India - Tenth Industrial Credit and Investment Corporation Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 142-IN APPRAISAL OF THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED INDIA May 21, 1973 Regional Projects Department Asia Regional Office This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS US$1.00 Rs 7.6* Rs 1 = US$0.132 Rs 1 million US$132,000 Rs 1 billion D US$132.0 million * India has not declared a new par value following, the devaluation of the US Dollar. The Rupee is officially valued at a fixed Pound Sterling rate; and, as the Pound is now floating relative to the US Dcllar, the Dollar-Rupee exchange rate is subject to change. The appraisal is based on an exchange rate of US$1.00 to Rs 7.5. ABBREVIATIONS GOI - Government of India ICICI - Industrial Credit and Investment Corporation of India IDBI - Industrial Development Bank of India IFCI - Industrial Finance Corporation of India KfW - Kreditanstalt fuer Wiederaufbau LIC - Life Insurance Corporation of India SFC - State Financial Corporation SIDC - State Industrial Development Corporation SIIC - State Industrial Investment Corporation UK - United Kingdom USAID - United States Agency for International Development UTI - Unit Trust of India FISCAL YEARS ICICI = January 1 - December 31 GOI = April 1 - March 31  APPRAISAL OF THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED TABLE OF CONTENTS Page No. BASIC DATA .......................................... ....... i SUS2ARY ....*.......... o.*......... ...................... iii I. INTRODUCTION ..................... 1 II. ECONOM1IC ENVIRONMENT ANID INDUSTRIAL FINANCE ..... 1 Industrial Trends .......................... 1 Policy Setting ............................. 2 Patterns of Industrial Finance ............. 3 III. ICICItS ROLE IN THE ECONOMY ..... ................ 4 ICICI as a Mobilizer of Resources .. ........ 4 ICICI as a Source of Industrial Finance .... 5 ICICI's Developmental Impact ........... 5 IV. INSTITUTIONAL ASPECTS ..... ...................... 6 Organization ............................. 6 Policies and Practices ..................... 8 Procedures ................ ................. 10 Relations with the Government and Financial Institutions .... ............... 12 Relations with the Business Community ...... 13 V. OPERATIONS, PORTFOLIO AND FINANCIAL POSITION .... 13 Trend of Operations ..... ................... 13 Characteristics of ICICI's Operations ...... 14 Quality of ICICI's Portfolio .... ........... 16 Profitability and Financial Position ....... 18 VI. BUSINESS PROSPECTS .............. ................ 19 Industrial Investment Perspectives ......... 19 ICICI's Business Prospects and Resource Requirements ...... .................... 20 Financial Projections .......... ............ 22 This report was prepared by Messrs. Ernst Loeschner, Bernard Girin and Agustin Que following their visit to India in January/February 1973.  -2- APPENDIX I: Review of :[CICI's Development APPENDIX II: ICICI's Contribution to GOI's Industrial Policy Objectives APPEIDIX III: Expansion of ICICI's Promotional Role LIST OF ANNEXES INDIA MAP: Location of Major Industrial Centers 1. Some Indicators of Recent Industrial Performance 2. Operations of Industrial Financing Institutions ICICI Resource Mobilization 3. Resource Position as of December 31, 1972 4. Details of Rupee Borrowings Concluded up to December 31, 1972 5. Details of Foreign Currency Borrowings Concluded up to December 31, 1972 Institutional Aspects 6. Distribution of Shareholdings as of December 31, 1972 7. Members of the Board of Directors as of Apr1l 30, 1973 8. Organization Chart as of January 31, 1972 9. Main Terms and Conditions for Assistance Operations 10. Summary of Operations 11. Analysis of Rupee and Foreign Currency Loans Committed by Size and Maturity 12. Industrial Distribution of Financial Assistance 13. Geographical Distribution of Financial Assistance 14. Cost Overruns and Delays in Projects Completed in 1971 and 1972 15. Financial Performance of ICICI Clients in Operation 16. Analysis of Arrears 17. Equity Portfolio as of December 31, 1972 18. Audited Income Statements, 1969-1972 19. Audited Balance Sheets, 1969-1972 20. Cash Flow Statements, 1969-1972 Projections 21. Forecast of Operations, 1973-1977 22. Projected Income Statements, 1973-1977 23. Projected Balance Sheets, 1973-1977 24. Projected Cash Flow Statements, 1973-1977 25. Estimated Disbursement Schedule for the Proposed Tenth Loan.  INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED BASIC DATA 1. Year of establishment: 1955 2. Ownership (December 31, 1972) Number of Shares Percentage of Total Domestic 750,153 75.0 Public Sector (637,248) (63.7) Private Sector (112,905) (11-3) Foreign 249 ,847 25.0 Total 1,000,000 100.0 3. I3RD Loans Status of Loans as of Dec. 31, 1972 Rate of (in US$ million) Loan No. Date Signed Interest Amount Credited Disbursed 109-IN March 14,1955 4-5/8% 1/ 9.9 9.9 9.9 232-IN July 15, 1959 Variable - 9.8 9.8 9.8 269-IN Oct. 28, 1960 - ditto - 19.3 19.3 19.3 312-IN Feb. 28, 1962 - ditto - 19.0 19.0 19.0 34o-IN June 5, 1963 - ditto - 26.9 26.9 26.9 414-IN May 28, 1965 5-1/2% 1/ 47.7 48.3 47.1 515-IN Sept.19, 1967 Variable - 25.0 25.0 23.5 683-IN June 3, 1970 7% 40.0 40.0 30.5 789-IN Oct. 27, 1971 7-1/4% 60.0 60.0 10.5 4. Operations (Amounts in Rs. million) Approvals 1968-70 1971 1972 Total Rupee loans 123.3 158.3 113.5 395.1 Underwritings 166.0 24.5 43.7 234.2 Direct subscriptions 13.0 29.7 33.4 76.1 Guarantees 3/ 23.4 -10.0 2.5 15.9 Foreign currency loans- 617.6 202.5 330.4 1,150.5 943.3 _405.0 523.5 1,871.8 1/ Interest will be applied to each portion of the loans at the Bankts standard rate when such portion is committed for a specific project. 2/ $400,000 cancelled on January 31, 1973. / Exchange rates applied: US$1 Rs. 7.28 for 1968-72 - Rs. 7.5 from 1973 oawards.  - ii - (in Rs. million) Commitments 1968-70 1971 1972 Total Rupee loans 102.2 91.4 91.9 285.5 Underwritings 175.2 21.6 43.1 239.9 Direct subscriptions 10.0 8.9 15.7 34.6 Guarantees 12.3 - - 12.3 Foreign currency loans Y 489.6 236.0 214.4 940.0 Total 789.3 357.9 365.1 1,512.3 Disbursements Rupee 238.3 101.0 109.1 448.4 Foreign exchange 3/ 382.9 204.7 265.8 853.4 Total 621.2 305.7 374.9 1,301.8 5. Financial Performance (in Rs. million) Year ending December 31 1970 1971 1972 (a) Total assets 1,430.6 1,576.8 1,836.2 of which loan and investment portfolio 1,270.7 1,419.8 1,613.7 Long-term debt 1,231.3 1,334.0 1,543.2 Rupee subordir.ated borrowings 547.0 548.2 605.4 Foreign currency borrowings 684.3 785.8 937.8 Equity 157.3 185.1 231.1 Long-term debt/equity 3.2 7.5 7.6 Long-term debt/equity as defined in Bank Loan Agreement 8.0 7.6 7.8 (Percentages) (b) Earnings before interest, provisions and tax as % of average total assets 7.3 7.7 8.0 Profit after tax and provisions as % of average equity 13.7 13.3 11.7 Reserves and provisions as % of total portfolio 6.6 7.0 7.2 