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C M Y K
C M Y K
SHELF PROSPECTUS Dated December 8, 2012
POWER FINANCE CORPORATION LIMITED(A Government of India
undertaking)
Our Company was incorporated as Power Finance Corporation
Limited on July 16, 1986 as a public limited company under the
Companies Act, 1956, as amended (the “Companies Act”) and was
granted a certificate of incorporation by the Registrar of
Companies, National Capital Territory of New Delhi and Haryana and
a certificate of commencement of business on December 31, 1987. For
further details, see
the section titled “History and Certain Corporate Matters” on
page 107.Registered and Corporate Office: ‘Urjanidhi’, 1 Barakhamba
Lane, Connaught Place, New Delhi 110001, India.
Telephone: +91 11 2345 6000; Facsimile: +91 11 2341 2545Company
Secretary and Compliance Officer: Mr. Arun Kumar Shrivastav;
Telephone: +91 11 2345 6000; Facsimile: +91 11 2341 2545
E-mail: [email protected]; Website:
www.pfcindia.com
LEAD MANAGERS TO THE ISSUE TRUSTEE FOR THE BONDHOLDERS
ICICI SECURITIES LIMITEDH.T. Parekh Marg, ChurchgateMumbai 400
020, IndiaTelephone: (+91 22) 2288 2460Facsimile: (+91 22) 2282
6580Email: [email protected] Grievance
Email:[email protected]:
www.icicisecurities.comContact Person: Mr. Ayush Jain/
Mr. Manvendra TiwariCompliance Officer: Mr. Subir SahaSEBI
Registration No.: INM000011179
A. K. CAPITAL SERVICES LIMITED30-39, Free Press House, Free
Press Journal Marg215, Nariman Point, Mumbai 400 021Maharashtra,
IndiaTelephone: (+91 22) 6754 6500Facsimile: (+91 22) 6610
0594Email: [email protected]:
www.akcapindia.comInvestor Grievance
Email:[email protected] Person : Ms. Akshata
Tambe/
Mr. Yashesh ThakkarCompliance Officer: Mr. Vikas AgarwalSEBI
Registration No.: INM000010411
ENAM SECURITIES PRIVATE LIMTIED*1st floor, Axis House,C-2 Wadia
International CentreP.B. Marg, Worli, Mumbai- 400025Telephone: (+91
22) 4325 2525Facsimile: (+91 22) 4325 3000Email:
[email protected]: www.enam.comInvestor Grievance Email:
[email protected] Person: Mr. Akash AgarwalCompliance
Officer: Mr. M. NatarajanSEBI Registration Number: INM000006856
IL & FS TRUST COMPANY LIMITEDThe IL & FS Financial
CentrePlot C – 22, G BlockBandra Kurla ComplexBandra (East), Mumbai
– 400 051Telephone: (+91 22) 2659 3333Facsimile (+91 22) 2653
3297Email: [email protected]:
www.itclindia.comInvestor Grievance ID:
[email protected] Person : Mr. Subhash
JhaSEBI Registration Number: IND0000000452
LEAD MANAGERS TO THE ISSUE REGISTRAR TO THE ISSUE
KOTAK MAHINDRA CAPITAL COMPANY LIMTIED1st Floor, Bakhtawar, 229
Nariman PointMumbai 400 021, IndiaTelephone: (+91 22) 6634
1100Facsimile: (+91 22) 2283 7517Email: [email protected]:
www.investmentbank.kotak.comInvestor Grievance Email:
[email protected] Person : Mr. Ganesh RaneCompliance
Officer: Mr. Ajay VaidyaSEBI Registration No.: INM000008704
SBI CAPITAL MARKETS LIMITED202, Maker Tower “E”, Cuffe
ParadeMumbai 400 005, Maharashtra, IndiaTelephone: (+91 22) 2217
8300Facsimile: (+91 22) 2217 8332Email:
[email protected]: www.sbicaps.comInvestor
Grievance Email: [email protected] Person : Ms.
Apeksha Munwanee/Ms. Sylvia MendoncaCompliance Officer: Mr. Bhaskar
ChakrabortySEBI Registration No.: INM 000 003531
MCS LIMITEDF-65 1st Floor, Okhla Industrial AreaPhase – 1, New
Delhi - 110020Telephone:( +91 11) 4140 6149Facsimile (+91 11) 4170
9881Email: [email protected]: www.mcsdel.comContact Person
: Mr. Ajay DalalSEBI Registration Number: INR00000056**
ISSUE PROGRAMME***
ISSUE OPENS ON: [l] ISSUE CLOSES ON: [l]
* The merchant banking business of Enam Securities Private
Limited has vested with Axis Capital Limited, which is in the
process of completing the formalities of its SEBI registration.**
The SEBI registration of MCS Limited was valid till July 30, 2012.
MCS Limited has applied for renewal of its registration by an
application to SEBI dated April 27, 2012, prior to the date of
expiry of such registration. The approval of SEBI in this regard is
awaited.*** The Issue shall remain open for subscription from 10:00
a.m to 5:00 p.m. (Indian Standard Time) for the period indicated
above, except that the Issue may close on such earlier date (such
early closure being subject to the Category IV Portion being fully
subscribed prior to such early closure) or extended date as may be
decided by the Board or the a duly constituted committee thereof,
subject to necessary approvals. In the event of an early closure or
extension of the Issue, our Company shall ensure that notice of the
same is provided to the prospective investors through an
advertisement in a reputed daily national newspaper on or before
such earlier or extended date of Issue closure.
PUBLIC ISSUE BY POWER FINANCE CORPORATION LIMITED (“COMPANY” OR
THE “ISSUER”) OF TAX FREE BONDS OF FACE VALUE OF ` [●] EACH IN THE
NATURE OF SECURED, REDEEMABLE, NON-CONVERTIBLE DEBENTURES, HAVING
BENEFITS UNDER SECTION 10(15)(iv)(h) OF THE INCOME TAX ACT, 1961,
AS AMENDED (“BONDS”) AGGREGATING UP TO ̀ 4,590 CRORES (“ISSUE”).
THE BONDS WILL BE ISSUED AT PAR IN ONE OR MORE TRANCHES UP TO ̀
4,590 CRORES (“SHELF LIMIT”)*, ON TERMS AND CONDITIONS AS SET OUT
IN SEPARATE TRANCHE PROSPECTUSES FOR EACH TRANCHE ISSUE, WHICH
SHOULD BE READ TOGETHER WITH THIS SHELF PROSPECTUS.* Our Company is
also considering raising funds through private placements of the
Bonds in one or more tranches during the process of the present
Issue, within the Shelf Limit, at its discretion. Our Company will
ensure that Bonds issued through public issue and/ or on private
placement basis should not exceed the Shelf Limit.The Issue is made
under the Securities and Exchange Board of India (Issue and Listing
of Debt Securities) Regulations, 2008, as amended (“SEBI Debt
Regulations”) and pursuant to notification No. 46/2012 F. No.
178/60/2012-(ITA.1) dated November 6, 2012 issued by the Central
Board of Direct Taxes, Department of Revenue, Ministry of Finance,
Government of India, by virtue of powers conferred upon it by item
(h) of sub-clause (iv) of clause (15) of section 10 of the Income
Tax Act, 1961, as amended.
GENERAL RISKSInvestors are advised to read the section titled
“Risk Factors” on page 11 carefully before taking an investment
decision in relation to this Issue. For taking an investment
decision, investors must rely on their own examination of the
Issuer and the Issue, including the risks involved. This Shelf
Prospectus has not been and will not be approved by any regulatory
authority in India, including the Securities and Exchange Board of
India (“SEBI”), the Reserve Bank of India (“RBI”), any registrar of
companies or any stock exchange in India.
ISSUER’S ABSOLUTE RESPONSIBILITYThe Issuer, having made all
reasonable inquiries, accepts responsibility for and confirms that
this Shelf Prospectus read together with the relevant Tranche
Prospectus for a Tranche Issue does contain and will contain all
information with regard to the Issuer and the relevant Tranche
Issue, which is material in the context of the relevant Tranche
Issue; that the information contained in this Shelf Prospectus and
together with the relevant Tranche Prospectus for a Tranche Issue
will be true and correct in all material respects and is not
misleading in any material respect; that the opinions and
intentions expressed herein are honestly held and that there are no
other material facts, the omission of which makes this Shelf
Prospectus read with the relevant Tranche Prospectus as a whole or
any such information or the expression of any such opinions or
intentions misleading in any material respect at the time of the
relevant Tranche Issue.
CREDIT RATINGICRA Limited (“ICRA”) has assigned a rating of
‘[ICRA]AAA’ to the long term borrowings programme of our Company
(including bonds and long term bank borrowings) for Fiscal 2013, by
its letter dated November 26, 2012. CRISIL Limited (“CRISIL”) has
assigned a rating of ‘CRISIL AAA/ Stable’ to the long term
borrowings programme of our Company for Fiscal 2013, by it letter
dated November 23, 2012. Instruments with these ratings are
considered to have the highest degree of safety regarding timely
servicing of financial obligations and such instruments carry
lowest credit risk. For details, see the section titled “Terms and
Conditions in Connection with the Bonds” on page 155. For the
rationale for this rating, see Annexure B of this Shelf Prospectus.
