ASIAN DEVELOPMENT BANK PCR:IND 29062

PROJECT COMPLETION REPORT

ON THE

PRIVATE SECTOR INFRASTRUCTURE FACILITY (Loan Nos. 1480-IND & 1481-IND)

IN

INDIA

August 2003

CURRENCY EQUIVALENTS

Currency Unit – Indian rupee/s (Re/Rs)

At Appraisal 16 September 1996

At Project Completion 16 May 2002

Re1.00 = $0.0282 $0.020 $1.00 = Rs35.50 Rs48.99

ABBREVIATIONS

ADB - Asian Development Bank CAR - capital adequacy ratio DFI - development finance institution DSCR - debt-service recovery ratio ICICI - Industrial Credit and Investment Corporation of India IDBI - Industrial Development Bank of India IFCI - Industrial Financial Corporation of India JBIC - Japanese Bank for International Cooperation NPA - nonperforming asset NTP - New Telecom Policy PCR - project completion report

PFI - participating financial institution PSIF - private-sector infrastructure facility RBI - Reserve Bank of India RRP - report and recommendation of the President SCICI - SCICI Limited

NOTES

(i) The fiscal year (FY) of the ICICI Bank Limited and IFCI ends on 31 March. FY before a

calendar year denotes the year in which the fiscal year ends, e.g. FY2001 ends on 31 March 2001.

(ii) In this report, “$” refers to US dollars.

CONTENTS Page

BASIC DATA (iii) I. BACKGROUND 1

A. History 1 B. Scope of Operations 1 C. Relationship with Asian Development Bank and Other Lenders 2 D. Relevance of Design and Formulation 3 E. Related Technical Assistance 3

II. IMPLEMENTATION 4 A. Lending Policies 4

B. Characteristics of Subloans 4 C. Implementation and Internal Operation of Subprojects 5

D. Operational Performance of ICICI and IFCI 6 E. Financial Performance of ICICI and IFCI 8 F. Financial Statements and Ratios 9 G. Covenants 10 H. Performance of the Asian Development Bank 10

III. EVALUATION 10

A. Loan Appraisal 10 B. Implementation 11 IV. ASSESSMENT AND RECOMMENDATIONS 12

A. Relevance 12 B. Efficacy in Achievement of Purpose 12 C. Efficiency in Achievement of Outputs and Purpose 12 D. Preliminary Assessment of Sustainability 12 E. Other Impacts 13 F. Overall Assessment 13 G. Lessons Learned 13 H. Recommendations 14

APPENDIXES 1. Subloans Approved 15 2. Chronology of Main Events in Project Implementation 16 3. Projected and Actual Disbursements 19 4. Subproject Status 20 5. Organization Structure of ICICI 22 6. Organization Structure of IFCI 23 7. Approvals and Disbursements by ICICI 24 8. Portfolio Quality Analysis of ICICI 25 9. Asset Mix of ICICI 26 10. Approvals and Disbursements by IFCI 27 11. IFCI Portfolio Quality 29

12. Balance Sheets of ICICI and ICICI Bank 30 13. Income Statements of ICICI & ICICI Bank 34 14. Cash Flow Statements of ICICI & ICICI Bank 37 15. Ratio Analysis of ICICI 38 16. Balance Sheets of IFCI 39 17. Income Statements of IFCI 41 18. Cash Flow Statements of IFCI 42 19. Ratio Analysis of IFCI 43 20. Status of Compliance with Major Loan Covenants by ICICI 44 21. Status of Compliance with Major Loan Covenants by IFCI 48 22. Assessment of Development and Poverty Reduction Impact 52

(iii)

BASIC DATA

A. Loan Identification

1. Country 2. Loan Numbers 3. Loan Title 4. Borrowers 5. Name of DFIs 6. Amount of Loan 7. Project Completion Report

Number

India 1480 & 1481-IND Private Sector Infrastructure Facility ICICI Bank Ltd (ICICI), and Industrial Finance Corporation of India (IFCI) ICICI and IFCI $250 million ($150 million to ICICI and $100 million to IFCI) PCR:IND 762

B. Loan Data

1. Appraisal Date Started

Date Competed 31 July 1995 11 August 1995

2. Loan Negotiations Date Started

Date Completed

27 September 1996 1 October 1996

3. Date of Board Approval 7 November 1996 4. Date of Loan Agreement 14 August 1997

5. Date of Loan Effectiveness

In Loan Agreement Actual

ICICI IFCI

Number of Extensions

13 November 1997 25 September 1997 26 September 1997 None

6. Terminal Date for Commitments

In Loan Agreement

ICICI IFCI

Actual ICICI IFCI

Number of Extensions

24 September 2001 25 September 2001 13 July 2001 18 October 2000 None

(iv) 7. Closing Date

In Loan Agreement ICICI IFCI

Actual ICICI IFCI

Number of Extensions

26 September 2002 27 September 2002 13 November 2001 16 May 2002 None

8. Terms to the Borrower

- Interest Rate - Maturity - Grace Period

Market-based loan window with lending spread of 40 basis points. 20 years 5 years

9. Terms of Relending At market rate

10. Disbursements

a. Dates

Initial Disbursement Final Disbursement Time Interval ICICI 29 October 1997 13 November 2001 4 years, 1 monthIFCI 1 December 1997 20 December 2000 3 years Effective Date Original Closing Date Time Interval ICICI 25 September 1997 26 September 2002 5 years IFCI 26 September 1997 27 September 2002 5 years

b. Amount ($ million)

PFI

Category

Original

Allocation

Last Revised

Allocation

Net Amount

Disbursed

Undisbursed

Balance ICICI Project

Expenditure 150.00 150.00 150.00 0.00

IFCI Project Expenditure

100.00 100.00 62.50 37.50

Total 250.00 250.00 212.50 37.50

C. Implementation Data

1. Number of Subloans 9

(v) 2. Sectoral Distribution of Subloans

Amount in $ Subloan Sector Number of Subloans Amount

Power Ports Roads Telecommunications

5 1 1 2

106,723,29623,562,623

6,481,26975,731,011

Total 9 212,498,199

3. Size of Subloans (actual) Amount in $

Range Number of Subloans Amount Up to $5 million 1 3,206,729Over $5 million-$10 million 3 24,090,673Over $10 million-$25 million 2 37,625,546Over $25 million-$50 million 1 30,423,110Over $50 million Total