Financial expenses as % of average total assets 4.7 4.9 5.2 Administrative expenses as % of average total assets 0.5 0.4 0.4 Book value p.s. as % of par value 209.7 211.5 213.1 Cash dividend as % of par value 10.0 10.0 10.0 Dividend pay-out ratio 37.1 34.2 42.9  APPRAISAL OF THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED SUMMAIY i. The Industrial Credit and Investment Corporation of India (ICICI) is now 18 years old. After a five-year period of consolidation, ICICI's business has been expanding rapidly at a compound growth rate of about 16% annually, reaching in 1972 a level of commitments of $50 million equivalent. More than half of ICICI's operations are in the form of foreign currency loans, rendering it the leading institutional source of finance for imports of machinery and equipment by private industry in India. ii. This achievement would not have been possible without the conti- nuous support of the Bank under whose auspices ICICI was created in 1955. In following closely ICICI's developments, the Bank has provided ICICI with nine lines of credit to ICICI over the years, the most recent being a $60 million loan in 1971. At the same time, funds from the Bank implied the provision of finance untied as to procurement--an advantage that ICICI's clients appreciate. In turn, the Bank has been able to extend its support to medium- and large-scale industry in India through an effective interme- diary, thus contributing to the expansion of the country's industrial base. 1/ iii. The ownership of ICICI is dominated by public sector corporations which altogether hold 64 percent of ICICI's capital. The balance is held by foreign shareholders (25%) and Indian private investors (11%). The Bank has been the most important source of ICICI's funds having provided, up to the end of December 1972, 55 percent of its total resources and 84 percent of its foreign currency resources. Other sources of foreign currency have been USAID, Kreditanstalt fur Wiederaufbau (KfW) and the Overseas Develop- ment Administration of the United Kingdom. Rupee funds have been mobilized through public sector borrowings, initially from the Government and later from the Industrial Development Bank of India, through share issues, internally generated resources and recently primarily through debenture issues. In March 1973 ICICI successfully floated its fourth and largest debenture issue, for Rs 80 million. iv. In providing assistance in the form of term loans, underwritings of and subscriptions to shares and debentures, and the guaranteeing of loans, ICICI continues to finance essentially the modern and non-traditional industries in India, particularly chemicals, ferrous metal products and engineering goods. The corporation plays an important developmental function in improving investment proposals when necessary and in arranging for tech- nical and financial collaboration with enterprises abroad, particularly in projects utilizing the latest technologies. 1/ Appendix I contains a review of ICICI's history and the Bank's role in it.  - iv - v. ICICI-assisted projects account for substantial portions of the country's manufacturing capacity in some leading industries like synthetic rubber and electrical machinery. They have contributed significantly to employment creation, and have generated satisfactory net benefits to the Indian economy. A detailed sample ana"Lysis of ICICI-assisted and completed projects indicates that three-fourths of its projects yielded an internal economic rate of return in excess of 12% and half of its projects in excess of 20%. This analysis constitutes a part of the Special Study on ICICI's developmental impact currently being carried out jointly by ICICI and the Bank. vi. ICICI continues to be well-managed and to operate effectively. Mr. H. T. Parekh is now executive chairman. Mr. S. S. Mehta, who had previously been general manager, was promoted to managing director. A number of other senior staff changes were also made and ICICI has been able to fill all its top management positions by promoting from within. The board of ICICI comprises 15 directors of which six are private industrialists. Liaison with GOI is achieved through the Government directors on the board and while ICICI has a close relationship with GOI in order to implement industrial policy, ICICI retains operational autonomy. vii. ICICI's portfolio is in satisfactory condition, its liquidity is good, its policies and practices remain sound. In December 1972, ICICI's interest rate for foreign currency loans was raised from 9% to 9.5%. The standard rate for rupee loans has been maintalined at 8.5% in view of local money market conditions. ICICI has maintained good standards in its appraisal and follow-up work and has sustained an adequate record of profitability, enabling it both to pay a 10% dividend to its shareholders and to add substantially to its reserves. In short, ICICI has maintained its creditworthiness. viii. ICICI has considerably enhanced its economic appraisal expertise as a result of its detailed project analysis in the Special Study mentioned above. The corporation is now in a position to apply economic analytical tools with a greater degree of confidence. In response to a suggestion by the Bank earlier this year, ICICI has presented a proposal outlining both the economic methodology it would apply for projects of different types and sizes and the criteria it would follow in using economic analysis to help decide on the acceptability of projects. Largely on the basis of this proposal, agreement was reached during negotiations. In particular, ICICI would apply the Little-Mirrlees method it had used in the Special Study to gauge the economic merits of all its larger projects. ix. The sectoral distribution of ICICI't operations continues to be wide. Recently, increased or new lending has taken place for synthetic fibers well as pulp and paper. Operations still tend to be heavily concentrated in the established industrial centers of Gujarat and Maharashtra and attempts to achieve a more diversified geographical distribution have not proved very successful despite Government incentive schemes. ICICI has made contribu- tions in promoting the establishment of new enterprises and those in back- ward areas. It has recently participated in the surveys of the industrial  v potential of several backward states and has already financed a few projects which followed from these surveys. However, there is scope for increased involvement by ICICI in promoting industrial enterprises. In particular, ICICI can increase further its financial assistance to backward areas, intensify its contacts with state level institutions and involve itself with projects in the early stages of their formulation. During negotiations, an understanding was reached with ICICI on these points. x. Over the last two years ICICI's operations have continued to expand with an increase in