This rating is not a recommendation to buy, sell or hold securities
and investors should take their own decision. This rating is
subject to revision or withdrawal at any time by the assigning
rating agencies and should be evaluated independently of any other
ratings.
PUBLIC COMMENTSThe Draft Shelf Prospectus dated November 29,
2012 was filed with BSE Limited (“BSE”), the Designated Stock
Exchange, pursuant to the provisions of the SEBI Debt Regulations
and was open for public comments for a period of seven Working Days
(i.e., until 5 p.m) from the date of filing of the Draft Shelf
Prospectus with the Designated Stock Exchange, i.e. November 30,
2012.
LISTINGThe Bonds are proposed to be listed on the BSE, which is
also the Designated Stock Exchange for the Issue. BSE has given its
in-principle listing approval vide its letter dated December 7,
2012.
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TABLE OF CONTENTS
DEFINITIONS AND ABBREVIATIONS
..........................................................................................................
3
CERTAIN CONVENTIONS, USE OF FINANCIAL, INDUSTRY AND MARKET DATA
AND CURRENCY OF PRESENTATON
....................................................................................................................
9
FORWARD LOOKING STATEMENTS
........................................................................................................
10
RISK FACTORS
................................................................................................................................................
11
THE ISSUE
.........................................................................................................................................................
32
SUMMARY FINANCIAL INFORMATION
...................................................................................................
35
SUMMARY OF BUSINESS
..............................................................................................................................
49
GENERAL INFORMATION
............................................................................................................................
56
CAPITAL STRUCTURE
...................................................................................................................................
62
OBJECTS OF THE
ISSUE................................................................................................................................
66
STATEMENT OF TAX BENEFITS (FOR ASSESSEES OTHER THAN NON
RESIDENTS) ................. 68
INDUSTRY OVERVIEW
..................................................................................................................................
71
OUR BUSINESS
.................................................................................................................................................
82
REGULATIONS AND POLICIES
.................................................................................................................
102
HISTORY AND CERTAIN CORPORATE MATTERS
..............................................................................
107
OUR MANAGEMENT
....................................................................................................................................
115
STOCK MARKET DATA FOR OUR SECURITIES
...................................................................................
127
FINANCIAL INDEBTEDNESS
......................................................................................................................
130
OUTSTANDING LITIGATION AND MATERIAL DEVELOPMENTS
.................................................. 145
OTHER REGULATORY AND STATUTORY DISCLOSURES
................................................................
149
ISSUE STRUCTURE
.......................................................................................................................................
153
TERMS AND CONDITIONS IN CONNECTION WITH THE BONDS
....................................................... 155
TERMS OF THE ISSUE
.................................................................................................................................
156
ISSUE PROCEDURE
......................................................................................................................................
168
MAIN PROVISIONS OF ARTICLES OF ASSOCIATION OF THE COMPANY
................................... 188
MATERIAL CONTRACTS AND DOCUMENTS FOR INSPECTION
..................................................... 199
DECLARATION
..............................................................................................................................................
200
ANNEXURE A: FINANCIAL STATEMENTS
.............................................................................................
201
ANNEXURE B: CREDIT RATING AND RATIONALE
.............................................................................
568
ANNEXURE C: STOCK MARKET DATA FOR NON CONVERTIBLE DEBENTURES
LISTED ON THE WHOLESALE DEBT MARKET OF THE NSE
..................................................................................
577
ANNEXURE D: CONSENT LETTER OF DEBENTURE TRUSTEE
....................................................... 599
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DEFINITIONS AND ABBREVIATIONS Unless the context otherwise
indicates, all references in this Shelf Prospectus to “the Issuer”,
“our Company” or “the Company” or “PFC” or “the Issuer” are to
Power Finance Corporation Limited, a public limited company
incorporated under the Companies Act. Unless the context otherwise
indicates, all references in this Shelf Prospectus to “we” or “us”
or “our” are to our Company and the Subsidiaries, the Joint
Ventures and associates, on a consolidated basis. Unless the
context otherwise indicates or implies, the following terms have
the following meanings in this Shelf Prospectus, and references to
any statute or regulations or policies includes any amendments or
re-enactments thereto, from time to time. Company related terms
Term Description Articles/ Articles of Association/AoA Articles
of association of our Company. Board/ Board of Directors Board of
directors of our Company. Director Director of our Company, unless
otherwise specified Equity Shares Equity shares of our Company of
face value of ` 10 each. Joint Ventures The joint ventures of our
Company, being National Power Exchange Limited and
Energy Efficiency Services Limited. Memorandum/ Memorandum of
Association/ MoA
Memorandum of association of our Company.
“Registered Office” or “Corporate Office” or “Registered Office
and Corporate Office”
The registered office and corporate office of our Company,
situated at ‘Urjanidhi’, 1 Barakhamba Lane, Connaught Place, New
Delhi 110001, India.
RoC Registrar of Companies, National Capital Territory of Delhi
and Haryana. Statutory Auditors/Auditors The statutory auditors of
our Company being N.K. Bhargava & Co. and Raj Har
Gopal & Co. Subsidiaries The direct and indirect
subsidiaries of our Company, as mentioned in the section
titled “History and Certain Corporate Matters” on page 107.
Issue related terms
Term Description Allotment/ Allot/ Allotted The issue and
allotment of the Bonds to successful Applicants pursuant to
the Issue. Allotment Advice The communication sent to the
Allottees conveying details of Bonds allotted to the
Allottees in accordance with the Basis of Allotment. Allottee A
successful Applicant to whom the Bonds are Allotted pursuant to the
Issue. Applicant/ Investor A person who applies for the issuance
and Allotment of Bonds pursuant to the
terms of this Shelf Prospectus, relevant Tranche Prospectus(es)
and the Application Form.
Application An application for Allotment of the Bonds.
Application Amount The aggregate value of the Bonds applied for, as
indicated in the Application Form. Application Form The form in
terms of which the Applicant shall make an offer to subscribe to
the
Bonds and which will be considered as the Application for
Allotment of Bonds in terms of respective Tranche
Prospectus(es).
“ASBA” or “Application Supported by Blocked Amount”
The application (whether physical or electronic) used by an ASBA
Applicant to make an Application by authorizing the SCSB to block
the Bid Amount in the specified bank account maintained with such
SCSB.
ASBA Account An account maintained with an SCSB which will be
blocked by such SCSB to the extent of the appropriate Application
Amount of an ASBA Applicant.
ASBA Applicant Any Applicant who applies for Bonds through the
ASBA process. Banker(s) to the Issue/ Escrow Collection Bank(s)
The banks which are clearing members and registered with SEBI as
Bankers to the Issue, with whom the Escrow Accounts will be opened
in respect of the Issue, in this case being [●].
Base Issue Size As specified in the Tranche Prospectus for each
Tranche Issue. Basis of Allotment The basis on which Bonds will be
allotted to successful Applicants through the
Issue and which is described in the section titled “Issue
Procedure – Basis of Allotment” at page 186.
Bond Certificate(s) A certificate issued to the Bondholder(s)
who has applied for Allotment of the Bonds in physical form or in
case the Bondholder has applied for rematerialisation of the Bonds
held by him.
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Term Description Bondholder(s) Any person holding the Bonds and
whose name appears on the list of beneficial
owners provided by the Depositories (in case of bonds in
dematerialized form) or whose name appears in the Register of
Bondholders maintained by the Issuer (in case of bonds in physical
form).
Bonds Tax free bonds in the nature of secured redeemable
non-convertible debentures of face value of ` [●] each having
benefits under section 10(15)(iv)(h) of the Income Tax Act,
proposed to be issued by Company under the Tranche
Prospectus(es).
Business Days All days excluding Saturdays, Sundays or a public
holiday in India or at any other payment centre notified in terms
of the Negotiable Instruments Act, 1881.
Category I � Public Financial Institutions, scheduled commercial
banks, multilateral and bilateral development financial
institutions, state industrial development corporations, which are
authorised to invest in the Bonds;
� Provident funds and pension funds with minimum corpus of ` 25
crores, which are authorised to invest in the Bonds;
� Insurance companies registered with the IRDA; � National
Investment Fund set up by resolution no. F. No. 2/3/2005-DDII
dated November 23, 2005 of the Government of India published in
the Gazette of India;
� Insurance funds set up and managed by the army, navy or air
force of the Union of India or set up and managed by the Department
of Posts, India;
� Mutual funds registered with SEBI; and � Alternative
Investment Funds, subject to investment conditions applicable
to
them under the Securities and Exchange Board of India
(Alternative Investment Funds) Regulations, 2012.
Category II Companies within the meaning of section 3 of the
Companies Act and bodies corporate registered under the applicable
laws in India and authorised to invest in the Bonds.
Category III The following Investors applying for an amount
aggregating to above ` 10 lakhs across all Series of Bonds in each
Tranche Issue:
i. Resident Indian individuals; and ii. Hindu Undivided Families
through the Karta.
Category IV The following Investors applying for an amount
aggregating upto and including ` 10 lakhs across all Series of
Bonds in each Tranche Issue:
i. Resident Indian individuals; and ii. Hindu Undivided Families
through the Karta.
Consolidated Bond Certificate The certificate issued by the
Issuer to the Bondholder(s) for the aggregate amount of the Bonds
in each Series that are Allotted to them in physical form under
each Tranche Issue(s) or rematerialized and held by them.