2 9

117,152,141212,498,199

4. Project Performance Report Ratings

Ratings Name of

Institution Implementation

Period Development

Objectives Implementation

Progress ICICI IFCI

Jan 1999 to Dec 2000Jan 2001 to Feb 2001

Mar 2001 to May 2001Jun 2001 to Feb 2003

Jan 1999 to Dec 2000Jan 2001 to Jun 2002Jul 2002 to Dec 2002

S S S S

S S

PS

HS S

HS S

HS S

PS HS = highly satisfactory, PS = partly satisfactory, S = satisfactory. Refer to note below on project performance ratings.

D. Data on Asian Development Bank Missions

Name of Mission

Date No. of Persons

No. of Person-Days

Specialization of Membersa

Consultation 8-10 Mar 1995 3 9 b,c,d Fact-Finding 23 Apr-6 May 1995 3 42 I,d Appraisal 31 Jul-11 Aug 1995 5 60 b,d,I,j,o Contact 15-17 Jan 1996 4 12 I,d,j Review (1) 7-11 Dec 1998 2 10 i,k Review (2) 11-15 Sep 2000 3 15 b,h Review (3) PCR

6-20 Dec 2001 29-30 April 2003

21

152

b,e i

a a = engineer; b = financial analyst/economist; c = counsel; d = economist; e = energy specialist; f = control officer; g = programs officer; h = environment specialist; i = investment officer; j = manager, Financial Sector and Industry Division (West), k = associate project analyst; l - staff consultant, m-auditor, o-resident representative, India Resident Mission.

b PCR was prepared by Davendra Mittal, Investment Officer, and assisted by Michael Gomes, Senior Administrative Assistant, India Resident Mission.

Note: Timely submission of annual accounts for FY2000 resulted in an upgrade from ‘S’ to ‘HS’ from March 2001 to May 2001. However, a delay in utilization of funds resulted in a downgrade back to ‘S’ beginning June 2001.

Para 45 refers to IFCI’s poor financial performance resulting in a downgrade from ‘S’ to ‘PS’ beginning July 2002.

I. BACKGROUND A. History 1. Industrial Credit and Investment Corporation of India (ICICI) was incorporated in 1955 as a development financial institution (DFI), providing medium- and long-term financing to Indian corporations. In order to keep pace with the changing market environment, ICICI has evolved into a diversified financial services group whose businesses include investment banking, mutual funds, commercial banking, and investor services. ICICI diversified its business directly, as well as through a number of acquisitions, subsidiaries, and affiliates. In FY1999, ICICI was listed on the New York Stock Exchange.1 2. In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger between ICICI and two of its wholly-owned retail finance subsidiaries: ICICI Personal Financial Services Limited and ICICI Capital Services Limited. Shareholders of ICICI and ICICI Bank approved the merger in January 2002, the High Court of Gujarat at Ahmedabad approved it in March 2002, and the High Court of Judicature at Bombay and the Reserve Bank of India (RBI) in April 2002. The merger became effective on 3 May 2002, with the appointed date of the merger being 30 March 2002.2 As a result, ICICI group's finance and banking operations, both wholesale and retail, have been integrated into a single entity. As of 31 March 2003, domestic and foreign institutional investors owned around 60% of the share capital of ICICI Bank; American Depository Receipt holders another 26%; and the public, nonresident Indians and overseas corporate bodies 14%. 3. Industrial Finance Corporation of India Ltd. (IFCI) was established in 1948 under an Act of Parliament as the first DFI in India to provide medium- and long-term finance for the industrial sector. IFCI was converted to a public limited company in 1993, and its name changed to IFCI Ltd. By 31 March 2003, banks, institutions, insurance companies, and mutual funds owned a combined 67% of IFCI’s shares, with government-owned Industrial Development Bank of India (IDBI) holding 32%. The public, nonresident Indians, and overseas corporate bodies owned the remaining 33%.3 4. SCICI Limited (SCICI) was incorporated in December 1986 to develop the maritime and allied sectors. It later diversified into air and road transport, ports, telecommunications, and energy. SCICI, of which ICICI owned 19.9%, merged with ICICI on 1 April 1996 in order to eliminate overlap and boost efficiency. ICICI was the surviving institution.4 B. Scope of Operations 5. Initially, ICICI was engaged in medium- and long-term corporate financing. In the early 1990s, ICICI diversified into investment banking, mutual fund operations, commercial banking, venture capital, investor services, Internet brokering, and insurance, either directly or through subsidiaries and affiliates. After converting into a universal bank, ICICI Bank shifted its focus to

1 ADB. 1993. PCR for Loan No. 778-IND. ADB. 1996. PCR for Loan No. 1072-IND, and ADB. 1996. RRP for

Urban Environment and Infrastructure Facility (Loan No. 1720) . ADB. RRP for Housing Finance Facility (Loan No. 1761) for details on history of ICICI.

2 ADB. 2002. Board paper No. R269-02 on Loan Nos. 1072-IND, 1480-IND, 1720-IND and 1761-IND : ICICI Limited-Change in Scope of Project Implementation.

3 ADB. 1995. PCR for Loan 975-IND. IFCI’s history. 4 ADB. 2000. Pursuant to the merger of SCICI with ICICI, ADB cancelled the loan to SCICI.

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retail lending evident from the significant increase in retail assets although it is still involved in infrastructure financing. On 31 March 2003, retail assets accounted for 18% of its total portfolio.