loan approvals of 19 percent in 1971 and of a further 29 percent in 1972. The major share of approvals (63 percent in 1972) con- tinues to be in foreign exchange for imports, but approvals for rupee lending increased very sharply and in 1972 reached double the level of 1970. This increased activity is a reflection of the confidence on the part of the private sector in the longer term prospects of the economy. This confidence is further reflected in the pronounced increase in actual disbursements of foreign currency loans which went up from an average of US$30 million per annum in 1970 and 1971 to US$36 million in 1972. xi. Although affected by some uncertainties, the outlook for further industrial investment is satisfactory. ICICI's commitments forecast, implying a growth rate of about 10% p.a. after 1973, appears realistic. To carry out its operations until the end of 1975, ICICI will have to raise more funds: about $107 million in foreign exchange to finance equipment imports and about Rs 220 million (about $29 million equivalent) for local needs. xii. ICICI's achievements, as mentioned above, show its suitability and creditworthiness as an intermediary through which the Bank can continue to play an important role in providing assistance to Indian industry. To finance its expanding volume of operations, ICICI needs resources from abroad. It can count on limited amounts from bilateral sources (KfW and UK) and, in addition, has good prospects of obtaining a $15 million equivalent Euro-currency loan. Numerous advantages would accrue to ICICI from its association with the international capital market. However, for the bulk of its foreign currency resource needs over the next few years ICICI will still depend on the Bank. xiii. To fill the corporation's incremental resource needs, a tenth Bank loan of $70 million to ICICI is recommended. This amount, together with the expected Euro-currency loans and finance from bilateral sources, should cover ICICI's foreign currency commitments of $112 million through the end of 1975. The loan would cover about 38% of ICICI's total commitments in this period. xiv. The terms of the proposed loan should be similar to those of recent Bank loans to development finance companies, including the standard commitment charge. The use of the loan would be limited to foreign currency expenditures for imports. As in the last loan, only those of ICICI's projects which need more than $4 million of ICICI's resources, including Bank loan funds, should require the approval of the Bank. ICICI's present contractual 9:1 borrowing limit in relation to its equity should be retained.   APPRAISAL OF THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED 1. INTRODUCTION 1.01 The Industrial Credit and Investment Corporation of India (ICICI), has been associated with the World Bank for almost 20 years. During that period ICICI has received nine Bank loans totalling $265 million, including a $60 million line of credit in 1971. 1.02 Recently ICICI approached the Bank for a tenth loan. This report updates the appraisal of ICICI in the President's Report of October 13, 1971, and recommends a $70 million loan. The proposed tenth loan is an appro- priate occasion to review ICICI's evolution and the role the Bank has been playing in shaping its operations and policies. This review is contained in Appendix I to this report. II. ECONOMIC ENVIRONMENT AND INDUSTRIAL FINANCE Industrial Trends 2.01 The most recent study of India's economy is presented in "Economic Situation and Prospects in India" dated April 11, 1973. The year 1972 was marked by a widespread shortfall in agricultural output in many parts of the country; for 1972/73, foodgrain production is estimated at only 100 million tons compared with the record output of 108 million tons in 1970/71. 2.02 Industrial production showed, on the other hand, an improved record. After a deceleration in the rate of growth of industrial output from 7.1% in 1969 to about 3% in 1971, industrial production increased again at roughly 7% in 1972 (Annex 1). This improvement in industrial production, however, has not offset the decline in agricultural output and, as a result, GDP growth is not expected to exceed 2% in 1972. This low growth has been associated with budgetary and balance of payments difficulties. Moreover, the cumulative effect on industrial investment and production in the next two years resulting from lower agricultural incomes has not been determined, but it can safely be assumed that demand for certain consumer goods will decline in 1973. 2.03 Much of the improvement in industrial production in 1972 can be attributed to the strong recovery of basic industries, intermediate and capital goods as well as increases in cotton textiles. Due to a better utilization of capacity, which in 1971 stood at only 65%, steel production rose by 4% in 1972. Industries which are dependent on the steel industry, primarily engineering and consumer durables, also showed improvements as a result. 2.04 Notwithstanding these developments, dampening influences in industry still abound. Power shortages, transport bottlenecks and slack public sector demand for industrial goods act as constraints on production.  -2- 2.05 The performance of non-traditional export items (mostly engineering) did not reach targeted levels in 1972, largely because of the rise in domestic demand for these commodities and, hence, reduced surpluses for exports. Despite these temporary setbacks, industrial exports remain India's main hope for overcoming the decline in traditional export items--tea, jute and cotton. 2.06 Problems in meeting demand have become typical since 1970. Fertil- izers and minerals (except coal) have been in short supply for some time. Despite the recent increase in steel production and liberalized imports, steel -emains a scarce commodity. The engineering industry has had a large backlog of unfilled orders. Nevertheless, some of these shortages are being met through liberalized import policies. Also, investors are responding to these opportunities and the growing stream of license applications points to a revival of investors' interest in manufacturing. 1/ Policy Setting 2.07 In February 1973, further changes occurred in the industrial licensing policy, which had already been revised in 1970. The 1970 revi- sions were designed to reduce the Government's control over smaller invest- ments to promote manufacturing activities in the medium- and small-scale sectors and in the backward regions of the country. Strict control, however, was retained over key industries in the Government's highest priority or "core" 2/ sector, investments by foreign firms and investments requiring foreign exchange in excers of 10% of total capital cost. Furthermore, public financial institutions were encouraged to make large rupee loans partially convertible into equity. 