Consortium Members A.K. Stockmart Limited, Axis Capital Limited,
SBICAP Securities Limited and Kotak Securities Limited.
Credit Rating Agencies For the present Issue, the credit rating
agencies, being ICRA and CRISIL. CRISIL CRISIL Limited. Debenture
Trust Deed The trust deed to be entered into between the Debenture
Trustee and the Company
within three months from the Issue Closing Date. Debenture
Trustee/ Trustee Trustee for the Bondholders, in this case being IL
& FS Trust Company Limited. Debt Application Circular Circular
no. CIR/IMD/DF – 1/20/ 2012 issued by SEBI on July 27, 2012. Debt
Listing Agreement The listing agreement entered into between our
Company and the relevant stock
exchanges in connection with the listing of the debt securities
of our Company. Deemed Date of Allotment The date on which the
Board of Directors/or any committee thereof approves the
Allotment of the Bonds for each Tranche Issue or such date as
may be determined by the Board of Directors/ or any committee
thereof and notified to the Designated Stock Exchange. The actual
Allotment of Bonds may take place on a date other than the Deemed
Date of Allotment. All benefits relating to the Bonds including
interest on Bonds (as specified for each Tranche Issue by way of
the relevant Tranche Prospectus) shall be available to the
Bondholders from the Deemed Date of Allotment.
Demographic Details The demographic details of an Applicant,
such as his address, bank account details for printing on refund
orders and occupation.
Designated Branches Such branches of the SCSBs which shall
collect the ASBA Applications and a list of which is available on
http://www.sebi.gov.in/sebiweb/home/list/5/33/0/0/Recognised-Intermediaries
or at such other website as may be prescribed by SEBI from time to
time.
Designated Date The date on which Application Amounts are
transferred from the Escrow Account to the Public Issue Account or
the Refund Account, as appropriate, following which the Board of
Directors shall Allot the Bonds to the successful Applicants,
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Term Description provided that the sums received in respect of
the Issue will be kept in the Escrow Account up to this date.
Designated Stock Exchange BSE Limited. Draft Shelf Prospectus
The draft shelf prospectus dated November 29, 2012 filed by the
Company with the
Designated Stock Exchange in accordance with the provisions of
the SEBI Debt Regulations.
Escrow Accounts Accounts opened with the Escrow Collection
Bank(s) into which the Members of the Syndicate and the Trading
Members, as the case may be, will deposit Application Amounts from
non-ASBA Applicants, in terms of the Shelf Prospectus and the
Escrow Agreement.
Escrow Agreement Agreement dated [●] entered into amongst the
Company, the Registrar to the Issue, the Lead Managers and the
Escrow Collection Banks for collection of the Application Amounts
from non-ASBA Applicants and where applicable, refunds of the
amounts collected from the Applicants on the terms and conditions
thereof.
ICRA ICRA Limited. Issue Public issue by our Company of tax free
bonds of face value of ` [●] each, in the
nature of secured, redeemable, non-convertible debentures having
benefits under section 10(15)(iv)(h) of the Income Tax Act,
aggregating up to ` 4,590 crores*. * Our Company is also
considering the raising of funds private placements of the Bonds in
one or more tranches during the process of the present Issue,
within the Shelf Limit, at its discretion. Our Company will ensure
that Bonds issued through public issue and/ or on private placement
basis should not exceed the Shelf Limit.
Issue Closing Date Issue closing date as specified in the
relevant Tranche Prospectus for the relevant Tranche Issue.
Issue Opening Date Issue opening date as specified in the
relevant Tranche Prospectus for the relevant Tranche Issue.
Issue Period The period between the Issue Opening Date and the
Issue Closing Date inclusive of both days, during which prospective
Applicants may submit their Application Forms.
Lead Managers/ LMs ICICI Securities Limited, A. K. Capital
Services Limited, Enam Securities Private Limited, Kotak Mahindra
Capital Company Limited and SBI Capital Markets Limited.
Market Lot One Bond. Maturity Amount/ Redemption Amount
In respect of Bonds Allotted to a Bondholder, the face value of
the Bonds along with interest that may have accrued as on the
Redemption Date.
Members of the Syndicate The Lead Managers, the Consortium
Members (for the purpose of marketing of the Issue), sub -
consortium members, brokers and sub – brokers registered with the
sub - consortium members..
Notification/ CBDT Notification Notification No. 46/2012 F. No.
178/60/2012-(ITA.1) dated November 6, 2012 issued by the Central
Board of Direct Taxes, Department of Revenue, Ministry of Finance,
Government of India.
NSE National Stock Exchange of India Limited. Public Issue
Account An account opened with the Banker(s) to the Issue to
receive monies from the
Escrow Accounts for the Issue and/ or the SCSBs on the
Designated Date. Record Date 15 (fifteen) days prior to the
relevant interest payment date, relevant Redemption
Date for Bonds issued under the relevant Tranche Prospectus. In
the event the Record Date falls on a Saturday, Sunday or a public
holiday in New Delhi or any other payment centre notified in terms
of the Negotiable Instruments Act, 1881, the succeeding Business
Day will be considered as the Record Date.
Redemption Date/ Maturity Date The date on which the Bonds will
be redeemed, as specified in the relevant Tranche Prospectus.
Reference G sec rate The average of the base yield of G – sec
for equivalent maturity reported by the Fixed Money Market and
Derivative Association of India on a daily basis (working day)
prevailing for two weeks ending on the Friday immediately preceding
the filing of the Tranche Prospectuses with the Designated Stock
Exchange and the RoC.
Refund Account The account opened with the Refund Bank(s), from
which refunds, if any, of the whole or part of the Application
Amount shall be made.
Refund Banks The Bankers to the Issue, with whom the Refund
Account(s) will be opened, in this case being [●].
Register of Bondholders The register of Bondholders maintained
by the Issuer in accordance with the provisions of the Companies
Act and as more particularly detailed in the section titled “Terms
of the Issue – Register of Bondholders” on page 157.
Registrar to the Issue/ Registrar MCS Limited
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Term Description Registrar MoU Memorandum of understanding dated
November 8, 2012 entered into between our
Company and the Registrar to the Issue. Security The security
for the Bonds proposed to be issued, being a charge on the book
debts
of the Company and/ or identified immovable property by a first/
pari passu charge, as may be agreed between the Company and the
Debenture Trustee, pursuant to the terms of the Debenture Trust
Deed, to be created within three months of the Issue Closing Date,
in accordance with the SEBI Debt Regulations.
“Self Certified Syndicate Banks” or “SCSBs”
The banks which are registered with SEBI under the Securities
and Exchange Board of India (Bankers to an Issue) Regulations, 1994
and offer services in relation to ASBA, including blocking of an
ASBA Account, a list of which is available on
http://www.sebi.gov.in/sebiweb/home/list/5/33/0/0/Recognised-Intermediaries
or at such other website as may be prescribed by SEBI from time to
time.
Series of Bonds A series of Bonds which are identical in all
respects including, but not limited to terms and conditions,
listing and ISIN number (in the event that Bonds in a single Series
of Bonds carry the same coupon rate) and as further referred to as
an individual Series of Bonds in the relevant Tranche
Prospectus.
Shelf Limit
The aggregate limit of the Issue, being ` 4,590 crores* to be
issued under this Shelf Prospectus, through one or more Tranche
Issues.
* Our Company is also considering the raising of funds private
placements of the Bonds in one or more tranches during the process
of the present Issue, within the Shelf Limit, at its discretion.
Our Company will ensure that Bonds issued through public issue or
on private placement basis should not exceed the Shelf Limit.
Shelf Prospectus
This Shelf Prospectus dated December 8, 2012 to be filed by the
Company with the RoC in accordance with the provisions of the
Companies Act and the SEBI Debt Regulations.
Stock Exchanges The BSE and the NSE Syndicate ASBA Application
Locations
Application centres at Mumbai, Chennai, Kolkata, Delhi,
Ahmedabad, Rajkot, Jaipur, Bengaluru, Hyderabad, Pune, Vadodara and
Surat where the Members of the Syndicate shall accept ASBA
Applications.
Syndicate SCSB Branches In relation to ASBA Applications
submitted to a Member of the Syndicate, such branches of the SCSBs
at the Syndicate ASBA Application Locations named by the SCSBs to
receive deposits of the Application Forms from the members of the
Syndicate, and a list of which is available on
http://www.sebi.gov.in/sebiweb/home/list/5/33/0/0/Recognised-Intermediaries
or at such other website as may be prescribed by SEBI from time to
time.
“Transaction Registration Slip” or “TRS”
The slip or document issued by any of the Members of the
Syndicate, the SCSBs, or the Trading Members as the case may be, to
an Applicant upon demand as proof of registration of his
application for the Bonds.
Trading Members Individuals or companies registered with SEBI as
“trading members” who hold the right to trade in stocks listed on
BSE, through which investors can buy or sell securities listed on
BSE, a list of who are available on
http://www.bseindia.com/members/MembershipDirectory.aspx
Tranche Issue Issue of the Bonds pursuant to the respective
Tranche Prospectuses. Tranche Prospectus The tranche prospectus
containing the details of Bonds including interest, other
terms and conditions, recent developments, general information,
objects, procedure for application, statement of tax benefits,
regulatory and statutory disclosures and material contracts and
documents for inspection, in respect of the relevant Tranche
Issue.