6. IFCI is engaged in medium- and long-term finance for industrial development. Over the years, the term ‘industry’ has been widened to include infrastructure, road construction, amusement parks, cultural centers, travel and transport facilities, and the film and entertainment industry. IFCI assists research and development, as well as the commercialization of new technology, through its subsidiary IFCI Venture Capital Funds Ltd. It also provides merchant banking, consulting, and other services through its subsidiary IFCI Financial Services Ltd. Services have expanded in response to market changes and the competitive environment, that emerged during the 1990s. 7. ICICI and IFCI offer loans, as well as primary and secondary market instruments, in local and foreign currencies. As of 31 March 2003, ICICI’s outstanding gross loans in local and foreign currencies were Rs479,243 million and Rs92,124 million equivalent respectively. About 84% of total loan assistance was denominated in rupees. By 31 March 2002, IFCI’s outstanding loans in local and foreign currencies were Rs118,527 million and Rs35,670 million equivalent respectively, with 77% of total loans in the local currency. IFCI and ICICI fund their foreign currency needs through commercial borrowing, as well as multilateral and bilateral lines of credit from various international agencies. ICICI Bank also mobilizes foreign currency deposits, mainly in tenors of 1 to 3 years. C. Relationship with ADB and Other Lenders 8. ICICI has a long-standing association with ADB. The first line of credit for $100 million was extended to ICICI in 19865 to augment ICICI’s foreign exchange resources and enhance private sector financing. The loan was closed in July 1991 and rated satisfactory. Another line of credit6 for $120 million was given to ICICI in FY1996 to modernize production facilities at medium-sized industries. The loan was closed in February 1995 and rated partially successful. ICICI is currently participating in the Urban and Environment Infrastructure Facility7 and the Second Housing Finance Project8. IFCI had received a line of credit for $150 million to modernize production facilities at medium-sized industry, against which $104.50 million was disbursed9. The loan was repaid in full in February 2001 and has been rated satisfactory. 9. ICICI has an ongoing relationship with major international lenders such as the World Bank, the Japanese Bank for International Cooperation, Kreditanstalt für Wiederaufbau, and DEG-German Investment and Development Company. Their lines of credit were used for various purposes, including infrastructure projects, green-field and brown-field industrial projects, and industrial pollution control. IFCI has an existing relationship with Kreditanstalt für Wiederaufbau, from which it has obtained a line of credit for project finance. 10. Following financial sector reforms, DFIs’ access to cheap financing including budgetary support, as well as RBI and government-guaranteed bonds has tailed off. Previously, DFI bond issues qualified as eligible instruments for banks in meeting statutory liquidity ratio requirements, although that permission was subsequently withdrawn. DFIs have since been turning to the Indian bond market, through private placements and public issues, to meet their 5 ADB. 1986. Loan 778-IND: for $100 million. 6 ADB. 1990. Loan 1072-IND: for $120 million. 7 ADB. 1999. Loan 1720-IND: Urban and Environment Infrastructure Facility for $80 million. 8 ADB. 2000. Loan 1761-IND: Housing Finance II Project for $80 million. 9 ADB. 1989. Loan 975-IND: for $150 million.

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local currency requirements. IFCI’s credit rating was also downgraded, making its bonds more expensive. ICICI Bank has been increasingly raising money through fixed deposits to lower its funding costs. IFCI has also been mobilizing funds through retail fixed deposits, although on a smaller scale.

D. Relevance of Design and Formulation 11. The private-sector infrastructure facility (PSIF) was conceived at a time when the Government felt that the existing infrastructure was inadequate to satisfy the needs of economic development and population growth. With the fiscal deficit estimated at 8% of gross domestic product and the debt burden growing, the Government realized its limitations in meeting infrastructure requirements and so it decided to liberalize the various sub-sectors within the infrastructure sector and create an enabling environment for private sector participation. Besides, with the expectation of limited increase in bilateral/ multilateral funding for infrastructure, it was felt that financing infrastructure will require mobilizing domestic resources which in turn could be sustained by efficient and properly functioning banking sector and capital market. 12. ADB approved the PSIF in October 1996 with these factors in mind.10 The PSIF envisaged three loans, totaling $300 million, to three financial institutions viz. ICICI ($150 million), IFCI ($100 million) and SCICI ($50 million) for on lending to private sector infrastructure projects in power, telecommunications, roads, and ports. The institutions were identified based on their capacity for, and experience in, long-term lending; their access to domestic and international capital markets; and their investment banking expertise. PSIF also envisaged a project development facility, totaling $10 million, ($5 million to ICICI, $3 million to IFCI and $2 million to SCICI), to be carved out of the loans to each financial institution and used for capacity building, project preparation, and implementation. At the institutions’ request, ADB agreed they would undertake their own capacity-building by: (i) strengthening their infrastructure groups; (ii) organizing and participating in various training programs, conferences, and seminars; (iii) working on various mandates, in close co-ordination with international banks, advisors, and consultants, and (iv) providing assistance to the government on policy issues. In view of the above, the $10 million originally intended for capacity building was reallocated to subproject financing. 13. ADB’s operational strategy in India focuses on economic growth and efficiency by supporting increased private investment in infrastructure. With infrastructure bottlenecks severely hampering growth, the strategy prioritized assistance for energy, transport, communications, and urban infrastructure. The PSIF would attract private capital through long-term debt financing and a policy dialogue that would establish the right regulatory framework. Moreover, the PSIF was expected to bolster government initiatives to promote private-sector participation in infrastructure development. E. Related Technical Assistance 14. The PSIF did not envisage any related technical assistance (TA).