2.08 To prevent the emergence of monopolistic tendencies in the private sector, approval by the Monopolies Commission (in addition to the approvals by the licensing authorities) was made a requirement for projects sponsored by the "larger business houses" and foreign firms. In 1971, however, some of the licensing requirements were liberalized. They applied to projects designed to expand output and which required little foreign exchange, especially if production was for exports, strategic items or substantial import substitution. As a result, considerable increases in the number of letters of intent issued for new industrial licenses have been recorded since then. 2.09 The February 1973 revisions in the industrial policy changed the definition of "larger houses" for the purposes of licensing restrictions and 1/ In 1971, 1,015 letters of intent for new investment were signed and 676 licenses were issued, compared with 438 and 363, respectively, in 1970. In 1972 (January/July) 531 letters of intent and 252 licenses were issued. 2/ Agricultural inputs, iron and steel, non-ferrous metals, petroleum, coking coal, certain heavy industrial machinery, shipbuilding, news- rrint and electronics.  - 3 - added some industries 1/ to the "core" sector in which these larger houses, as well as foreign firms, can invest. Larger houses are now defined as enterprises with total assets of not less than Rs 200 million as against Rs 350 million previously. They are encouraged to engage in ventures with share capital participation by the Central and State Governments. Nevertheless, much confusion still surrounds this "joint sector" concept. Altogether, these changes imply a partial reversal of the 1970 policy to curb the growth of large enterprises. Patterns of Industrial Finance 2.10 Based on the letters of intent for licensing purposes, gross in- vestment in private industry in 1972/73 is estimated to be in excess of the Rs 10 billion in 1971/72. Over 15% of this amount was provided by the major term-financing institutions: Industrial Development Bank of India (IDBI), ICICI, Industrial Finance Corporation of India (IFCI), State Financial Corporations (SFCs), and State Industrial Development Corporations (SIDCs). 2.11 The first three are term-lending institutions of national scope, whose assistance has been directed mainly to medium and-large scale enter- prises. IDBI, an affiliate of the Reserve Bank of India and to which IDA recently made a credit of $25 million equivalent, acts as a lender of last resort in its direct operations which have been concentrated in the modern industrial sectors. Its indirect operations comprise refinancing of loans and rediscounting of bills. IDBI is the largest source of term-loans for the industrial sector. Its operations have been accelerating rapidly in the last two years, with 1971/72 approvals reaching Rs 1.43 billion. ICICI approvals totalled Rs 524 million in 1972, the majority of which were for foreign currency loans (paragraph 5.01). IFCI (which is half-owned by IDBI and half by other financial institutions) also provides foreign currency loans but its resources are limited and its import financing operations have been only about one-fifth of ICICI's level. IFCI's specialty is financing cooperatives, mainly sugar and cotton; its approvals have totalled about Rs 300 million p.a. over the last three years. Over the last nine year, 140 companies have received joint financing from these institutions with IDBI providing nearly 60 percent and ICICI and IFCI about 20 percent each of the joint assistance for projects with a total cost of about Rs 13 billion. 2.12 At the state level, the SFCs and SIDCs are the most important industrial financing institutions. Total loans approved by the SFCs have increased sharply, reaching Rs 640 million in 1971/72. The bulk (about 70%) of the SFC's assistance has been to the small-scale sector. SIDCs provided term loans also at an increasing rate, reaching a level of Rs 112 million in 1971/72. However, their main impact derives from their promotional activities. 1/ Among the additions are steam generating plants, industrial turbines, equipment for transmission and distribution of electricity, commercial vehicles, earth-moving machinery, scientific instruments, drugs and pharmaceuticals.  2.13 Commercial banks, the Life nsurance Corporation (LIC), and the Unit Trust of India (UTI), also provide long-term finance. The latter two primarily underwrite new issues and invest in industrial shares and deben- tures; LIC also has large portfolio holdings of public bonds and loans to State Governments. 2.14 During 1971/72, term-lending institutions showed a continuing substantial increase in both approvals and disbursements. Their total share in the financing of fixed investment in the private corporate sector is estimated to have risen from 17% in 1968/69 to 29% in 1971/72. Approvals totalled Rs 3.07 billion and idisbursements were Rs 1.83 billion in 1971/72, ropresenting increases of 36% and 25%, respectively, over the levels of the previous year (Annex 2). Traditionally, the bulk of their assistance has been in the form of loans. During 1971/72, only Rs 259 million or 8% of total approvals were for underwriting of and subscription to industrial securities. III. ICICI'S ROLE IN THE ECONOMY ICICI as a Mobilizer of Resources 3.01 ICICI's resources stood at Rs 2,291.9 million at December 31, 1972. Foreign sources supplied 65% of the total, while domestic sources provided Rs 793.4 million or the remaining 35%. Foreign sources, mostly untied as to procurement, have traditionally supplied the bulk of ICICI's resources. (Annex 3). 3.02 ICICI's domestic resources have largely (64%) been mobilized from the public sector, essentially through GOI (Rs 274.4 million outstanding) and IDBI loans (Rs 151 million outstanding). Funds from the private sector were raised primarily through share issues in 1955, 1967 and 1971, bringing paid-up capital to Rs 100 million. 1/ Internal cash generation has allowed ICICI to add substantially to reserves which stood at Rs 113.1 million at the end of 1972. In addition, ICICI has made a contribution to the develop- ment of India's capital market by floating four debenture issues which netted Rs 260 million on terms favorable to ICICI (6%, 12 years maturity). (Annex 4). Most of these debentures were taken up by LIC, UTI, IDBI and commercial banks; however, individual and corporate investors also subscribed. In March 1973, ICICI offered its fourth debenture issue, its largest ever, for Rs 80 million. It was fully subscribed. 3.03 ICICI has been successful in mobilizing foreign resources. It has received nine World Bank lines of credit totalling $265 million, of which $169.9 million (Rs 1,236.8 million) were outstanding at December 31, 1972. The Bank is ICICI's most important source of finance, accounting for 54% 1/ However, ICICI's share capital is now predominantly (64%) held by public sector institutions following the 1969 bank nationalization.  - 5 - of its total resources and 84% of its foreign currency resources. Other lines of credit have been obtained from USAID (Rs 10.0 million outstanding), the German Kreditanstalt fuer Wiederaufbau (KfW) (Rs 171.1 million outstanding) and from the United Kingdom (Rs 56.9 million outstanding). (Details are in Annex 5). An important development in ICICI's policy of diversifying its foreign currency resources is the proposed $15 million equivalent borrowing in the Euro-currency market (para 6.07). ICICI as a Source of Industrial Finance 3.04 ICICI's important role in resource allocation stems from its dominant position as an institutional source of loans for imports. Of the Rs 255 million in foreign currency loans extended by term-lending institutions in 1971/72, ICICI provided Rs 225 million or 88%; IFCI provided the rest. More than half of ICICI's commitments in the past three years have been in the form of term loans for the import of capital goods. These have been amounting to $20-30 million per year. Due to the time lag between approval and disbursement of funds, disbursements were somewhat smaller, about $15-25 million p.a.; however, they represent a sizeable proportion of India's equipment imports which amount to about $250 million annually. By contrast, the total of ICICI's rupee loans is much smaller amounting to commitments of about $12.0 million equivalent a year. 3.05 ICICI's investment operations are fairly balanced between under- writing and direct subscriptions, following the increased emphasis on the latter in the past two years. In 1970, underwritings amounted to Rs 37.1 million, and direct subscriptions to Rs 10.4 million. In 1972, underwritings amounted to Rs 43.7 million and direct subscriptions totalled Rs 33.4 million. 3.06 ICICI's allocation of its resources to different industries and geographical locations is discussed in paras 5.08 and 5.09. ICICI's Developmental Impact 3.07 Contribution to GOI's Industrial Objectives. The Government's industrial licensing policy circumscribes the volume and type of business available to financial institutions. Within the context of that policy, ICICI aims at directing its assistance to non-traditional industries and it has been successful in achieving this objective. ICICI has been able to increase its volume of operations essentially by processing the continually increasing number of applications submitted to it and appraising those projects it wished to pursue. At the same time it has attempted to meet specific objectives of GOI's industrial policy. 3.08 ICICI's contributions towards meeting these objectives may be gauged from the following examples. ICICI finances joint sector companies and, consistent with GOI's policy to broaden public sector ownership, nego- tiates conversion rights into equity on large rupee loans. Some 66 small companies have been extended technical and financial assistance in the past three years. To encourage the development of backward areas, ICICI has participated in industrial surveys, is actively seeking out projects from these areas and, since 1970, has been providing concessional terms for  - 6 - small- and medium-sized projects in backward areas. Projects which promise export earnings are given priority by ICICI. Indeed, ICICI's client com- panies continually fare better in exports than the national average for their industries. Although most of the projects ICICI finances are relatively capital intensive by Indian standards, it is estimated that direct employment creation by ICICI-financed projects has totalled over 300,000 jobs or about 11% of employment created by industry since 1955. A more extensive review of ICICI's activities in these fields is contained in Appendix II. In addition, ICICI's future scope of assistance in the area of promotion is discussed in para 4.16 and in Appendlix III. 3.09 Special Study. A comprehensive analysis of ICICI's contribution to economic development in India is being conducted through a joint ICICI- World Bank Special Study. Complete results of this study -- in which ICICI focuses on operational aspects and the Bank on ICICI's institutional environ- ment -- are not yet available. However, a detailed analysis of a represent- ative sample of 42 ICICI-financed and completed projects has already been concluded which shows that three-fourths of them yielded an internal economic rate of return in excess of 12%, and half in excess of 20%. Although the sample includes a few marginal projects and one with a negative economic rate of return, it can be stated overall that ICICI has performed efficiently in allocating scarce resources. 3.10 A further interesting result which has emerged from the Special Study is the profile of - typical project in ICICI's portfolio: the typical or average project belongs to the modern industrial sector (e.g. chemicals, electrical equipment). The total capital cost amounts to about Rs 10 million of which ICICI has financed about 20% - about two-thirds of it in foreign exchange. A high proportion (60%) of the cost has been financed by promoters' contributions and internally generated funds, while the remaining 20% has been provided by other institutional sources. The project involved some form of foreign collaboration. One-fourth of the raw materials used during pro- duction are imported; however, on the output side, it makes a significant contribution to import replacement. It employs about 350 people; the investment/employment ratio is around Rs 40,000. The financial performance of the project is satisfactory with a return of 14% on capital employed. Profits are about equally divided into retained earnings, taxes and dividend distribution. Capacity utilization is 60% and although most of the output of the project is sold in the domestic market, its export performance is much better than the industry average. IV. INSTITUTIONAL ASPECTS Organization 4.01 Ownership. Following ICICI's second rights issue of Rs 25 million in August 1971, to which some of the foreign shareholders did not subscribe, Indian public sector shareholdings increased to 64% of ICICI's capital (ver3us 60% in mid-1971). The balance is held by foreign shareholders (25%) and Indian private investors (11%). The total number of shareholders  increased from 1,665 in mid-1971 to 1,819 at the end of 1972 (Annex 6). Foreign shareholdings are likely to diminish further as a proportion of ICICI's capital as the latter increases. 4.02 Board. ICICI's board presently comprises 15 directors: six directors are industrialists connected with leading business houses, three are chief executives or senior officials of public financial institutions, two (the chairman and the managing director) are full time officers of ICICI, two represent foreign shareholders and two are GOI senior officers (one appointed by GOI from the Ministry of Finance) (Annex 7). Of the fifteen, seven have been associated with ICICI for more than five years. The composition of ICICI's board does not entirely reflect the distribution of its ownership, as individual directors are invited to join the board primarily on the basis of their personal qualifications. 