Tripartite Agreements Agreements entered into between the
Issuer, Registrar and each of the Depositories under the terms of
which the Depositories agree to act as depositories for the
securities issued by the Issuer.
Working Days All days excluding Sundays or a public holiday in
India or at any other payment centre notified in terms of the
Negotiable Instruments Act, 1881, except with reference to Issue
Period, Interest Payment Date and Record Date, where working days
shall mean all days, excluding Saturdays, Sundays and public
holiday in India or at any other payment centre notified in terms
of the Negotiable Instruments Act, 1881
Conventional and general terms or abbreviations
Term/Abbreviation Description/ Full Form BSE BSE Limited.
Companies Act Companies Act, 1956.
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7
Term/Abbreviation Description/ Full Form AGM Annual General
Meeting. AS Accounting Standards issued by Institute of Chartered
Accountants of India. CAGR Compounded Annual Growth Rate. CBDT
Central Board of Direct Taxes, Department of Revenue, MoF. CDSL
Central Depository Services (India) Limited. CRAR Capital to Risk
Assets Ratio. CSR Corporate Social Responsibility. DIN Director
Identification Number. Depository(ies) CDSL and NSDL. Depositories
Act Depositories Act, 1996. DP/ Depository Participant Depository
Participant as defined under the Depositories Act, 1996. DRR
Debenture Redemption Reserve. DTC Direct Tax Code. FCNR Account
Foreign Currency Non Resident Account. FDI Foreign Direct
Investment. FEMA Foreign Exchange Management Act, 1999. FII Foreign
Institutional Investor (as defined under the SEBI (Foreign
Institutional
Investors) Regulations, 1995), registered with the SEBI under
applicable laws in India.
FIMMDA Fixed Income Money Market and Derivative Association of
India. FIR First Information Report Financial Year/ Fiscal/ FY
Period of 12 months ended March 31 of that particular year. GDP
Gross Domestic Product. GoI or Government Government of India. HUF
Hindu Undivided Family. IAS Indian Administrative Service. ICAI
Institute of Chartered Accountants of India. IFRS International
Financial Reporting Standards. Income Tax Act Income Tax Act, 1961.
India Republic of India. Indian GAAP Generally accepted accounting
principles followed in India. IRDA Insurance Regulatory and
Development Authority. IT Information technology. JV Joint Venture
LIBOR London Inter-Bank Offered Rate. Listing Agreement
The agreement entered into between the Company and each Stock
Exchange in relation to listing of the Equity Shares on the Stock
Exchange(s).
MoF Ministry of Finance, GoI. MCA Ministry of Corporate Affairs,
GoI. MoP Ministry of Power, GoI. NBFC Non Banking Finance Company,
as defined under applicable RBI guidelines. NECS National
Electronic Clearing System. NEFT National Electronic Fund Transfer.
NSDL National Securities Depository Limited. NSE National Stock
Exchange of India Limited. NR or “Non-resident” A person resident
outside India, as defined under the FEMA. p.a. Per annum. PAN
Permanent Account Number. PAT Profit After Tax. PFI Public
Financial Institution, as defined under section 4A of the Companies
Act. RBI Reserve Bank of India. ` or Rupees or Indian Rupees The
lawful currency of India. RTGS Real Time Gross Settlement. SEBI
Securities and Exchange Board of India. SEBI Act Securities and
Exchange Board of India Act, 1992. SEBI Debt Regulations
Securities and Exchange Board of India (Issue and Listing of
Debt Securities) Regulations, 2008.
Business/ Industry related terms
Term/Abbreviation Description/ Full Form ADB Asian Development
Bank. ALCO Asset Liability Management Committee.
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8
Term/Abbreviation Description/ Full Form APDP Accelerated Power
Development Program. APDRP Accelerated Power Development Reform
Program. AT&C Aggregated technical and commercial. CEA Central
Electricity Authority. DPE Department of Public Enterprises, GoI.
ECBs External Commercial Borrowings. FCNR Foreign Currency
Non-Resident. IFC Infrastructure Finance Company IRM Integrated
Enterprise wide Risk Management. ISO International Organization for
Standardization. ITP Independent Transmission Projects. MoU
Memorandum of Understanding. MNRE Ministry of New and Renewable
Energy. NPAs Non-Performing Assets. PSU Public Sector Undertaking.
R-APDRP Restructured Accelerated Power Development and Reform
Programs. SPV Special Purpose Vehicle. TRA Trust and Retention
Account. UMPP Ultra Mega Power Projects. Yield Ratio of interest
income to the daily average of interest earning assets.
Notwithstanding anything contained herein, capitalised terms that
have been defined in the sections titled “Capital Structure”,
“Regulations and Policies”, “History and Certain Corporate
Matters”, “Statement of Tax Benefits (For Assessees other than non
residents)”, “Our Management”, “Financial Indebtedness”,
“Outstanding Litigation and Material Developments” and “Issue
Procedure” on pages 62, 102, 107, 68, 115, 130, 145 and 168
respectively will have the meanings ascribed to them in such
sections.
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9
CERTAIN CONVENTIONS, USE OF FINANCIAL, INDUSTRY AND MARKET DATA
AND CURRENCY OF PRESENTATON
Certain Conventions All references in this Shelf Prospectus to
“India” are to the Republic of India and its territories and
possessions. Financial Data Unless stated otherwise, the financial
data in this Shelf Prospectus is derived from our audited
consolidated financial statements, prepared in accordance with
Indian GAAP and the Companies Act for the Fiscals 2012, 2011, 2010,
2009 and 2008 and the six months ended September 30, 2012. In this
Shelf Prospectus, any discrepancies in any table between the total
and the sums of the amounts listed are due to rounding off. All
decimals have been rounded off to two decimal points. The current
financial year of our Company commences on April 1 and ends on
March 31 of the next year, so all references to particular
“financial year”, “fiscal year” and “Fiscal” or “FY”, unless stated
otherwise, are to the 12 months period ended on March 31 of that
year. The degree to which the Indian GAAP financial statements
included in this Shelf Prospectus will provide meaningful
information is entirely dependent on the reader‘s level of
familiarity with Indian accounting practices. Any reliance by
persons not familiar with Indian accounting practices on the
financial disclosures presented in this Shelf Prospectus should
accordingly be limited. Currency and Unit of Presentation In this
Shelf Prospectus, references to “`”, “Indian Rupees”, “INR” and
“Rupees” are to the legal currency of India, references to “US$”,
“USD”, and “U.S. dollars” are to the legal currency of the United
States of America, references to “Yen” and “JPY” are to the legal
currency of Japan and references to “Euro” or “€ ” or “EUR” are to
the Euro, the single currency of the participating member states in
the third stage of the European Economic and Monetary Union of the
Treaty establishing the European Community, as amended from time to
time. Except as stated expressedly, for the purposes of this Shelf
Prospectus data will be given in ` in crores. In this Shelf
Prospectus, any discrepancy in any table between total and the sum
of the amounts listed are due to rounding off. Industry and Market
Data Any industry and market data used in this Shelf Prospectus
consists of estimates based on data reports compiled by government
bodies, professional organizations and analysts, data from other
external sources and knowledge of the markets in which we compete.
These publications generally state that the information contained
therein has been obtained from publicly available documents from
various sources believed to be reliable but it has not been
independently verified by us or its accuracy and completeness is
not guaranteed and its reliability cannot be assured. Although we
believe the industry and market data used in this Shelf Prospectus
is reliable, it has not been independently verified by us. The data
used in these sources may have been reclassified by us for purposes
of presentation. Data from these sources may also not be
comparable. The extent to which the industry and market data is
presented in this Shelf Prospectus are meaningful depends on the
reader‘s familiarity with and understanding of the methodologies
used in compiling such data. There are no standard data gathering
methodologies in the industry in which we conduct our business and
methodologies and assumptions may vary widely among different
market and industry sources. Exchange Rates The exchange rates (in
`) of the USD, JPY and Euro as for last 5 years and six months
ended September 30, 2012 are provided below: Currency September
30,
2012 March 31,
2012* March 31, 2011 March 31, 2010 March 31,
2009 March 31,
2008 USD 53.1300 51.5300 45.1400 45.5800 51.45 40.11 JPY 0.6889
0.6318 0.5484 0.4900 0.5265 0.4029 EURO 68.9400 69.0500 63.9900
61.3100 68.43 63.47 (Source: SBI TT selling rates) * March 31 2012
was a trading holiday; hence exchange rates for March 30, 2012 have
been used.
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10
FORWARD LOOKING STATEMENTS Certain statements contained in this
Shelf Prospectus that are not statements of historical fact
constitute “forward-looking statements”. Investors can generally
identify forward-looking statements by terminology such as “aim”,
“anticipate”, “believe”, “continue”, “could”, “estimate”, “expect”,
“intend”, “may”, “objective”, “plan”, “potential”, “project”,
“pursue”, “shall”, “seek”, “should”, “will”, “would”, or other
words or phrases of similar import. Similarly, statements that
describe our strategies, objectives, plans or goals are also
forward-looking statements. All statements regarding our expected
financial conditions, results of operations, business plans and
prospects are forward-looking statements. These forward-looking
statements include statements as to our business strategy, revenue
and profitability, new business and other matters discussed in this
Shelf Prospectus that are not historical facts. All forward-looking
statements are subject to risks, uncertainties and assumptions
about us that could cause actual results to differ materially from
those contemplated by the relevant forward-looking statement.
