India - Sixth Industrial Credit and Investment Corporation Project

RESTRICTED ...>>-, ,'t, Report No. P-433 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED May 19, 1965  REPORT AND RECC6D!1ENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMIITED 1. I submit herewith the following report and recommendation on a proposed loan in an amount in various currencies equivalent to $50 million to The Industrial Credit and Investment Corporation of India Limited (here- inafter called ICICI). The loan would help ICICI to continue its foreign exchange assistance to private industrial enterprises in India. PART I - INTRODUCTION 2. The proposed loan would be the Bank's sixth loan to ICICI. If this loan is made, as well as two pending loans totalling $84 million to India for a Power Transmission project and the Kothagudem Power project, the Bank would have made 34 loans for Indian projects. These three loans, totalling $134 million, would increase the total of Bank loans to India (net of cancellations) from $847.1 million to $981.1 million. 3. The proposed loan and the two power loans would be the first Bank loans made to India since June 1963. Pledges made by the Bank within the framework of the Indian consortium for India's Third Five-Year Plan total $515 million, of which $175.5 million has so far been committed in loans as follows: Year Purpose Amount TF mn 1961 Coal mining (private sector) 35.0 1961 Calcutta port 21.0 1961 Railways 50.0 1961 Coal mining (IISCO) 19.5 1962 Industrial development 20.0 (Fourth ICICI project) 1963 Industrial development 30.0 (Fifth ICICI project) Total 175.5 The uncommitted balance of Bank pledges, at present $339.5 million, will be reduced to $205.5 million if the proposed loans are made.  4. The status of all of the Bank's previous loans for Indian projects as of April 30, 1965, is as follows: ($ million) Total loans, net of cancellations 847.1 of which has been repaid 210.4 Total now outstanding 636.7 Amount sold 97.3 of which has been repaid 76.3 20.7 Net amount held by Bank 616.0 The Association has now made 16 credits to India totalling $435 million. As of April 30, 1965, $259.1 million had been disbursed on these credits. 5. The total of outstanding Bank loans on April 30, 1965, included an undisbursed balance of $91.6 million. For the majority of the loans dis- bursements have been proceeding regularly. There are four loans, howHever, which have been affected by difficulties of various kinds: (a) Disbursements under the $35 million loan made in 1961 for the Private Sector Coal project were initially held up due to delays in processing import licences for the participating mining enterprises. Subsequently, many enterprises have been reluctant to proceed with investment due to flagging demand for coal in India, the maintenance of price controls and consequently un- attractive profit prospects. Up to April 30, 1965, only ~17.2 million had been disbursed out of the loan. (b) The $19.5 million loan for the Indian Iron and Steel Company's coal mining project did not become effective for about two years because of problems of land acquisition and uncertainty about government price policies. The project is nowi proceeding satis- factorily. (c) Disbursements have been slow on two loans, made in 1958 and 1961 respectively, for the development of Calcuttals..porzt.PBaciiities because of delays in the preparation of tender documenits by the Calcutta Port Comnmissioners and in the processing of required government approvals. The undisbursed balances under the above loans account for nearly 60 percent of the undisbursed amounts under all loans for Indian projects.  PAIRT II - DESCRIPTION OF THE PROPOSED LOAN 6. Borrower: The Industrial Credit and Investment Corporation of India Limited. Guarantor: India, acting by its President. Amount: The equivalent in various currencies of $50 million. Term and Amortization: 18 years, with payments beginning on Febru- ary 1, 1968, and ending on August 1, 1983. The Bank and ICICI will agree from time to time to change the amiortization schedule to cornform substantially to the aggregate of the repayment schedules applicable to ICICI's loans, out of the proceeds of the proposed loan, for individual investment projects. Interest Rate: 5-l/2 percent per annum. Commitment Charge: 3/8 of 1 percent per annum accruing from the time the Loan Account is credited with parts of the loan for individual invest- ment projects. PART III - APPRAISAL OF THE PROPOSED LOAN 7. A detailed re-appraisal of ICICI (DB-19a) is attached (No. 1). ICICI is the largest development finance company associated with the Bank. Since 1955, when it was established, the Bank has made five loans to it totalling $90 million. ICICI's total resources of share capital, surpluses, reserves and long-term borrowings amounted at the end of 1964 to the equivalent of about $177 million, including borrowings in foreign exchange of $104 million. 8. In its first decade of operations, ICICI approved assistance to 374 projects for a total of $215 million equivalent, nearly half of it in the form of foreign exchange loans, and by the end of 1964 $115 million had been disbursed. 125 projects have come into production, about one third of them sponsored by entrepreneurs entering industry for the first time. ICICI's assistance has benefited particularly the newer Indian industries, such as the manufacture of machinery and chemicals, in which the private sector has registered notable advances. Though the system of controls in India limits ICICI's freedom to select its customers, especially for foreign exchange loans, it is free to reject any investment which it con- siders unsound. The loan and investment portfolio of ICICI is generally  - 4 - good and the proportion of ICICI's projects encountering difficulties is no greater than would be expected in a developing economy undergoing great strains. Because it is the only Indian investment institution possessing substantial amounts of untied foreign exchange, ICICI has been able to require high standards in the preparation of projects. This discipline has already had a "demonstration effect" in Indian finance and industry. ICICI has also been a successful catalyst between Indian and foreign investors, and has contributed substantially to the growth of the Indian capital market through its numerous underwriting activities. 9. With the continued growth expected in the private industrial sector in India, ICICI's prospects of rendering increased foreign exchange assis- tance depend largely on the volume of untied foreign exchange resources at its disposal. ICICI's record of putting scarce foreign exchange to judicious use would justify a Bank loan of $50 million, which is intended to cover the bulk of the foreign exchange lending ICICI expects to approve to mid-1967. As in the previous loan, ICICI would have the freedom to request credits to the Loan Account of up to $2 million for any investment project without the Bank's prior approval. The proposed loan would be larger than any previous Bank loan to ICICI, and would be the largest made so far by the Bank to any development finance company. 10. ICICI's financial position is sound and its prospects are good. It should be able to meet debt service payments on the proposed loan and other borrowings, as well as to maintain satisfactory dividend payments and allo- cations to reserves. ICICI has now reached a stage where an increase in its share capital would be advisable and it proposes to make this increase in 1965 by a share issue of Rs. 25 million, equal to one half of its present capital. However, in the present unfavorable conditions of the Indian capital market it is not yet certain whether the new issue will be possible in 1965. ICICI's permissible borrowing limit now amounts to four times its net worth plus a government loan of Rs.75 million which is subordinated to other debt and paid-in share capital. ICICI's proposed borrowing program for the next two years would, however, exceed the limit on the present definition of debt which includes two other loans received by ICICI from the Government of India. As these loans are subordinated to the Bank's loans, and because of the quality of ICICI's performance and portfolio, I consider it appropriate that ICICI's present borrowing limit be relaxed somewhat, and the proposed Loan Agreement contains a new definition of the borrowing limit which excludes the subordinated government loans from indebtedness. ICICI will, however, continue its efforts to make the new share issue as soon as possible. 11. An amendment, made in 1963 to the Indian Companies Act, gives the Government of India the right, if the Government considers it necessary in the public interest, to convert government loans made to companies into