4.03 The board meets about once a month: it approves all business transactions, except small loans and investments up to Rs 1 million (which are approved by the chairman within an aggregate limit of Rs 10 million per month) and portfolio sales of ICICI's investments (which are decided upon by a committee of the board). Over the years, a close relationship has been established between board and management, enhanced by the fact that the chairman exercises executive powers on a full-time basis. The present chairman, Mr. H.T. Parekh, has been part of ICICI's management almost from its inception and displays strong leadership in the board. The Government directors provide useful liaison with GOI on general policy issues as well as on specific project proposals. 4.04 Management and Staff. During 1972, Mr. H. T. Parekh was both chairman and managing director. Since January 1, 1973, he has led ICICI as executive chairman. In his capacity as managing director he was succeeded by Mr. S.S. Mehta (formerly general manager); Dr. P.B. Medhora (formerly deputy general manager) was promoted to general manager, Mr. S. Kumarasundaram (formerly assistant general manager) to deputy general manager and Mr. S.S. Nadkarni (formerly chief of the Projects Department) to assistant general manager. Although Mr. Parekh is likely to continue as the head of ICICI for several more years, this series of promotions no doubt paves the way for a gradual transfer of executive responsibility. It is reassuring that ICICI has been able to fill all its top management positions by promotions from within. 4.05 ICICI's staff organization is shown in the Chart attached to this report. The staff now numbers 305 including 119 professionals (as against 253 and 94 respectively at the end of 1970). The main change, at the profes- sional level, during the past two years, has been an increase from 62 to 80, in the number of junior officers, spread evenly throughout the organization. The academic qualificiations of these recruits are generally high. 4.06 In spite of this relatively large increase in professional staff, ICICI is still understaffed, particularly in its appraisal and follow-up work. To cope with the present and expected workload, it plans to recruit five more officers for its Projects Department (now numbering 18) and three  - 8- more for its Follow-up Department (now numbering 15). However, in view of the increasing volume of operations, a larger recruitment program would be required to deal thoroughly and expeditiously with the workload, to engage in more promotional work and to cope with the added demands on senior staff time arising from the new merchant ban.king activities (para 4.08). During negotiations, ICICI's plans for staff expansion were discussed. ICICI has already made arrangements to recruit the officers mentioned above. In addition, ICICI plans to recruit three officers to help strengthen its economic project analysis and several other officers to work in the Market Research Department and the Development and Training Division. This recruitment program was considered reasonable. 4./7 ICICI stresses staff training at all levels and has recently established a separate unit for development and training activities. ICICI supplements its own training by sending its officers to other institutions, including the World Bank. 4.08 In July 1972, ICICI's board decided to establish a merchant banking unit which will offer, against a fee, a range of services including market studies, preparation of applications for loans from institutions in India and abroad, and negotiations with brokers for underwriting arrangements. These services will be available to ICICI's clients and to companies in sufficiently good standing to be eligible for ICICI's assistance. To begin with, two senior officers from the Projects Department and one from the Legal Department have been designated on a part time basis to staff the unit. 4.09 The regional offices in Calcutta and Madras which were opened in 1969 and have since relieved Bombay headquarters of follow-up functions, have recently undertaken project appraisal work. Each office has a staff of six professionals, including engineers, lawyers and financial analysts. Both offices participate actively in the monthly meetings of the Inter-Institutional Groups of their respective areas whose main task is to follow -p on the joint studies of backward areas completed in 1971-72. The work of the two offices has not yet led to an increase in the volume of ICICI's business in their respective areas. To achieve this objective, a further strengthening of their staffs will probably be required, partizularly for project appraisal and promotional work. During negotiations, ICICI explained that it had recently recruited an experienced officer to expand the Calcutta office's promotional activities. In addition, ICICI plans to hire one officer each for the Madras and Calcutta offices to strengthen their appraisal and promotional work and one legal expert for the Calcutta office. This program is likely to lead to an increase in ICICI's business in the areas serviced by the two offices. Policies and Practices 4.10 Loan Policies. ICICI generally discourages rupee loans below Rs 1 million but has no lower limits for foreign currency loans. It has no fixed upper limits for loans or for overall commitments per enterprise, each case being judged on its own merits. As of December 31, 1972, ICICI had  extended financial assistance in excess of 10% of its equity to 12 companies. Of these, three companies received finance totalling the equivalent of about 90% of ICICI's equity. However, all 12 companies show a satisfactory per- formance in their operations, profits and service of their debt to ICICI, which indicates that ICICI has been following prudent policies before decid- ing on relatively large commitments to a single enterprise. 4.11 In December 1972, ICICI raised its interest rate on foreign currency loans from 9% to 9.5% in order to maintain its interest rate spread. The standard rate for rupee loans was kept at 8.5% in view of current excess liquidity in the banking system. ICICI also levies a commitment fee of 1% on undrawn amounts, which starts accruing approximately two and a half months after board approval. In addition, a 1% interest rate, contingent upon the achievement of a specified level of profitability, is charged on loans to private limited companies. 1/ ICICI's loans are usually secured by first mortgages. It obtains bank or insurance company guarantees in cases where ICICI's loan is small or a company's units are already mortgaged to another institution. 