Important factors that could cause actual results to differ
materially from our expectations include, among others: � our
ability to manage our credit quality; � interest rates and
inflation in India � growth prospects of the Indian power sector
and related policy developments; � changes in the demand and supply
scenario in the power sector in India; � general, political,
economic, social and business conditions in Indian and other global
markets; � our ability to successfully implement our strategy,
growth and expansion plans; � competition in the Indian and
international markets; � availability of adequate debt and equity
financing at reasonable terms; � performance of the Indian debt and
equity markets; � changes in laws and regulations applicable to
companies in India, including foreign exchange control
regulations in India; and � various other factors discussed in
this Shelf Prospectus, including under the section titled “Risk
Factors” on page 11. Additional factors that could cause actual
results, performance or achievements to differ materially include,
but are not limited to, those discussed in the section titled “Our
Business” on page 82. The forward-looking statements contained in
this Shelf Prospectus are based on the beliefs of management, as
well as the assumptions made by, and information currently
available to, management. Although we believe that the expectations
reflected in such forward-looking statements are reasonable at this
time, we cannot assure investors that such expectations will prove
to be correct. Given these uncertainties, investors are cautioned
not to place undue reliance on such forward-looking statements. If
any of these risks and uncertainties materialize, or if any of our
underlying assumptions prove to be incorrect, our actual results of
operations or financial condition could differ materially from that
described herein as anticipated, believed, estimated or expected.
All subsequent forward-looking statements attributable to us are
expressly qualified in their entirety by reference to these
cautionary statements.
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11
RISK FACTORS Prospective investors should carefully consider all
the information in this Shelf Prospectus, including the risks and
uncertainties described below, and under the section titled “Our
Business” on page 82 and under “Financial Statements” in Annexure A
of this Shelf Prospectus, before making an investment in the Bonds.
The risks and uncertainties described in this section are not the
only risks that we currently face. Additional risks and
uncertainties not known to us or that we currently believe to be
immaterial may also have an adverse effect on our business,
prospects, results of operations and financial condition. If any of
the following or any other risks actually occur, our business
prospects, results of operations and financial condition could be
adversely affected and the price of, and the value of your
investment in the Bonds could decline and you may lose all or part
of your redemption amounts and/ or interest amounts. The financial
and other related implications of risks concerned, wherever
quantifiable, have been disclosed below. However, there are certain
risk factors where the effect is not quantifiable and hence has not
been disclosed. The numbering of risk factors has been done to
facilitate ease of reading and reference, and does not in any
manner indicate the importance of one risk factor over another. In
this section, unless the context otherwise requires, a reference to
the "Company", "we", "us" and "our" is a reference to Power Finance
Corporation Limited. Unless otherwise specifically stated in this
section, financial information included in this section for Fiscal
2008, 2009, 2010, 2011 and 2012 and the six months ended September
30, 2012 have been derived from our standalone financial statements
for Fiscal 2008, 2009, 2010, 2011 and 2012 and the six months ended
September 30, 2012. For further information, see the section titled
“Certain Conventions, Use of Financial, Industry and Market Data
and Currency of Presentation” on page 9. RISKS RELATING TO OUR
BUSINESS AND INDUSTRY 1. We have a significant concentration of
outstanding loans to certain borrowers, particularly public
sector power utilities, many of which are historically
loss-making, and if these loans become non-performing, the quality
of our asset portfolio may be adversely affected. As of September
30, 2012, our single largest borrower accounted for 7 .96% (`
11206.97 crores) of our total outstanding loans, and our top five
and top ten borrowers accounted for, in the aggregate, 31.59% (`
44484.57 crores) and 52.06% (` 73317.32 crores), respectively of
our total outstanding loan assets amounting to ` 140819.21
crores.
We are a PFI focused on financing of the power sector in India,
which has a limited number of borrowers, primarily comprising state
power utilities ("SPUs") and state electricity boards ("SEBs"),
many of which have been historically loss making. Our past exposure
has been, and future exposure is expected to be, concentrated
towards these borrowers. As of September 30, 2012, our state
sector, central sector, joint sector and private sector borrowers
accounted for 63.2%, 17.33%, 7.4% and 12.07% respectively, of our
total outstanding loans. Historically, PSUs have had a relatively
weak financial position and have in the past defaulted on their
indebtedness. Consequently, we have had to restructure some of the
loans sanctioned to certain SPUs and SEBs, including rescheduling
of repayment terms. In addition, many of our public sector
borrowers, particularly SPUs, are susceptible to various
operational risks including low metering at the distribution
transformer level, high revenue gap, high receivables, low plant
load factors and high AT&C losses, which may lead to further
deterioration in the financial condition of such entities. As of
September 30, 2012, our single largest borrower accounted for 7.96%
of our total outstanding loans, and our top five and top ten
borrowers accounted for, in the aggregate, 31.59% and 52.06%,
respectively, of our total outstanding loans. In addition, we have
additional exposure to these borrowers in the form of non-fund
based assistance. Our most significant borrowers are primarily
public sector power utilities. Any negative trends or financial
difficulties, or an inability on the part of such borrowers to
manage operational, industry and other risks applicable to such
borrowers, could result in an increase in our non-performing assets
("NPAs") and adversely affect our business, financial condition and
results of operations. 2. We may not be able to recover, or there
may be a delay in recovering, the expected value from security
and collaterals for our loans, which may affect our financial
condition. Although we endeavour to obtain adequate security or
implement quasi-security arrangements in connection with our loans,
we have not obtained such security or collateral for all our loans.
In addition, in connection with certain of our loans, we have been
able to obtain only partial security or have made disbursements
prior to
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12
adequate security being created or perfected. There can be no
assurance that any security or collateral that we have obtained
will be adequate to cover repayment of our loans or interest
payments thereon or that we will be able to recover the expected
value of such security or collateral in a timely manner, or at all.
As of September 30, 2012, 67.12% of our outstanding loans were
secured by a charge on the relevant project assets, 9.91% were
unsecured but guaranteed by the relevant state government, and
22.97% were unsecured. Our loans are typically secured by various
movable and immovable assets and/ or other collaterals. We
generally seek a first ranking pari passu charge on the relevant
project assets for loans extended on a senior basis, while for
loans extended on a subordinated basis we generally seek to have a
second pari passu charge on the relevant project assets. In
addition, some of our loans may relate to imperfect security
packages or negative liens provided by our borrowers. The value of
certain kinds of assets may decline due to operational risks that
are inherent to power sector projects, the nature of the asset
secured in our favor and any adverse market or economic conditions
in India or globally. The value of the security or collateral
obtained may also decline due to an imperfection in the title or
difficulty in locating movable assets. Although several pieces of
legislation in India provide for various rights of creditors for
the effective realization of collateral in the event of default,
there can be no assurance that we will be able to enforce such
rights in a timely manner, or at all. There could be delays in
implementing bankruptcy or foreclosure proceedings. Further,
inadequate security documentation or imperfection in title to
security or collateral, requirement of regulatory approvals for
enforcement of security or collateral, or fraudulent transfers by
borrowers may cause delays in enforcing such securities. In
addition, certain of our loans have been granted as part of a
syndicate, and joint recovery action implemented by a consortium of
lenders may be susceptible to delay. In addition, in the event that
any specialized regulatory agency assumes jurisdiction over a
defaulting borrower, actions on behalf of creditors may be further
delayed. RBI has developed a corporate debt restructuring process
to enable timely and transparent debt restructuring of corporate
entities that are beyond the jurisdiction of the Board of
Industrial and Financial Reconstruction, the Debt Recovery Tribunal
and other legal processes. The applicable RBI guidelines
contemplate that in the case of indebtedness aggregating ` 10
crores or more, lenders for more than 75% of such indebtedness by
value and 60% by number may determine the restructuring of such
indebtedness and such determination shall be binding on the
remaining lenders. In circumstances where other lenders account for
such indebtedness by value and number and are entitled to determine
the restructuring of the indebtedness of any of our borrowers, we
may be required by such other lenders to agree to such debt
restructuring, irrespective of our preferred mode of settlement of
our loan to such borrower. In addition, with respect to any loans
made as part of a syndicate, a majority of the relevant lenders may
elect to pursue a course of action that may not be favourable to
us. Any such debt restructuring could lead to an unexpected loss
that could adversely affect our business, financial condition or
results of operations. 3. We have granted loans to private sector
borrowers on a non-recourse or limited recourse basis, which
increases the risk of non-recovery and may adversely affect our
financial condition. As of September 30, 2012, ` 17,000.43 crores,
or 12.07% of our total outstanding loans were to private sector
borrowers.