10 ADB. 1996. Loans No. 1480/1481/1482-IND: Private Sector Infrastructure Facility for $300 million.

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II. IMPLEMENTATION A. Lending Policies 15. ICICI’s lending policies have evolved with the deregulation of the financial sector. In order to create a diverse asset base, it has started focusing on areas such as corporate and structured finance. To reduce risk, focus has shifted from pure asset-backed lending to cash-flow-based financing, enhanced security structures, proper allocation of risk, and other risk mitigation measures. After its transformation into a universal bank, ICICI Bank has increased its focus on retail finance (refer para 5), with extensive use of information technology to develop its retail franchise. 16. IFCI’s appraisal methods are based on sound financial and commercial principles. During PSIF implementation, however, IFCI’s financial performance was hurt by sluggish economic growth, lower tariffs, the removal of non tariff barriers, and depressed capital markets. As a result, a significant portion of its portfolio turned into non-performing assets (NPAs). IFCI has sketched out a medium- to long-term strategic plan in which it has consciously decided to reduce project finance which is currently more than 90% of total assets by diversifying into short-term products and fee-based activities. This decision was taken based on the recommendations of the working group appointed by the Government, which cited the limited availability of long-term finance for lending for infrastructure projects. Based on recommendations from private consultants, IFCI has decided to position itself as a mid-corporate service provider and has created separate groups to monitor health of large assets, identify and manage risk in credit proposals, refinance loans pertaining to good assets, and generate new business. B. Characteristics of Subloans 17. The PSIF envisaged the financial institutions on lending to private sector infrastructure projects in four sub sectors: power, telecommunications, roads, and ports. In the power sector, the PSIF was expected to focus on projects not exceeding 500 megawatts’ capacity in states that were undertaking restructuring measures with priority to be accorded to power plants that would benefit a large number of users than single users, and for telecommunications, the PSIF would finance services outside the metropolitan areas. In the case of roads, the PSIF would finance bypasses, flyovers, road widening, interchanges, and certain state expressways all of which might be opened to the private sector on a build-operate-transfer basis. In the port sector, the PSIF would finance facilities for ship repair, dry docks, warehousing, storage, and cargo handling for lease and operation by the private sector. In this sector, the PSIF would also finance privatization of existing public port and terminal facilities, as well as the setting up of private ones. 18. It was stipulated that 30% of an individual subproject or $75 million whichever is lower might be financed under the PSIF, subject to sectoral limitations that might be stipulated by the Government. The participating financial institutions were, however, permitted to jointly finance subprojects, provided total financing did not exceed the limitations for individual subprojects. Notwithstanding the range of exposure, each institution was required to finance at least two infrastructure subprojects, preferably in different sub sectors. 19. The ICICI component of the PSIF was fully utilized by the closing date. In the case of IFCI, withdrawal applications were put on hold in December 2000 because IFCI had not complied with financial covenants since March 2000. It became apparent that IFCI was unlikely

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to meet financial covenants by the loan closing date and, due to financial problems, IFCI had decided to restrict its exposure to high-risk infrastructure projects. ADB therefore decided to cancel the undisbursed component of $37.5 million at IFCI’s request, effective 16 May 2002. Nine subprojects were financed in the four subsectors (Appendix 1).11 Through the PSIF, ICICI financed three power projects, two telecom projects, and one road project, while IFCI financed four power projects and one port project. Out of the power subprojects financed by the PFIs, two were common. However, it was ensured that the aggregate financing of both the PFIs in the two subprojects was within the stipulated limit of 30% of the project cost. 20. The five power sector subprojects are all generation projects, located in states that have already initiated or are in the process of initiating reforms viz.: Andhra Pradesh, Himachal Pradesh, Karnataka, and Tamil Nadu. A state electricity regulatory commission has already been constituted in each of these states and tariff orders issued by all of them. The unbundling and corporatization of state electricity boards have already begun in Karnataka and Andhra Pradesh. Three of the five subprojects are thermal power plants, using fuels such as naphtha/ natural gas, lignite, and corex gas (a byproduct of steel production). The remaining two are hydropower projects. The corex gas power plant was a cogeneration project, with some power used for captive consumption and the balance sold to the state electricity board. 21. Both of the approved telecom subprojects were intended to provide services in non-metropolitan areas. One of the subprojects would provide fixed-line telephone services in Rajasthan, and the other subproject would provide mobile services in Haryana, Kerala, and western Uttar Pradesh. The highway subproject involved construction of a 30-kilometer bypass road in the state of Karnataka, while the port subloan envisaged building a commercial port in Mundra, Gujarat. 22. The nine subprojects were dispersed throughout the country. Subloans varied from $3 million for a power project to $67 million for a telecom project. The PSIF catalyzed investment of $2.05 billion, of which promoters contributed $679 million (33% of the project cost). ADB contributed 10% of the project cost, with the remaining 57% came from other loans. C. Implementation and Internal Operation of Subprojects 23. The main events in project implementation are furnished in Appendix 2. PSIF implementation was smooth, except for the fact that IFCI did not comply with financial covenants after March 2000 (para 19). The report and recommendation of the President (RRP) did not estimate an implementation or drawdown schedule. Annual data on projected and actual disbursements of the loan are given in Appendix 3. 24. All the nine subprojects financed under PSIF have already commenced commercial operations and are operating satisfactorily (Appendix 4). None of the subprojects has as on date fallen in arrears. 25. Four subprojects faced problems during implementation. The completion of one of the subprojects in power sector was delayed by nearly two years for a number of reasons, including technical problems with the engineering, procurement, and construction contractor and disputes between the initial project sponsors. One project sponsor eventually left the venture and sold its stake to the other project sponsor and financial institutions. Another subproject in the power

11. ADB approved 6 subprojects for ICICI and 5 subprojects for IFCI. However, 2 of those subprojects were the

same, so the total number of subprojects approved was reduced to 9 from 11.