4.12 ICICI's loan agreements contain covenants to protect its position, including the requirement that clients assume the exchange risk. ICICI also reserves the right to appoint a director on a borrower's board, and has done so in 33 cases. In conformity with GOI guidelines, ICICI seeks conversion rights for part of its rupee loans in cases where the total of its rupee assistance exceeds Rs 5 million. 4.13 Equity Investment Policies. ICICI continues its long standing policy of not investing in equity for quick yields and marketability, but rather for the longer-term prospects of a project. It is prepared to take the risks of underwriting share issues for industrialists who would not otherwise have been able to go to the market. Most equity investment operations are executed in conjunction with a loan and, for big projects, jointly with IDBI and other financial institutions. As of December 31, 1972, ICICI's equity investment portfolio at cost was about 80% of its own net worth. 4.14 Debenture Investment Policies. Since its inception and increasingly so in recent years, ICICI has invested in debentures, either by taking up part of debentures issues which it had underwritten or by subscribing to them directly. ICICI now holds debentures floated by 52 companies. Public issues of debentures carry an interest rate of 8% and are redeemable in 10 to 12 years; ICICI charges a commission of 1.5% for its underwriting services. As debentures are floated generally by only well-established companies, they are readily marketable and the returns to ICICI are satisfactory. Some of the issues underwritten in the past were convertible into equity and ICICI has exercised this option in most cases. As a result of GOI policy, ICICI has recently been negotiating the option to convert part of the debenture issues into equity shares. 1/ ICICI introduced this feature because it cannot, in these companies, obtain equity which could lead to capital appreciation.  - 10 - 4.15 Guarantee Policies. ICICI assistance to companies by way of deferred payments guarantees has not been a significant part of its operation; through the end of 1972 it had provided guarantees amounting to Rs 73 million to 8 companies for 9 projects, all of them large. In most of these projects, ICICI provided substantial assistance in other forms as well. ICICI continues to maintain its normal standards of appraisal for projects under consideration for guarantees. As a matter of policy, ICICI also obtains adequate security for the guaranteed amounts. 4.16 Promotion. In judging ICICIfs promotional activities, the institu- tional and industrial policy framework in which it is operating has to be c-^nasidered. At the state level, there are specialized institutions (SIICs and SIDCs) whose essential task comprises the setting up of industrial enter- prises. Their work is complemented by the State Directorates of Industry which, based on their familiarity with the resource endowments of their areas, commission feasibility studies, build industrial estates and search for entrepreneurial talent. From a national planning point of view, the Government has increasingly paid attention to the fostering of industries in backward States and is offering financial incentives to attract business into these areas. This framework assigns an essentially complementary role to ICICI in promoting enterprises. Appendix II highlights its recent efforts in this regard. In addition, ICICI has been providing training for many years to the staff of state level financing institutions. However, ICICI can do more to strengthen its promotional Prole by increasing its financial assistance to backward areas, by intensifying its working arrangement with state level institutions and agencies and by fostering projects in their early stages of formulation. These points were discussed with ICICI during negotiations and an understanding on its future promotional activities was reached. Appendix III which contains the details of this understanding also describes ICICI's efforts to promote the establishment of a housing develop- ment finance corporation. Procedures 4.17 Appraisa1. ICICI's investigations into projects continue to center on the technical and financial aspects of appraisal. As before these aspects are generally well handled. Management and market aspects are also adequately covered although more attention is required on organizational arrangements for successfully realizing sales prospects at home and abroad. In 1971 and 1972, an effort was made to improve appraisal work by introducing probability analysis and by providing a better integration of the project into its wider industrial context. Overall, ICICI's appraisal work continues to be of good quality. 4.18 Economic Analysis. Following negotiation of the Bank's Ninth Loan, ICICI now includes a quantitative assessment of the economic merits of projects in its appraisal reports. The effective rate of protection calculation is the most commonly used method, complemented or sometimes replaced by the domestic resource cost calculation. In a few cases, ICICI has also attempted to assess internal economic rates of return. In addition to evaluating the social cost of domestic production, ICICI probes into other economic aspects of projects such as employment generation and multiplier  - 1 1 - effects. Although these aspects shed additional light on the desirability of projects, it seems that such economic analysis has had little impact on ICICI's decisions on projects. ICICI's margin of maneuver in modifying project design is limited by the existing policy setting which -- because of the licensing system and price controls -- often determines production scales, location, technology of the project, and costs of both investments and products. However, in cases of excessive production scale, ICICI has been instrumental in reducing the sizes of projects. On the other hand, as licensed capacities are GOI-fixed maxima, ICICI's only choice in practice for low scale/high cost projects is between approval and rejection. This is so, since it is a cum- bersome process of uncertain outcome to obtain an increase in the capacity specification from the licensing authority. 4.19 To ensure that economic analysis will have a greater impact on ICICI's decisions in gauging the acceptability of projects, the Bank invited ICICI earlier this year to present a proposal outlining the economic methodology and the criteria it would use to assist in judging the merits of projects. A constructive proposal was received before negotiations which showed that ICICI has considerably enhanced its economic appraisal expertise as a result of the Special Study (para 3.09). The corporation is now in a position to apply economic analytical tools with a greater degree of confidence. 