As of September 30, 2012, ` 17,000.43 crores, or 12.07% of our
total outstanding loans were to private sector borrowers. Under the
terms of our loans to private sector borrowers, our loans are
secured by project assets, and in certain cases, we also obtain
additional collateral in the form of a pledge of shares by the
relevant promoter, or sponsor guarantee. We expect to increase our
exposure to private sector borrowers in the future. The ability of
such borrowers to perform their obligations under our loans will
depend primarily on the financial condition and results of the
relevant projects, which may be affected by many factors beyond the
borrowers' control, including competition, operating costs,
regulatory issues and other risks. If borrowers with non-recourse
or limited recourse loans were to be adversely affected by these or
other factors and were unable to meet their obligations, the value
of the underlying assets available to repay the loans may become
insufficient to pay the full principal and interest on the loans,
which could expose us to significant losses. 4. Our ability to
compete effectively is dependent on our ability to maintain a low
effective cost of funds;
inability to do so could have a material adverse effect on our
business, financial condition and results of operations.
Our ability to compete effectively is dependent on our timely
access to, and the costs associated with raising capital and our
ability to maintain a low effective cost of funds in the future
that is comparable or lower than that of our competitors.
Historically, we have been able to reduce our cost of capital and
our reliance on commercial borrowings through issuance of Indian
Rupee denominated bonds and loans guaranteed by the GoI.
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13
We also benefit from certain tax benefits extended by the GoI.
As a government owned NBFC, loans made by us to central and state
entities in the power sector are currently exempt from the RBI's
prudential lending (exposure) norms that are applicable to other
non-government owned NBFCs. There can be no assurance that we will
continue to benefit from any direct or indirect support from the
GoI and any adverse development in GoI policies may result in an
increase in our cost of funds. Following a general decrease in the
level of direct and indirect financial support by the GoI to us in
recent years, we are fundamentally dependent upon funding from the
equity and debt markets and commercial borrowings and are
particularly vulnerable in this regard given the growth of our
business. The market for such funds is competitive and there can be
no assurance that we will be able to obtain funds on acceptable
terms, or at all. Many of our competitors have greater and cheaper
sources of funding than we do. Further, many of our competitors may
have larger resources or balance sheet strength than us and may
have considerable financing resources. In addition, since we are a
non-deposit taking NBFC, we may have restricted access to funds in
comparison to banks and deposit taking NBFCs. While we have
generally been able to pass any increased cost of funds onto our
customers, we may not be able to do so in the future. If our
financial products are not competitively priced, there is a risk of
our borrowers raising loans from other lenders and in the case of
financially stronger SPUs and SEBs and private sector borrowers,
the risk of their raising funds directly from the market. Our
ability to raise capital also depends on our ability to maintain
our credit ratings in order to access various cost competitive
funding options. We are also dependent on our classification as an
IFC which enables us, among other things, to raise, under the
automatic route without the prior approval of the RBI, ECBs up to
USD 750 million each Fiscal, subject to the aggregate outstanding
ECBs not exceeding 50% of our owned funds, for on-lending to the
infrastructure sector as defined under the ECB policy, subject to
complying with the following conditions: (i) compliance with the
norms prescribed in the DNBS Circular
DNBS.PD.CCNo.168/03.02.089/2009-10 dated February 12, 2010, and
(ii) hedging of the currency risk in full. As an IFC, we are also
required to maintain CRAR of 15%, with a minimum tier I capital of
10%. In addition, adverse developments in economic and financial
markets or the lack of liquidity in financial markets could make it
difficult for us to access funds at competitive rates. If we are
not able to maintain a low effective cost of funds, we may not be
able to implement our growth strategy, competitively price our
loans and, consequently, we may not be able to maintain the
profitability or growth of our business, which could have a
material adverse effect on our business, financial condition and
results of operations. 5. The escrow account mechanism and the
trust and retention account arrangements implemented by us
as a quasi- security mechanism in connection with the payment
obligations of our borrowers may not be effective, which could
adversely affect our financial condition and results of
operations.
We use escrow accounts as a credit enhancement mechanism for
certain of our public sector borrowers that do not meet certain of
our credit risk criteria. As of September 30, 2012, 80.1% of our
outstanding loans to state and central sector borrowers involved
such escrow account mechanism. Similarly, in the case of private
sector borrowers, security is typically obtained through a first
priority pari passu charge on the relevant project assets, and
through a trust and retention mechanism. The escrow account
mechanism and the trust and retention account arrangements are
effective in the event that revenue from the end users or other
receipts, as applicable, is received by our borrowers and deposited
in the relevant escrow account or trust and retention account. We
do not have any arrangement in place to ensure that such revenue is
actually received or deposited in such accounts and the
effectiveness of the escrow account mechanism and the trust and
retention account arrangements is limited to such extent. In the
event that end users do not make payments to our borrowers, the
escrow account mechanism and the trust and retention account
arrangements will not be effective in ensuring the timely repayment
of our loans, which may adversely affect our financial condition
and results of operations. In addition, as we diversify our loan
portfolio and enter into new business opportunities, we may not be
able to implement such or similar quasi-security mechanisms or
arrangements and there can be no assurance that even if such
mechanisms and arrangements are implemented, they will be
effective. 6. We are involved in a number of legal proceedings
that, if determined against us, could adversely
impact our business and financial condition. Our Company is a
party to various legal proceedings. These legal proceedings are
pending at different levels of adjudication before various courts,
tribunals, statutory and regulatory authorities/ other judicial
authorities, and if determined against our Company, could have an
adverse impact on the business, financial condition and
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14
results of operations of our Company. No assurances can be given
as to whether these legal proceedings will be decided in our favor
or have no adverse outcome, nor can any assurance be given that no
further liability will arise out of these claims. For further
information relating to outstanding litigation against our Company,
see the section titled "Outstanding Litigation and Material
Developments" on page 145. 7. Our borrowers’ insurance of assets
may not be adequate to protect them against all potential
losses
to which they may be subject, which could affect our ability to
recover the loan amounts due to us. Under our loan agreements,
where loans are extended on the basis of charge on assets, our
borrowers are required to create a charge on their assets in our
favour in the form of hypothecation or mortgage or both. In
addition, terms and conditions of the loan agreements require our
borrowers to maintain insurance against damage caused by any
disasters including floods, fires and earthquakes or theft on their
charged assets as collateral against the loan granted by us.
However, in most cases our borrowers do not have the required
insurance coverage, or they have not renewed the insurance policies
or the amount of insurance coverage may be less than the
replacement costs of all covered property and is therefore
insufficient to cover all financial losses that our borrowers may
suffer. In the event the assets charged in our favour are damaged,
it may affect our ability to recover the loan amounts due to us. 8.
We will be impacted by volatility in interest rates in our
operations, which could cause our net
interest margins to decline and adversely affect our
profitability. Our operations will be impacted by volatility in
interest rates. Interest rates are highly sensitive due to many
factors beyond our control, including the monetary policies of the
RBI, deregulation of the financial sector in India, domestic and
international economic and political conditions and other factors.
Due to these factors, interest rates in India have historically
experienced a relatively high degree of volatility. When interest
rates decline, we are subject to greater re-pricing and prepayment
risks as borrowers take advantage of the attractive interest rate
environment. In periods of low interest rates and high competition
among lenders, borrowers may seek to reduce their borrowing cost by
asking lenders to re-price loans. If we are required to restructure
loans, it could adversely affect our profitability. If borrowers
prepay loans, the return on our capital may be impaired as any
prepayment premium we receive may not fully compensate us for the
costs of utilizing funds elsewhere. If interest rates rise we may
have greater difficulty in maintaining a low effective cost of
funds compared to our competitors, who may have access to lower
cost funds. 9. Our interest income and profitability is dependent
on the continued growth of our asset portfolio.
Any declines in our net interest margins in the future can have
a material adverse effect on our business, financial condition and
results of operations.
Our results of operations are substantially dependent upon the
level of our net interest margins. Income from our financing
activities is the largest component of our total income. Among
other factors, volatility in interest rates can materially and
adversely affect our financial performance. In a rising interest
rate environment, if the yield on our interest earning assets does
not increase simultaneously with or to the same extent as our cost
of funds, or, in a declining interest rate environment, if our cost
of funds does not decline simultaneously or to the same extent as
the yield on our interest earning assets, our net interest income
and net interest margin would be adversely impacted. Our net
interest margin has increased from 3.95% in Fiscal 2011 to 4.23%
for the half year ending September 30, 2012. However, a decline in
our net interest margin in the future can have a material adverse
effect on our business, financial condition and results of
operations. 10. As an NBFC and an IFC, we are required to adhere to
certain individual and borrower group
exposure limits prescribed by the RBI. Any change in the
regulatory regime may adversely affect our business, financial
condition and results of operations.