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sector, although completed on schedule, had a cost overrun of $16 million comprising of $8 million for equipment to change fuel from naphtha to natural gas, and the rest to cover increases in interest payments during construction, finance charges, and contingency. Besides, the subproject faced implementation problems including lack of infrastructure for transporting heavy equipment to the site. Another subproject in the power sector got delayed for a year because a downturn in capital markets which delayed its initial public offering and floods, which destroyed roads leading to the project site. Project costs rose from Rs12,630 million at the time of approval to Rs16,120 million (FY2002 estimates). The subproject in the road sector was completed on schedule, but costs exceeded the original budget by Rs165 million because of additional earth and pavement work. 26. The PSIF was used to subscribe to debentures issued by the various subprojects. At the time of approval of various sub-projects, it was ensured that the estimated financial internal rate of return was always more than the cost of the capital. The various subprojects’ FIRRs at the time of approval ranged from 12.6% to 24.9%. The FIRR for power subprojects on completion would have remained the same as the tariffs of all the generating plants financed were based on cost plus approach. The FIRR of the telecom subprojects would have been adversely affected due to reduced subscribers and lower tariffs. In the case of road sector, the FIRR would have dropped due to traffic being lower than the projected levels. All subprojects complied with environmental regulations applicable to the states where they were located and the country. 27. SCICI merged with ICICI on 1 April 1996, with ICICI the surviving institution (para 4). The PSIF was approved in November 1996 while the merger of SCICI with ICICI though effective 1 April 1996 was concluded subsequent to PSIF approval. As SCICI was no longer a legal entity, transferring the $50 million SCICI loan to ICICI would have required fresh Board approval. Meanwhile, ADB also revised its loan charges effective 1 January 2000, introducing a front-end fee and increasing the lending spread. Both the Government and ICICI refused to avail of the loan at the higher charges and as a result ADB decided to cancel the SCICI loan in November 2000. 28. Sluggish economic growth and other factors affected the performance of the industrial sector, which in turn hampered the performance of IFCI, whose financial parameters failed to comply with ADB loan covenants. India Resident Mission (INRM) held a number of discussions with IFCI and the Government on the feasibility of a possible turnaround by IFCI to meet financial covenants and its ability to fully utilize the loan by the closing date. IFCI decided to limit its exposure to high-risk infrastructure projects with long repayment periods. This decision, coupled with the fact that it was unlikely to comply with financial covenants such as capital adequacy and debt-equity ratios, led ADB to cancel the un-disbursed component of $37.5 million at IFCI’s request, effective 16 May 2002. D. Operational Performance of ICICI and IFCI 1. Organization, Management and Staffing 29. ICICI is a professionally managed organization. Its board of directors consists of professionals, full-time directors, and a government nominee. The managing director & chief executive officer manage day-to-day operations with the support of the joint managing directors,

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executive directors, and a pool of competent professionals from various disciplines.12 ICICI Bank has its head office in Mumbai and 540 branches across the country. 30. After transforming into a universal bank, ICICI’s organizational structure was revamped (Appendix 5). It now has five groups: retail banking, wholesale banking, a corporate center, international banking, and project finance and special asset management. As of 31 March 2003, ICICI Bank had 10,617 employees, 4,274 of whom were officers trained in accountancy, management, engineering, law, computers, economics, or banking. 31. IFCI, like ICICI, is professionally managed. Its board consists of professionals from diverse fields, as well as representatives of shareholders such as IDBI, Life Insurance Corporation, and State Bank of India. The chairman and managing director head the day-to-day operations, with the support of the executive directors and experienced professionals. IFCI has its headquarters in New Delhi and eleven regional offices.13 32. During PSIF implementation, IFCI had hired private consultants to examine strategic options and draw up its business plan (para 16). Based on their recommendations, IFCI has reorganized into operational departments covering management of large assets, credit coordination, asset recovery, corporate advisory services, treasury, foreign exchange, and resources. These new groups are supported in turn by service departments such as corporate accounts, legal services, information technology, economic research, and human resources (Appendix 6). As of 31 January 2003, IFCI had 858 employees, 524 of whom were officers trained in accountancy, management, engineering, law, computers, economics, or banking. 2. Personnel Administration 33. Training is important for both the PFIs to meet challenges in the financial sector. Particularly important is overall competency development of executives and staff. ICICI has built strong capabilities in training and development, with training and leadership programs at a dedicated training facility. ICICI Bank also uses the best available training programs and personnel, both Indian and foreign, to build skills and capabilities on a global standard. IFCI has integrated training with its business strategy. An analysis of needs across the organization determines a comprehensive training plan for each year, which is then approved by the board of directors. 34. ICICI Bank undertakes campus and lateral recruitment. ICICI Bank encourages employees to work in different departments, enriching their knowledge and experience, giving them a broader view of the organization, and ensuring that the bank finds the best uses for them. Salaries are at market levels, helping attract talented professionals. ICICI Bank has a good relationship with its employees. 35. IFCI’s recruitment is based on manpower assessment. For specialized disciplines such as infrastructure, risk management, economics, foreign exchange, information technology, and legal affairs, recruitment is done laterally. Government directives reportedly govern staff salaries, which are not market related. IFCI has a good relationship with its employees and their union.

12 ADB. 1993. Refer PCRs for 778–IND (ICICI Ltd.) and ADB. 1996. PCR for Loan No. 1072-IND for details on

organization structure and management of ICICI. 13 ADB. 1995. Refer PCR for Loan No. 975–IND for details on organization structure and management of IFCI.