4.20 Largely on the basis of ICICI's proposal, agreement was reached during negotiations both on the methodology and the criteria ICICI would follow in its economic project appraisals. In particular, ICICI would apply the Little-Mirrlees method it had used in the Special Study to gauge the economic merits of all its large projects involving a total capital cost of more than Rs 25 million and ICICI assistance of more than Rs 5 million. ICICI would thus be the first development bank associated with the Bank Group to use systematically an advanced economic methodology such as Little- Mirrlees for its project appraisals. For smaller projects ICICI would calculate the domestic resource cost of foreign exchange earned or saved and the effective rate of protection. Whenever these economic tests should raise doubts about the economic priority of projects, ICICI would provide special justification if it judged it appropriate to proceed with the proposed financing. This justification would include an assessment of such factors as external economies and income distribution effects. 4.21 Procurement and Disbursement. Procedures in these areas continue to be satisfactory. ICICI's clients have access to foreign machinery only if comparable equipment is not available indigenously. In any case, ICICI urges its borrowers to procure equipment from the most competitive sources. It generally insists that its clients obtain quotations from at least three different firms, whether for import or for local procurement. When more than nine months elapse between appraisal and disbursements, quotations are requested again at the time of disbursements. In evaluating alternative supply sources, ICICI takes into consideration not only quoted prices but also the suppliers' reputation, service facilities, quality and delivery period. Disbursements are competently effected by ICICI's Disbursement Department.  - 12 - 4.22 Follow-up. ICICI's follow-up procedures and the depth of its project supervision are, by and large, satisfactory. However, the staff strength of the Follow-up Department and the organization of its work have not entirely kept up with the growth of ICICI's portfolio. ICICI's management plans to deal with that problem by staff increases (para 4.05), and an improved allocation of work whereby specialized groups (headed by senior officers) would supervise all projects in a particular industry. Problem projects have recently been assigned to a special cell within the Follow-up Department. It coordinates its work with the directors ICICI nominates on the boards of these companies. In view of the satisfactory performance of its clients, ICICZ could accomplish adequate supervision by visiting a relatively small number of its clients every year to supplement its regular checks on progress reports. Recently, ICICI has further streamlined its follow-up organization by assigning the supervision of management and organizational aspects of client companies to a special unit headed by an experienced officer. 4.23 Since 1970, ICICI has been issuing annual detailed progress reports on its client industries in addition to the progress reports on its client companies, also compiled yearly. These reports are especially useful for the appraisal of new projects for existing clients and for comparisons of performance data across industries. Relations with the Goveriment and Financial Institutions 4.24 The Government, as a direct provider or guarantor of funds, as an allocator of foreign exchange business, and as a setter of economic policy, has always been important to ICICI. This is particularly true today, given the Government's interest in public financing institutions as tools of economic policy. Furthermore, ICICI has been particularly important to the Government as a source of untied foreign exchange for industrial investment. In these circumstances, a close relationship between ICICI and Government is of particular relevance. Government authorities have been pleased with ICICI's efficiency and progress in its operations. At the same time, GOI would like ICICI to become active in promotion and to redress the regional imbalance in its portfolio (para 5.09). 4.25 The connections of ICICI's chairman with decision makers in New Delhi as well as the recently developed day-to-day contacts between ICICI staff and Government staff at working levels have assured a generally congenial and effective working relationship. These contacts have been paticularly valuable in dealing with licensing problems. Despite the close relationship ICICI has been able to retain a satisfactory degree of operation- al autonomy. 4.26 Among public financial institutions, IDBI is of particular importance to ICICI, as a source of capital, as a pacesetter on interest rate policy, and as the maker of other policies in significant areas. Relations are also close with IFCI, UTI and LIC, with which ICICI frequently eng-;cs in joint loan and investment operations. ICICI's contacts with state level institutions, particularly the SIDCs and SIICs, are important  - 13 - for promotional work and hold out promise for an increased engagement for ICICI in this field. 4.27 ICICI's willingness to impart training at its facilities to staff of both Indian and foreign development banks has been widely appreciated. Although mostly foreign institutions avail themselves of this opportunity, individual staff members of many Indian institutions receive training every year at ICICI. Relations with the Business Community 4.28 ICICI's image as a national institution still derives primarily from its near-monopoly position in India in lending untied foreign exchange for investment. Altogether, ICICI's relations with the business community are good; this is borne out by the fact that half of its projects approved in the past two years involved repeat operations. ICICI has been particularly helpful in shaping investment proposals, advising clients on project cost and in assisting them in negotiating technical and financial collaboration arrangements with foreign partners. (About half of its clients have colla- boration arrangements with foreign firms.) Businessmen also appreciate its willingness to underwrite share and debenture issues, and its capacity to decide faster than other development banks on applications for finance. The recent creation of a merchant banking cell (para 4.08), should enable ICICI to offer an even wider range of services to its clientele. V. OPERATIONS, PORTFOLIO AND FINANCIAL POSITION Trend of Operations 5.01 Annex 10 shows ICICI's operations since 1965. In the last two years, the momentum gained by ICICI's business further increased, reflecting the higher number of industrial licenses issued in 1971 and the first months of 1972. Net approvals increased by 19% in 1971 to Rs 405 million and by 29% in 1972 to Rs 523.5 million. As before, loans for import financing accounted for the major share (63% in 1972) of total approvals. 5.02 Loans. The following table summarizes ICICI's loan operations in 1970-72: --------------- -----(In Rs Million)-