We are a systemically important non-deposit taking NBFC and are
subject to various regulations by the RBI as an NBFC. With effect
from July 28, 2010, our Company has been classified as an IFC by
the RBI, which classification is subject to certain conditions
including (i) a minimum of 75% of the total assets of such NBFC
should be deployed in infrastructure loans (as defined under the
Non Banking Financial (Non-Deposit Accepting or Holding) Companies
Prudential Norms (Reserve Bank) Directions, 2007), (ii) net owned
funds of ` 300 crores or more, (iii) a minimum credit rating of "A"
or an equivalent credit rating of CRISIL, FITCH, CARE, ICRA or
equivalent rating by any other accrediting rating agencies, and
(iv) CRAR of 15% with a
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15
minimum tier I capital of 10%. Tier I capital for such purposes
means owned funds as reduced by investment in shares of other NBFCs
and in shares, debentures, bonds, outstanding loans and advances
including hire purchase and lease finance made to and deposits with
subsidiaries and companies in the same group exceeding, in
aggregate, 10% of the owned fund and perpetual debt instruments
issued by a systemically important non-deposit taking NBFC in each
year to the extent it does not exceed 15% of the aggregate tier I
capital of such company as of March 31 of the previous accounting
year. The maximum exposure ceilings as prescribed in respect of
systemically important non-deposit taking NBFCs that are also IFCs
under the Non-Banking Financial (Non-Deposit Accepting or Holding)
Companies Prudential Norms (Reserve Bank) Directions, 2007 are set
out below:
Concentration of credit / investment Loan company Infrastructure
Finance Company
Lending ceilings Lending to any single borrower 15% (+ 5*) 25%
Lending to any single group of borrowers 25% (+ 10*) 40% Investing
ceilings Investing in shares of a company 15% (+ 5*) 15% (+ 5*)
Investing in shares of a single group of companies 25% (+ 10*) 25%
(+ 10*) Loans and investment taken together Lending and investing
to single party 25% (+ 5*) 30% Lending and investing to single
group of parties 40% (+ 10*) 50%
*Additional exposure applicable in case the same is on account
of infrastructure loan and/or investment. As of September 30, 2012,
the CRAR of our Company was 17.69%. Any inability to continue being
classified as an IFC may impact our growth plans by affecting our
competitiveness. As an IFC, we will have to constantly monitor our
compliance with the necessary conditions, which may hinder our
future plans to diversify into new business lines. In the event we
are unable to comply with the eligibility condition(s), we may be
subject to regulatory actions by the RBI and/ or cancellation of
our registration as a systemically important non-deposit taking
NBFC that is also an IFC. Any levy or fines or penalties or the
cancellation of our registration as an NBFC or IFC may adversely
affect our business prospects, results of operations and financial
condition. In addition, the RBI has exempted us from prudential
exposure norms in respect of lending to central and state sector
borrowers in the power sector until March 31, 2013. In compliance
with RBI's directive in this regard, we have prepared a roadmap for
compliance with the RBI prudential norms and submitted the same to
the MoP on May 28, 2012 requesting the MoP to forward the roadmap
to RBI along with their recommendation. We follow prudential
lending norms and guidelines approved by the MoP with respect to
loans made to central and state entities in the Indian power
sector, while our loans made to the private sector are generally
consistent with lending (exposure) norms stipulated by the RBI.
However, if such exemption is not extended, our business prospects,
financial condition and results of operations may be adversely
affected. In addition, our ability to borrow from various banks may
be restricted under guidelines issued by the RBI imposing
restrictions on banks in relation to their exposure to NBFCs.
According to the RBI, the exposure (both lending and investment,
including off balance sheet exposures) of a bank to a single NBFC
should not exceed 10% of the bank's capital funds as per its last
audited balance sheet. Banks may, however, assume exposures on a
single NBFC up to 15% of their capital funds provided the exposure
in excess of 10% is on account of funds on-lent by the NBFC to the
infrastructure sector. Further, exposure of a bank to IFCs should
not exceed 15% of its capital funds as per its last audited balance
sheet, with a provision to increase it to 20% if the same is on
account of funds on-lent by the IFCs to the infrastructure sector.
Banks may also consider fixing internal limits for their aggregate
exposure to the power sector put together. Although we do not
believe such exposure limits have had any adverse effects on our
own liquidity, we believe that individual lenders from whom we
currently borrow may not be able to continue to provide us funds.
As we grow our business and increase our borrowings we may face
similar limitations with other lenders, which could impair our
growth and interest margins and could therefore have a material
adverse affect on our business, financial condition, results of
operations.
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11. Our contingent liabilities in the event they were to
materialize could adversely affect our b usiness, financial
condition and results of operations.
As of September 30, 2012, we had contingent liabilities of `
5201.11 crores including non-funded contingent exposure of ` 402.86
crores in the form of guarantees and ` 4695.22 crores in the form
of letters of comfort issued to borrowers’ banks in connection with
letters of credit and other contingent liabilities of ` 103.03
crores. If any or all of these contingent liabilities materialize,
our financial condition could be adversely affected. 12. If the
level of non-performing assets in our loan portfolio were to
increase, our financial condition
would be adversely affected. In the past, our gross NPAs have
been as indicated below:
Particulars as of Amount of Gross NPA (` in crores) NPA as % of
total loan assets As of March 31, 2010 13.16 0.02 As of March 31,
2011 230.65 0.23 As of March 31, 2012 1358.47 1.04 As of September
30, 2012 1361.51 0.97 The provisioning has been made in terms of
prudential norms laid down internally by us. As a government-owned
NBFC, loans made by us to central and state entities in the power
sector have been exempted from RBI's prudential lending (exposure)
norms applicable to other non-government owned non-deposit taking
systemically important NBFCs. Such exemptions, unless further
extended by the RBI, are currently applicable until March 31, 2013.
In compliance with RBI's directive in this regard, we have prepared
a roadmap for compliance with the RBI prudential norms and
submitted the same to the MoP on May 28, 2012 requesting the MoP to
forward the roadmap to RBI along with their recommendation. We
follow prudential lending norms and guidelines approved by the MoP
with respect to loans made to central and state entities in the
Indian power sector, while our loans made to the private sector are
generally consistent with lending (exposure) norms stipulated by
the RBI. In the event we are required to follow a borrower-wise NPA
determination policy for our government sector borrowers, our NPA
levels may increase substantially, which may have a material
adverse effect on our business, financial condition and results of
operations. In addition, we may, from time to time, amend our
policies and procedures regarding asset classification or
rescheduling of our loans, which may also increase our level of
NPAs. In addition, we are required to assign risk weight of 20% to
the state government guaranteed loans not in default. However, if
such loans have remained in default for a period of more than 90
days, a risk weight of 100% is assigned. Our loans made to the
private sector are generally consistent with lending (exposure)
norms stipulated by the RBI. For further information on RBI
regulations and guidelines applicable to us, see the section titled
"Regulations and Policies” on page 102. If RBI provisioning norms
were to become applicable to us, our level of NPAs and provisions
with respect thereto could be significantly higher. If we are not
able to prevent increases in our level of NPAs, our business and
our future financial condition could be adversely affected. 13. Our
statutory auditors have qualified their reports on our audited
standalone financial statements
for Fiscals 2007, 2008, 2009, and 2010 and our audited
consolidated financial statements for F iscals 2009 and 2010. There
can be no assurance that there will not be any similar
qualifications to our audited standalone and consolidated financial
statements in future periods.
Our statutory auditors have qualified their reports on our
audited standalone financial statements for Fiscals 2007, 2008,
2009 and 2010. Our statutory auditors have also qualified their
reports on our audited consolidated financial statements for
Fiscals 2009 and 2010. Our statutory auditors have qualified their
report on our audited standalone and consolidated financial
statements for 2010 as reproduced below: “Power Finance Corporation
Limited (The Company) pursuant to the opinion of the Expert
Advisory Committee (EAC) of the Institute of Chartered Accountants
of India (ICAI) provided “Deferred Tax Liability” (DTL) on special
reserve created under section 36(1) (viii) of the Income Tax Act in
Fiscal 2005, by charging the profit and loss account with ` 142.87
crores and debiting the free reserves by ` 745.14 crores (for
creating DTL for Fiscal 1998 to Fiscal 2004). Since then the
Company continued to provide DTL until the end of March 2008 by
charging the profit and loss account. The total amount towards DTL
up to March 31, 2008 comes to ` 1,228.38 crores. The Company during
the Fiscal 2009 reversed the DTL provided in earlier years
amounting to
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` 1,228.38 crores and also did not provide DTL amounting to `
291.21 crores (including ` 133.28 crores for Fiscal 2009) in the
current year, contrary to opinions expressed by the EAC of the ICAI
on two occasions dated November 23, 2004 and May 18, 2006,
clarification furnished in July 2009 by the ICAI on the request of
the Comptroller and Auditor General of India and mandatory
provisions of Accounting Standard 22. In view of the facts and
circumstances placed before us, the profits and free reserves of
the Company are overstated by ` 774.45 crores and ` 745.14 crores
(previous year ` 616.52 crores and ` 745.14 crores), respectively
and DTL has been understated by `1,519.59 crores (previous year `
1,361.66 crores). Further, the amount of capital considered in the
calculation of CRAR is overstated to the above extent. As regards
the liability of ` 663.49 crores, which was ` 908.94 crores for the
previous year shown as “Interest Subsidy Fund from GoI” in the
balance sheet, received under Accelerated Generation and Supply
Program (“AG&SP”) Scheme from the MoP, GoI, our Company has
estimated the net excess amount of ` 166.25 crores (previous year `
283.14 crores) and ` 209.97 crores (previous year ` 44.27 crores)
as of March 31, 2010, for the 9th and 10th five year plan,
respectively. This net excess amount is worked out on overall basis
and not on individual basis and may vary due to change in
assumptions, if any, during the projected period such as changes in
moratorium period, repayment period, loan restructuring,
prepayment, interest rate reset, etc. Hence, the impact of this
excess, if any, could not be determined. As such we are not in a
position to express our opinion thereon.” Our statutory auditors
have similarly qualified their reports on our audited standalone
and consolidated financial statements for Fiscal 2009 with respect
to the non-provision of such deferred tax liability on special
reserve created under section 36(1)(viii) of the Income Tax Act. In
addition, our statutory auditors have similarly qualified their
reports on (i) our audited standalone and consolidated financial
statements for Fiscals 2007, 2008, 2009 and 2010 with respect to
the impact of the excess amount relating to the interest subsidy
fund from the GoI under the AG&SP scheme and (ii) our audited
standalone and consolidated financial statements for Fiscals 2006,
2007 and 2008 with respect to certain balances shown under loans,
advances and other debits/ credits in so far such balances have not
been confirmed, realized, discharged or adjusted, which are subject
to reconciliation. Our statutory auditors have not qualified their
report on our audited standalone and consolidated financial
statements for the financial year ended March 31, 2011. However,
there can be no assurance that there will not be any similar
qualifications to our audited standalone and consolidated financial
statements in future periods. 14. The power sector in India and our
business and operations are regulated by, and are directly and
indirectly dependent on, GoI policies and support, which make us
susceptible to any adverse developments in such GoI policies and
support.