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3. Lending Operations 36. Both the PFIs have established systems to appraise and monitor projects thanks to their long relationships with industry and proven competence in project financing. Over the years, both institutions have developed considerable expertise in risk management, structuring and syndicating large projects, and churning their portfolios. The institutions’ project appraisals include analyses of the promoters’ background, as well as technical, commercial, marketing, social, environmental, and finance factors. Both ICICI’s and IFCI’s loan monitoring procedures have matured over more than four decades in project finance. ICICI Bank offers loan products with varying repayment period ranging from upto 1 year for short-term loans for AAA-rated companies to almost 15 years for infrastructure projects. IFCI’s loans are medium to long-term ones, with repayment periods depending on project requirements. 4. Other Operations 37. ICICI has identified retail banking as a key engine of growth, and moving into that business segment has helped it diversify its portfolio and build a low-cost, stable resource base. ICICI Bank has positioned itself as a retail finance supermarket, with a product range that includes merchant banking, corporate advisory, securities trading, brokerage, Internet trading, mortgage finance, insurance, venture capital, and information technology funds. 38. IFCI has tried to focus on financial services too, while retaining its focus on project finance. These services include equipment financing, leasing, procurement and credit, supplier’s credit, buyer’s credit, and leasing/hire purchase. IFCI has also become active in merchant banking, with services including project counseling, project appraisal, credit syndication, corporate counseling for financial reconstruction and rehabilitation, technology finance, risk/ venture capital, and mergers and acquisitions. E. Financial Performance of ICICI and IFCI 39. ICICI’s loan portfolio increased from Rs289,084 million in March 1998 to Rs492,548 million in March 2001, with a compounded annual growth of 19% over the 3-year period. Data on ICICI’s approvals and disbursements is given in Appendix 7. ICICI classifies all credit exposure into NPAs and performing assets, according to RBI guidelines. Asset quality remains satisfactory, with net NPAs falling from 7.7% of total assets in March 1998 to 5.1% in March 2001 (Appendix 8). ICICI Bank’s loan portfolio stood at Rs532,794 million in March 2003. An analysis of the asset portfolio indicates the shift in focus from project finance to corporate and retail finance (Appendix 9), which can be attributed to the bank’s change in business strategy. Asset quality remains satisfactory, with net NPAs at 4.9% of total assets in March 2003. ICICI Bank has set up a special assets management group to manage large NPAs and other large accounts that require close watch. 40. IFCI’s performance deteriorated markedly from FY1998 to FY200214. IFCI’s loan portfolio shrank from Rs164,233 million in March 1998 to Rs147,516 million in March 2002, largely because of prepayments from existing borrowers and IFCI ‘s decision to reduce fresh lending to high-risk, long-term infrastructure projects. Data on approvals and disbursements made by IFCI is furnished in Appendix 10.

14 IFCI’s financial results for FY2003 were not available during the preparation of the project completion report.

9

41. IFCI classifies all credit as per RBI guidelines. The ratio of NPAs to total assets remained high, rising from 21.5% in March 1998 to 22.2% in March 2002 (Appendix 11). IFCI set aside provisions for its NPAs, but values remained high in percentage terms because of the continuous shrinkage in the size of the total outstanding loan portfolio. Following recommendations from private-sector consultants, IFCI set up an asset restructuring company to segregate its NPAs and ensure proper attention to them. The NPAs have been divided into 3 categories and an internal team for managing NPAs has been formed comprising of 3 groups with each group being assigned the responsibility of managing one category of NPAs. F. Financial Statements and Ratios 42. Financial statements for both ICICI (for the period 1998 to 2001) and ICICI Bank (for the period FY2002 to FY2003) are presented in Appendixes 12 to 14. ICICI’s asset portfolio has grown consistently (para 42), funded mainly by bonds and accretion to reserves. ICICI’s share capital has increased from Rs4,760 million in March 1998 to Rs7,854 million in March 2001. In March 2002, ICICI merged with ICICI Bank by trading one share in ICICI Bank for every two shares of ICICI. ICICI Bank’s share capital of Rs6,126 million as of 31 March 2003, therefore, cannot be compared with that of ICICI. ICICI Bank has placed more emphasis on corporate and retail assets than on project finance. Similarly, an analysis of the liability profile shows borrowings gradually being replaced by deposits. As of 31 March 2003, deposits constituted 45% of total liabilities. 43. ICICI’s interest income increased substantially from Rs37,810 million in FY1998 to Rs60,579 million in FY2001, with total income showing compounded annual growth of 17% over that period. ICICI’s profitability declined in FY2001, however, because of provisions and write-offs totaling Rs8,313 million. Its profits for FY2002 were primarily that of ICICI Bank, as that statement accounted for only 2 days’ of ICICI profits (the appointed date of the merger of ICICI with ICICI Bank being 30 March 2002). FY2003 income statements indicate the consolidated profitability of ICICI and ICICI Bank. 44. ICICI/ICICI Bank’s capital adequacy ratio (CAR) has been consistently higher than the norms stipulated by RBI. As of 31 March 2003, ICICI Bank’s CAR was 11.1% (Appendix 15). Its debt-service coverage ratio (DSCR) has been consistently higher than the ADB covenant of 1.1. Its return on net worth had been declining before its conversion into a bank, indicating that its margins had been under pressure. 45. IFCI’s financial statements from FY1998 to FY2002 are in Appendixes 16 to 18. IFCI, which had more than 90% of its portfolio in project finance, saw its financial performance suffer because a significant portion of its portfolio turned into NPAs in the face of sluggish economic growth, depressed capital markets, reduction in tariffs, and the removal of non-tariff barriers (paras 40 & 41). IFCI’s share capital increased from Rs3,536 million in March 1998 to Rs6,387 million in March 2002. IFCI increased its capital during FY2000 through a one-for-one rights issue to existing shareholders. IFCI’s preference share capital increased from Rs1,000 million in March 1998 to Rs4,293 million in March 2002. 46. IFCI’s income from lending operations declined from Rs20,621 million in FY1998 to Rs16,067 million in FY2002. IFCI’s profitability deteriorated significantly, with earnings dropping from a profit of Rs3,705 million in FY1998 to a loss of Rs8847 million in FY2002. IFCI’s adverse financial position can be attributed to rising NPAs, resulting into lower income; stiffer and higher provisioning requirements by RBI; and pressure on margins from lower interest rates.

