to the use of project finance, namely an investment decision involving an industrial asset, an organizational decision to create a legallyindependent entity which owns the asset, and a financing decision involving non-recourse debt. While most literatures on project finance describe it either in terms of the narrow principles of non-recourse and off-balance sheet finance, or in terms of unbound sources of finance for indusial investment 10 (GriffithJones and Fuzzo de Lima, 2004; Sorge, 2004; Sorge and Gadanecz, 2004; Vaaler et al., 2008), Howcroft and Fadhley (1998) argue that such definitions tend to be too generalized and contradictory.

From the empirical evidence they obtained, it is suggested that project finance also serves the primary strategic objective of industrial borrowers to preserve their borrowing capacity or circumvent any limitations on their debt-raising capabilities and simultaneously avoid or reduce their risk exposure. It also enables lenders to mitigate or lay off risk and earn higher than average rates of return. Esty (1999) discusses the costs and benefits of project finance using a case study of the Petrozuata project. The process of deal structure negotiation, including the financial, construction and operational contracts, is extremely time-consuming and expensive. For example, the project sponsors of Petrozuata project, Conoco and Maraven, spent more than five years negotiating the deal and paid more than USD 15 million in advisory fees, representing 60 basis points of the USD 2.43 billion transaction value. Besides, there are also costs for professional time and expenses for their own employees, and financing and insurance costs. Despite of the high transaction costs incurred, project finance can reduce the net financing costs associated with large capital investments (Esty, 2004, p.216). It reduces information costs incurred from information gap on assets value and growth opportunities by the transparent nature of the project and the project structure. It also reduces the cost of financial distress by reducing the probability of distress at the sponsor level and by reducing the costs of distress at the project level. The creation of independent economic entity may allow projects to obtain tax benefits which are not available to its sponsoring organizations. Project finance enables firms to reduce the cost of both leverage-induced underinvestment and underinvestment due to distress costs (Esty, 1999, 2003). Finnerty (2007) concurs that project finance can be applied to counter the underinvestment problem, reallocate free cash flow, and reduce asymmetric information and signalling costs, and hence creating value shareholders. The rationale of project finance includes economies of scale, risk sharing, expanded debt capacity, lower overall cost of funds, release of free cash flow, reduced cost of resolving financial distress, and reduced legal or regulatory costs. Figure 2 is the basic elements of project finance defined by Finnerty (2007, p.3).

Research methodology

Research methodology requires gathering relevant data from the specified documents and compiling databases in order to analyze the material and arrive at a more complete understanding. This project will utilize both quantitative and qualitative data collection tools. As the research is done through analyzing the internal records, so it is a form of Qualitative data collection. Similarly the sample size of data collection is different, so it is a form of Quantitative data collection. Data Collection Data collection will consist of observations and interviews.

The main data is obtained from the companys brochure and report. Further data is being collected from the companys website Data collected from the discussion with the company guide and the other members of the company.

Analysis of historical Records and Content in library reference and abstract guides data collected through Observations Interviews Standard text book