We are a government company operating in a regulated industry,
and the GoI, acting through the MoP, exercises significant
influence on key decisions relating to our operations, including
with respect to the appointment and removal of members of our
Board, and can determine various corporate actions that require the
approval of our Board or shareholders, including proposed budgets,
transactions with other Government companies or GoI entities and
agencies, and the assertion of any claim against such entities. The
GoI has also issued directions in connection with the payment of
dividends by government companies. The power sector in India and
our business and operations are regulated by, and are directly or
indirectly dependent on the GoI policies and support for the power
sector. The GoI has implemented various financing schemes and
incentives for the development of power sector projects, and we,
like other Government companies, are responsible for the
implementation of, and providing support to, such GoI schemes and
initiatives. We may therefore be required to follow public policy
directives of the GoI by providing financing for specific projects
or sub-sectors in the public interest which may not be consistent
with our commercial interests. In addition, we may be required to
provide financial or other assistance and services to public sector
borrowers and GoI and other government agencies in connection with
the implementation of such GoI initiatives, resulting in diversion
of management focus and resources from our core business interests.
Any developments in GoI policies or in the level of direct or
indirect support provided to us or our borrowers by the GoI in
these or other areas could adversely affect our business, financial
condition and results of operations.
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15. We currently engage in foreign currency borrowing and
lending and we are likely to continue to do so in the future, which
will expose us to fluctuations in foreign exchange rates, which
could adversely affect our financial condition.
As of September 30, 2012, we had foreign currency borrowings
outstanding of USD 790.73 million, Japanese Yen 41,643.20 million
and Euro 23.77 million, the total of which was equivalent to `
7,233.81 crores, or 6.13 % of our total borrowings. We may continue
to be involved in foreign currency borrowing and lending in the
future, which will further expose us to fluctuations in foreign
currency rates. Volatility in foreign exchange rates could
adversely affect our business and financial performance. We are
also affected by adverse movements in foreign exchange rates to the
extent they impact our borrowers negatively, which may in turn
impact the quality of our exposure to these borrowers. Foreign
lenders may also impose conditions more onerous than domestic
lenders. 16. Certain of our SEB borrowers have been restructured
and we have not yet entered into definitive
loan agreements with such restructured entities, which could
affect our ability to enforce applicable loan terms and related
State government guarantees.
We have granted long–term loans to various SEBs that were
guaranteed by the respective state governments. Pursuant to certain
amendments to the Electricity Act 2003 (“Electricity Act”), the
respective state governments have restructured these SEBs into
separate entities formed for power generation, transmission and/ or
distribution activities. As part of such restructuring process, all
liabilities and obligations of the restructured SEBs relating to
our loans were transferred, pursuant to a notification process, to
the respective state government, which in turn transferred such
liabilities and obligations to the newly formed state
government-owned transmission, distribution and/ or generation
companies. However, the relevant notification transferring such
liabilities and obligations under our loans necessitates the
execution of a transfer agreement among us, the respective state
government and the relevant newly formed transferee entity. We have
not yet executed such transfer agreements with respect to some of
these loans. In such circumstances, as the state government
guarantees have not been reaffirmed to cover the debt obligations
of such newly formed transferee entities, we may not be able to
enforce the relevant state guarantees in case of default on our
loans by such transferee entities. Although we intend to enter into
such transfer agreements to ensure that the terms of our original
loan agreements entered into with the SEBs continue to apply to
such transferee entities, there can be no assurance that we will be
able to execute such transfer agreements in a timely manner, or at
all. In addition, the relevant state government may not reaffirm
such guarantees with respect to the debt obligations assumed by
such restructured transferee entities. There may also be delay, due
to factors beyond our control, with respect to the establishment of
relevant trust and retention account arrangements with such
restructured transferee entities. In addition, we have restructured
loans sanctioned to certain SPUs and other SEBs, including
rescheduling of repayment terms. Any negative trends or financial
difficulties faced by such SPUs and SEBs could increase our NPAs
and adversely affect our business, financial condition and results
of operations. 17. We may incur shortfalls in the advance subsidy
received under the AG&SP scheme of the GoI,
which may affect our financial condition. In Fiscal 1998, the
GoI started the AG&SP, a scheme for providing interest
subsidies for various projects. We oversee and operate this scheme
on behalf of the GoI. The scheme subsidizes our normal lending
rates on loans to SPUs. The subsidy is paid in advance directly to
us from the central government budget and is to be passed on to the
borrowers against their interest liability arising in future under
the AG&SP scheme. We maintain an interest subsidy fund account
on account of the subsidy claimed from the GoI at net present value
which is calculated at certain pre-determined and indicative
discount rates, irrespective of the actual repayment schedule,
moratorium period and duration of repayment. The impact of the
difference between the indicative discount rate and period
considered at the time of drawal and the actual can be ascertained
only after the end of the respective repayment period in relation
to that particular loan. There might be instances where there is a
shortfall or a surplus in the subsidy received from the GoI. In the
event of there being a shortfall, we shall have to bear the
difference, which may affect our financial condition. 18. If we are
unable to manage our growth effectively, our business and financial
results could be
adversely affected. Our business has grown since we began
operations in March 1988. Our total loan assets increased from `
51,568.31 crores as of March 31, 2008 to ` 1,40,819.21 crores as of
September 30, 2012. We intend to
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continue to grow our business, which could place significant
demands on our operational, credit, financial and other internal
risk controls. It may also exert pressure on the adequacy of our
capitalization, making management of asset quality increasingly
important. Our asset growth will be primarily funded by the
issuance of new debt. We may have difficulty in obtaining funding
on attractive terms. Adverse developments in the Indian credit
markets, such as increase in interest rates, may significantly
increase our debt service costs and the overall cost of our funds.
Any inability to manage our growth effectively on favourable terms
could have a material adverse effect on our business and financial
performance. Because of our growth and the long gestation period
for power sector investments, our historical financial statements
may not be an accurate indicator of our future financial
performance. 19. We might not be able to develop or recover costs
incurred on our Ultra Mega Power Projects and
our failure to do so may have an adverse effect on our
profitability. We have been appointed as the nodal agency for the
development of UMPPs, each with a contracted capacity of 4,000 MW
or more. As of September 30, 2012, we have a total of nine
wholly-owned subsidiaries as SPVs for these projects. These SPVs
have been established to conduct the bidding process in accordance
with the Guidelines for Determination of Tariff by Bidding Process
for Procurement of Power by Distribution Licensees, 2005, as
amended. The SPVs undertake preliminary studies and obtain
necessary linkages, clearances, land and approvals including for
water, land and power sale arrangements, prior to transfer of the
projects to successful bidders. The objective is to transfer these
SPVs to successful bidders, through a tariff based international
competitive bidding process, who will then implement these
projects, on payment of development costs incurred by each SPV. Our
Company has and is likely to continue to incur expenses in
connection with these SPVs. There may be delays in the development
of such UMPPs or we may be unable to transfer these UMPPs due to
various factors, including environmental issues, resistance by
local residents, changes in related laws or regulatory frameworks,
or our inability to find a developer for such projects. In
addition, we may not be able to fully recover our expenses from the
successful bidder, which may result in financial loss to us, which
could adversely affect our financial condition and results of
operations. 20. Our agreements regarding certain of our joint
venture arrangements or investments in other
companies contain restrictive covenants, which limit our ability
on transfer our shareholding in such ventures.
Our Company has entered into two joint venture arrangements,
pursuant to which certain joint venture companies have been
incorporated, namely, National Power Exchange Limited and Energy
Efficiency Services Limited. Pursuant to a promoters’ agreement
dated April 8, 1999 and a supplementary agreement dated November
20, 2002, PTC India Limited (formerly known as Power Trading
Corporation of India Limited) is promoted by PGCIL, NTPC and our
Company. Our Company has entered into a share subscription and
shareholders agreement with the NSE and National Commodity &
Derivates Exchange Limited subscribing to the equity shares of
Power Exchange India Limited. Furthermore, our Company has
investments in the Small is Beautiful Fund, a venture capital fund
established with the objective to invest in equity and equity like
instruments of SPVs involved in the development of power projects.
For further information see the section titled "History and Certain
Corporate Matters" on page 107. Further, as we hold minority
interests in each of these joint venture companies, our joint
venture partners will have control over such joint venture
companies (except to the extent agreed under the respective joint
venture agreements). In addition,