10

47. IFCI has partly complied with ADB’s financial covenants. IFCI’s CAR has consistently fallen short of RBI norms since FY2000 and was 3.12% at the end of FY2002 (Appendix 19). Its DSCR, however, has been consistently higher than the ADB covenant of 1.1. G. Covenants 48. ICICI/ICICI Bank complied with most loan covenants except for some late or non-submission of reports (Appendix 20). As per ICICI’s request in October 2000, ADB waived the loan covenant of submitting a long-form audit report, provided that the ICICI’s annual report prepared in accordance with both the United States’ and India’s generally accepted accounting principles was submitted together with (i) the audit project account; and (ii) a list of NPAs with names of borrowers and amounts in arrears, which was provided in the long-form audit report as supplementary information. 49. IFCI became non compliant with the loan covenant on CAR starting FY2000 (Appendix 21). During FY2001, IFCI appointed an expert committee to devise a turnaround strategy, specific components of which were implemented by IFCI. Major shareholders and the Government injected additional capital of Rs10 billion. However, as certain covenants such as CAR and debt-equity ratio remained to be complied with, ADB canceled the un-disbursed component of $37.5 million at IFCI’s request, effective 16 May 2002 (para 19). During the early stages of implementation, IFCI did not submit semiannual progress reports or long-form audit reports. However, subsequent to the delegation of PSIF to INRM, it was ensured that IFCI submitted all reports as covenanted in the loan agreement. H. Performance of the Asian Development Bank 50. ADB’s performance during project implementation was satisfactory. In ICICI’s case, subprojects were approved and disbursements made at a fast pace allowing the loan to be closed in November 2001 rather than September 2002 as originally agreed. In the case of IFCI, due to the financial problems being faced by IFCI and long-term restructuring efforts being made, ADB approved no fresh commitments after October 2000. However, the project was moving smoothly until October 2000 with ADB approving five subprojects worth an amount aggregating $89.3 million. 51. Three review missions were fielded during the 5-year implementation period to evaluate the implementation. After the project was delegated to INRM in September 1999, ADB fielded two review missions for intensive follow-up and closer interaction. III. EVALUATION A. Loan Appraisal 1. Distribution of Sub loans 52. The PSIF’s purpose was to facilitate private sector participation in Indian infrastructure, as private capital was critically required to augment public sector resources. It was expected that each participating financial institution would finance at least two infrastructure subprojects, preferably in different sub-sectors so as to disburse the benefits of the project and help the institutions in gaining wider exposure. Nine subprojects (footnote 10) in the four identified sub-sectors were financed in seven different states. ICICI financed three power projects, two telecom projects, and one road project while IFCI financed four power projects and one port

11

project. The distribution of the sub-loans reflects satisfactory achievement of the above purposes. 2. Covenants 53. The covenants included under the project were generally appropriate in the circumstances prevailing at the time of the appraisal. It maybe mentioned that subsequent to the merger of ICICI with ICICI Bank, certain changes have been made in the loan agreement relating to the covenants on financial parameters including replacing DSCR with interest coverage ratio, maintaining a debt equity ratio of not more than 12:1 and following RBI guidelines on CAR, asset liability management and supervisory policies including statutory liquidity ratios. ICICI has generally complied with the covenants except for the timely submission of the reports, which were submitted only after follow-up (para 48). IFCI was in compliance of the covenants till March 2000 when it ran into financial difficulties (para 49). 3. Quality of Appraisal 54. ADB’s loan appraisal was generally thorough, including a comprehensive review of infrastructure sector, financial sector, institutional capabilities of the PFIs and appetite for such a loan. At the time of the appraisal, it was difficult to envisage the sluggishness of the economy, which eventually hurt IFCI’s financial performance. The appraisal did not, however, properly assess IFCI management’s dynamism, ability to react to market changes, or independent decision-making. Moreover, the appraisal did not consider the possibility of softening of interest rates and had considered the performance of the PFIs based on the continuation of a high interest rate scenario only. Also it was difficult to imagine the possibility of the merger between SCICI and ICICI, given that the appraisal was done in good faith and neither institution disclosed the merger plans. 55. Both the PFIs have credible appraisal and monitoring systems, which are sound and well established after more than four decades of project lending operations (para 36). Successful implementation of most of the subprojects reinforces their skills in identification, appraisal, and monitoring. B. Implementation 56. Implementation followed the intended milestones and achieved the intended objectives. In the case of ICICI, the sub-loan commitments were made well before the terminal date and the loan disbursed without delay. In the case of IFCI, part of the loan had to be cancelled despite the fact that the sub-loan commitments and disbursements were progressing well (para 49). 57. Both the PFIs have decades of experience in project finance and were well suited to appraise and monitor the PSIF. As required under the PSIF, both institutions set up dedicated units for infrastructure that were well equipped and had the required implementation expertise. 58. Some policy reforms took place in the four identified sub-sectors, the most significant of which was telecommunications. Reforms included a new telecommunications policy; the formation of Telecom Regulatory Authority of India; the effective end of an existing duopoly regime; and an option for existing players to shift to revenue sharing, which resulted in

12

significant private sector participation. Reforms have been initiated in the other sub-sectors but progress has been relatively slow15. IV. ASSESSMENT AND RECOMMENDATIONS A. Relevance 59. The PSIF is relevant given ADB’s and Government’s continued belief that addressing structural weaknesses, particularly in infrastructure and public finances, is key to medium-term economic success. In key areas of the economy particularly power, roads, and transport investments have failed to keep pace with economic needs, impeding the transition to more sustainable, poverty reducing growth16. Given the considerable resources that infrastructure projects require, and the significant drain on public finances of inefficient public infrastructure projects, the Government will need to promote greater private-sector involvement. Key to attracting private capital are a long-term framework and policy incentives for private initiative and investment; better policy coordination among government agencies; and enhanced availability of long-term domestic funding. The timing of the PSIF was appropriate because the Government had just opened infrastructure to private sector participation. B. Efficacy in Achievement of Purpose 60. The PSIF substantially achieved its immediate objective of promoting private sector participation in infrastructure by facilitating the growth of private financing. It has also been successful in channeling resources into infrastructure and raising institutional capacities for accelerating infrastructure development. However, it has been only partially successful in achieving its objective of developing an active secondary market for infrastructure securities. All the subprojects financed under the PSIF have issued debentures. India’s existing secondary debt market is primarily for AA+ to AAA rated securities. As most of the subprojects under PSIF have just commenced commercial operations, they are still perceived as high-risk and unlikely to obtain such ratings. Nonetheless, ICICI has been able to sell the debentures of some assisted infrastructure projects17 utilizing pass-through certificates issued by a special purpose vehicle configured as a trust. C. Efficiency in Achievement of Outputs and Purpose 61. All the subprojects were funded through debentures or other securities at market-related interest rates, and each of the subprojects is financially viable. There was considerable leverage of ADB funds, with ADB’s investment of $212.5 million in nine subprojects catalyzing investments worth $2.05 billion. The loan was efficient in achieving its purpose. D. Preliminary Assessment of Sustainability 62. Considering that all the subprojects were implemented without subsidies and the projects are making reasonable financial returns, the PSIF appears sustainable and potential for

15. Refer to RRP (Section III) relating to Loan Nos. 1871&72-IND: Private Sector Infrastructure Facility – II

approved in November 2000. 16. Refer to RRP (Section III) relating to Loan Nos. 1871&/2-IND - Private Sector Infrastructure Facility – II

approved in November 2000. 17. ICICI sold debentures in Jindal Tractabel Power Company Ltd.’s project worth Rs650 million, and two

tranches of Nandi Highway Developers Ltd. project debentures worth Rs324 million and Rs100 million.

