India - Industrial Credit and Investment Corporation Project

P-77 RESTRICTED FILE C'3?Y This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS CONCERNING A PROPOSED LOAN TO THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA, LIlITED z >t r, m xf o (al > ~m -4 z - z z -I 0 x X) 1~~ Decemnber 10, 1954 01  REPORT AND RECaNNENDATIONS OF THF, PRESIDENT TO THF, EXECUTIVE DIRECTORS CONCERNING A ?ROPOSED LOAiN TO THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA, LIMITED 1. I submit herewith the following report and recommendations with respect to the proposed loan, in various currencies amounting to the equivalent of U.S. tlO million, to a Corporation to be registered in India under the title of "The Industrial Credit and Investment Corporation of India, Limited". PART I - HISTORICAL 2. Towards the end of 1953 discussions were held in Washington between the Bank, the Foreign Operations Administration of the U.S4 Government and repre- sentatives of the Government of India about the possibility of establishing in India a privately-owned investment corporation for the purpose of encouraging the growth of private industry. It was proposed that the equity capital of such a corporation be raised by an issue of shares in India, and that efforts should be made to obtain subscribers from overseas. It was further proposed that the Government of India should make an advance to the corporation from rupee counterpart funds generated by the sale of steel supplied under the U.S. foreign assistance program. and that the Bank should consider making a loan to the corporation., 3. As a result of these discussions a mission, organized by the Bank, in- cluding Mr. George Woods of the First Boston Corporation and Rr. Robert Craft of the American Securities Corporation, visited India in February 1954 to dis- cuss the proposal with the Government of India and with leading businessmen. Interest in the proposal and support for it was found to be widespread. Accord- ingly, a Steering Committee, the membe,'s of which were five prominent Indian businessmen,* was set up to make detailed preparation for the proposed corpo- ration and, in particular, to arrange for the Memorandum and Articles of As- sociation of the proposed corporation to be drafted. Two members of this Comnittee visited Washington in March for further discussions. 4. Thereafter the Bank explored with leading financial institutions in the United Kingdom and the United States the possibility of private British and American participation in the equity capital of the proposed corporation, After initial discussions in London it was arranged that further action there should be taken by the Commonwealth Development Finance Company Limited. 5* Sufficient progress was made for the Bank to be able to arrange meetings in Washington in October 1954 which were attended by representatives of the * The members of the Steerinig Ccmmittee are Sir Ramaswami Mudaliar, a well-known public figure from Madras and Chairman of the Indo-Commercial Bank; Sir Biren Mookerjee of Martin Burn & Co., Ltd., Calcutta; Kasturbhai Lalbhai, a Bombay textile mill owner; Mr. A.D. Shroff of. Tata and Sons Ltd.; end Mr. G.D. Birla, a prominent Bengal industrialist,  Steering Committee, of the Government of India and of the British and American investors** At these meetings agreement wJas reached on all major points and drafts of all documents, including those relating to a Government advance of Rs. 75 million and the proposed Bank loan, were prepared and agreed, It was decided that the name of the corporation should be "The Industrial Credit and Investment Corporation of India, Limited". On November 15 the Steering Comn- rnittee met in Calcutta and approved the arrangements made during the Washington meetings. At the present time all steps necessary for the registration of the Corporation, and the subsequent raising by it of its eclity capital are being taken. It is the intention as soon as the equity capital has been raised to contract the Government advance. PART II - THE INDUSTRIAL CREDIT AID INVESTMENT CORPORATION OF INDIA, JII4TED 6. ObJects. The Industrial Credit and Investment Corporation of India, Limited (below called the Corporation) will be incorporated in India with the objects specified in its Memorandum of Association and especially "to carry on the business of assisting industrial enterprises within the private sector of industry in IndiEa in general by (i) assisting in the creation, expansion and modernization of such enterprises; (ii) encouraging and promoting the participation of private capital, both internal and external, in such enterprises; (iii) encouraging and promoting private ownership of industrial investments and the expansion of investment markets; and in particular by (i) providing finance in the form of long or medium-term loans or equity participations; (ii) sponsoring and underwriting new issues of shares and securities; (iii) guaranteeing loans from other private investment sources; (iv) making funds available for re-investment by revolving in- vestments as rapidly as prudent; (v) furnishing managerial, technical and administrative advice and assisting in obtaining managerial, technical and ad- ministrative services to Indian Industry11 * The British subscription is to be divided between the Eastern Exchange Banks, leading insurance companies, and the Commonwealth Development Finance Company, Ltd. The American investors are the Bamk of America, the Rockefeller Bros., the Olin Mathieson Chemical Corpe. and Tvestinghouse International Corporation.  -3- 7. Capital, The authorized capital of the Corporation will be Rs. 250 million (U.S. $52.5 million equivalent) divided into 500,000 Ordinary shares of Rs. 100 each and 2 million unclassified shares of Rs. 100 each. Of this capital, the 500,000 Ordinary shares of Rs. 100 each will be issued in the first instance. Of these shares, 200,000 are to be subscribed in cash at par by banks, insurance companies and others in India, 50000 are to be similarly subscribed by investors in the U.S.A. and 100,000 by investors in the U.K. The remaining 150,000 Ordinary shares are to be offered for public subscription at par in India, payment in full to be made upon application. The Articles of Association of the Corporation provide the amount of the Corporationls indebtedness may not exceed an amount equal to three times the aggregate of (i) the unimpaired capital; (ii) the amount of the Government advance outstanding; and (iii) the surplus and reserves of the Corporation (Article 69). The Articles also specify the respective rights of the Directors and shareholders regarding the issue of unclassified shares and further capital (Articles 11-14, 60-62). 8. Government Advance. It is proposed that the Government should enter into an agreement with the Corporation. This agreement would provide, inter alia: (a) that the Government should make a 30-year advance to the Corpo- ration amounting to Rs. 75 million, free of interest, repayable in fifteen equal annual instalments beginning in the sixteenth year. In the event of a winding up, the Government advance ranks for repayment behind debt and share capital; however, amounts of the advaneidue for repayment are treated as debt and are repay- able accordingly (Clauses 2, 4 and 5); (b) that, so long as any part of the advance is outstanding, the Government may appoint one director to the Board of the Corpo- ration; such director would not be liable to retire by rotation nor be required to hold any share qualification (Clause 6); (c) that, so long as any part of the advance is outstanding, the issued share capital of the Corporation may not be increased without the approval of the Government (Clause 3); (d) that if it is found that the capital of the Corporation (in- cluding the amount of the Government advance) has been impaired by 20C then the Government of India, the Corporation and the Bank are to examine the situation and determine upon remedial action; if the impairment reaches 30% then the Government of India, in consultation with the Bank and the Corporation, will have the right to apply to the court for an order for the winding up of the Corporation under the Indian Companies Act (Clause 8). The agreement further contains provisions designed to ensure that no inaividual or group shall acquire effective control of the Corporation (Clause 7).  9. Reserve. The Articles of Association of the Corporation provide that, after the first five years, there shall be set aside out of the profits of the Corporation othervrise available for dividend in each year a minimum of 25% towards a reserve until such reserve is equal to the outstanding balance of the Government advance. 10. Directors and Management. The Articles of Association provide that the number of directors shall not be less than five nor more than ten in number, excluding the Government director. Of the original Board of Directors, five will be the present members of the Steering Committee, two will be nominated by the British investors, one by the American investors and a ninth will be appointed by the Government of India as indicated above. It has been announced that IMr. P.S. Beale, at present Chief Cashier of the Bank of England, will be appointed as General Manager of the Corporation. l. Business Policies. An understanding has been reached betveen British and American investors, the Steering Committee and the Government o f India that at an early meeting of the Board of Directors of the Corporation the following general policies should be adopted: (a) that the Corporation will not seek, in any enterprise financed by it a controlling interest or any other interest which would give it primary responsibility for the management of such enterprise. The Corporation will, to the maximum extent possible, consistent with the protection of its interests, and after satisfying itself that qualified and experienced management is and will continue to be available, leave the management and control in the hands of the enterprise so financed, (b) that with the exception of intermediate investment of its liquid funds in short-term securities, the Corporation will keep its fi- nancing, whether through loans or equity participations or guaran- tees diversified, both as among types of undertakings and within any one area of India and normally will not commit more than 10% of the total of its original paid-up share capital and Government investment to any single undertaking.. (c) that the Corporation normally will revolve its funds by selling its investments at its discretion whenever it can receive a fair price therefor, In selling such investments the Corporation will pay due regard both to its own interests and to those of other participants in the particular investment. (d) that in undertaking obligations payable in foreign exchange the Corporationgs management, to the fullest extent possible, will endeavor to cover the foreign exchange risk involved by taking obligations payable in the applicable foreign exchange or by forward exchange contract or by other means. (e) that the Corporation will build reserves consistent with sound financial practices.  -5- PART III - DESCRIPTION OF PROPOSED LOAN Borrower 12, The Borrower vrould be the Industrial Credit and Inv6stment Corporation of India, Limited, a Corporation to be registered in India. Guarantor 13, The loan would be guaranteed by India. Amount 14. The amount would be the equivalent in various currencies of U.S. $10 million. Purpose 15. The proceeds of the loan would be used for the purchase of imported material and equipment, and for services, needed for the carrying out of private industrial projects in India to be financed by the Borrower. Terms 16. The loan would bear interest at a rate of 4-5/8% per annum, including the statutory commission of 1%. 17. The commitment charge would,be 3/h of 1% per annum on the amount stand- ing to the credit of the Loan-Account-, in accordance width the arrangements described in paragraph 20 below. 18. The loan would be for 15 years amortized by semi-annual payments begin.- n,ing January.l,, 1960,._which, are calculated to retire. the entireJ,loanAby July 1, 1969., as set.out in,Schedule.l. of the proposed Loan.Agreement. Legal Instruments and.Legal Authority 19. A draf.t.Loan Agreement.,between the, Bank and the Corporation is attached as Appendix 1. A draft Guarantee Agreement between India and the Bank is at- tached as Appendix 2. In addition,,there is attached as Appendix 3 the draft Agreement between India and the Borrouver; as Appendix h the draft Memorandum of Association, and, as.,Ap,pendix,5 the draf.tArticles ofw,Ass,ociationi 20. Attention is directed to the following points in the draft Loan Agreement: (a) the Bank is to approve 'investment projects financed by the Borrower out.of the proceeds of the Loan;  -6- (b) the Loan Account is to be credited with amounts required to meet the reasonable administrative expenses of the Borrower payable in foreign currency and other amounts are to be so credited after the relative investment project is approved by the Bank. However, amounts not exceeding in the aggregate $1 million at any one time may from time to time be credited to and withdrawn from the Loan Account in advance of such approval provided that, if the Bank shall not approve the in- vestment project within ninety days, the Borrower is to reim- burse the Loan Account accordingly; (c) neither the Memorandum nor the Articles of Association of the Corporation nor the Government Agreement may be amended without the approval of the Bank; (d) without the approval of the Bank no pre-payment may be made to India in respect of the Government advance; (e) conditions of effectiveness include the completed subscription in cash at par of Rs. 50 million of the Ordinary shares of the Corporation and the receipt by the Corporation of the full amount of the Government advance. 21, The report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement is attached as Appendix 6. PART IV - APPRAISAL OF THE PROPOSED LOAN 22. The economic background against which the proposed loan should be considered is described in a report, entitled "Current Economic Position and Prospects of India," dated November 9, which has been circulated to Executive Directors. Justification of the Project 23. One of the major impediments to the growth of industry in India has always been the lack of risk capital. From the time that the jute and cotton textile industries were established in the middle of the 19th Century to the period after WorldirWar I, new industrial enterprises relied heavily on capital raised abroad, chiefly in London. Such enterprises were almost invariably started by firms of managing agents who by reason of their experience of Indian conditions and of the control which they retained over the enterprises were able to provide the assurance of sound management needed to attract investors. 24. Largely as a result of the operations of these managing agencies the stock markets in India developed considerably and Indian capital began in- creasingly to flow to industry. After Wlorld Wfar I a large number of new in- dustries, producing capital and consumer goods, were started; and a substantial part of the capital for these enterprises was raised in India. However, the supply of domestic capital available for industry was never sufficient to meet the demand.  -7- 25. During World War II, andin the early post-war period, the inflationary effects of heavy military expenditures and the absence of competition from abroad led to very large investments in industry. By 1948, however, this stimulus was largely spent; since then it has been difficult even for the largest and best established concerns to raise new capital in the Indian mar- kets, and even such concerns have had to rely mainly on issues of fixed- interest securities rather than on equity capital. Even before the war the investors who supported industrial development were not numerous; most people tended either to hoard idle funds or to invest in real estate. Since the war a number of factors have caused the supply of capital for industry to fall off. The princes and large landholders who previously provided most of the funds flowing into industry are no longer in a position to do so; the redistribution of income in favor of low income groups has reduced the rate of saving; savings are increasingly in the form of insurance premia or contributions to pension and provident funds, thus available only to a limited extent for industrial investment. Furthermore, political developments, both external and internal, since 1947 and concern about the Government's attitude toward private industry have tended to discourage foreign and domestic investors. 26. The first Five-Year Plan for the period 1951-56 relied to a great extent upon private enterprise to bring about the industrial expansion thought neces- sary. The Plan estimated that a reasonable program for new investment for 42 industries specified therein would require a total outlay of about Rs. 2,300 million,-and this estimate took no account of the needs of the many smaller industries not specified in the Plan, whose needs in the aggregate would not be small. In the first two years of the Plan new investment in the 42 specified industries was estimated at Rse 520 million; and although in the past year the rate of investment has increased considerably, it is likely that many major industries will expand far more slowly than the needs of the Indian economy require. The Plan also envisaged an outlay of about Rs. 2,300 million on modernization and renewal of plant and equipment; but such evidence as is available suggests that the amounts so far spent for these purposes have been much below the planned level. 27. The Government of India has been disturbed by this situation, and has been considering ways and means of improving it. An inquiry committee was appointed in 1953 by the Reserve Bank to examine ways for making private savings available for industrial investment. It suggested various measures, and, in particular, supported the proposal to establish the Industrial Credit and Investment Corporation. It pointed out in its report that this Corporation could be expected to meet the needs of the Indian economy not merely by direct lending to, and investment in, industry, but also in other ways of equal im- portance. By reason of its large resources and the support it will receive from leading financial institutions in India and abroad it should be able to tap funds in India not at present being made available to industry, and in due course to increase the flow of foreign funds into India; its powers to under- write new issues would fill a major gap in the Indian capital market; and through its connections abroad it should be especially well placed to help Indian industry to meet its needs for technical knowledge and managerial experience, which are almost as pressing as the need for finance.  -8- Prospects of Fulfillment of Obligation 28. I am satisfied that the resources, management and policies of the Corporation should be such as will make a valuable contribution to private enterprise in Indian industry. I believe that the demand for the Corpo- rationts assistafice should be large enough to ensure profitable employment of its resources. The present economic and financial position of India and the sound fiscal policies of the Government indicate that foreign exchange will be available as required for India to meet the obligations to the Bank. 29. Previous loans to India are as follows: $34 million 15-year 4% loan of August 18, 1949 for railway rehabilitation; reduced to $32.8 million. $10 million 7-year 3-1/2% loan of September 29, 1949 for importation of agricultural machinery; reduced to $7.2 million. $18.5 millionr*-1yeav b% loan of April 18, 1950 for power development. $31.5 million 15-year 4-3/h% loan of December 18, 195' to Indian Iron and Steel Company, Limited, for expansion of iron and steel production facilities, $19.5 million 25-year 4-7/8% loan of January 23, 1953 for electric power development, flood control and irrigation; reduced to $10.5 million. $16.2 million 20-year 4-3/4% loan of November 19, 1954 to The Tata Hydro-Electric Power Supply Company, Ltd., The Andhra Valley Power Supply Company, Ltd., and The Tata Poijer Supply Company, Ltd., for a thermal power station. PART V - COMPLIANCE VWITH ARTICE S OF AGREEMENT 30. I am satisfied that the proposed loan complies with the requirements of the Articles of Agreement of the Bank. PART VI - RECOIMENDATIONS 31. I recommend that the Bank grant to the Industrial Credit and Investment Corporation of India, Limited upon its incorporation a loan in various cur- rencies amounting to the equivalent of $10 million for a term of 15 years, guaranteed by India, at such rates of interest and on such other terms and sub- ject to such other conditions as are specified in the draft Loan Agreement attached, Eugene R. Black President Attachments Washington, D.C. December 10, 1954