13

similar funding is highly likely. This is substantiated by the fact that ADB has provided PSIF II18 to two Indian financial institutions, with the focus on infrastructure projects in Gujarat, Madhya Pradesh, Karnataka, and Andhra Pradesh. 63. ICICI Bank’s operations are based on commercial considerations, with professional appraisal and monitoring of credit proposals. Retail lending will drive ICICI’s future growth, but the institution proposes continuing corporate lending/project finance on a smaller scale. IFCI, on the other hand, is going through financial restructuring (para 16) and would require handholding from the Government and major stakeholders until it turns around. E. Other Impacts 64. Apart from facilitating growth by removing impediments to infrastructure development, the PSIF also reduced poverty in terms of (i) freeing government funds for social spending, and (ii) directly and indirectly reducing poverty19 (Appendix 22). F. Overall Assessment 65. The PSIF can be rated successful. Development objectives were almost fully achieved. ADB’s investment of $212.5 million in nine subprojects catalyzed investments worth $2.05 billion. ICICI effectively identified six subprojects in three of four identified subsectors, with both commitments and disbursements made well within the envisaged timeframe. IFCI successfully identified five subprojects in two subsectors, although an undisbursed tranche of $37.5 million had to be cancelled (para 49). 66. The Government has not been able to generate the necessary private sector interest in infrastructure because of a poor enabling environment where (i) reforms are slow, (ii) governance structures are poor in quality, (iii) public/private interface is weak, and (iv) private sector’s inability to un-bundle or allocate risk20. G. Lessons Learned 67. The PSIF financed debentures for the subprojects, with the objective of developing an active secondary market for infrastructure securities. Most of the subprojects had not begun stable commercial operation, however, making the debt instruments unattractive investments (para 60). 68. India’s long-term debt market remains underdeveloped and suffers from a number of impediments. It has few players; inadequate support infrastructure; very limited participation by long-term investors such as funds and insurance companies; and a weak secondary market, which leads to poor liquidity and the absence of a benchmark yield curve.

18. ADB. 2001. Loan No. 1871-IND : Private Sector Infrastructure Facility II to Infrastructure Leasing & Financial

Services Ltd for $100 million approved in November 2001 and Loan 1871-IND: Private Sector Infrastructure Facility II to Industrial Development Bank of India (IDBI) for $100 million approved in November 2002.

19. These are being reviewed in more detail in two sectors under ADB RETA 5947: Assessing the Impact of Transport and Energy Infrastructure on Poverty Reduction, for $800,000, approved on 25 October 2000.

20 Refer to RRP (Section III) relating to Loan Nos. 1871 & 72-IND: Private Sector Infrastructure Facility – II approved in November 2000.

14

69. The PSIF encouraged both financial institutions to set up dedicated units for infrastructure. These groups provide a complete range of financial services, from identifying projects to structuring complex transactions. 70. A project-to-project approach to infrastructure development is not likely to advance private-sector participation significantly, certainly not to the extent the Government presently imagines. Capacity remains weak, and regulatory and institutional structures, standardized systems and processes especially at the state level remain insufficient. In order to address these problems, ADB has approved a TA21 to identify and resolve gaps in policy, the operating environment, and governance structures. H. Recommendations 71. Long-term financing for infrastructure projects is limited because most DFIs have been, or are being, converted into banks focused on corporate and retail lending. There is therefore scope for (i) a follow-up loan for capacity building and (ii) a project development fund for meeting infrastructure project costs. 72. During appraisal, greater emphasis should have been placed on analyzing the management of the potential borrower. IFCI management exhibited limited ability to reorient itself to the changing market environment and the challenges it posed. During implementation, equal emphasis should be placed on commitments/disbursements and subproject implementation by ensuring that semiannual progress reports are submitted on time.

21 TA. 2001. Technical Assistance for Enhancing Private Sector Participation in Infrastructure Development at the State Level .

Appendix 1 15

SUBLOANS APPROVED

Table A1.1: Subloans approved under Loan 1480-IND (ICICI) ($)

Srl. Name of Subborrower Subloan

CommittedSubloan

Disbursed Sector

1 Jindal Thermal Power Company Ltd 22,932,060 22,932,060 Power 2 Jaiprakash Hydro-power Ltd 30,792,737 30,792,737 Power 3 ST-CMS Electric Company Private Ltd 15,636,022 14,062,923 Power 4 Nandi Highways Developers Ltd 6,504,252 6,481,269 Roads 5 Shyam Telelink Ltd 9,623,784 8,924,732 Telecom 6 Escotel Mobile Communications Ltd 66,806,279 66,806,279 Telecom

Total 152,295,134 150,000,000

Table A1.2: Subloans approved under Loan 1481-IND (IFCI)

($)

Srl. Name of Subborrower Subloan Committed

Subloan Disbursed

Sector

1 Jindal Thermal Power Company Ltd 7,491,051 7,491,050 Power 2 Jaiprakash Hydropower Ltd 31,926,388 19,553,125 Power 3 Lanco Kondapalli 9,375,000 8,684,672 Power 4 Malana Power 15,471,651 3,206,729 Power 5 Adani Ports Ltd 25,072,290 23,562,623 Ports

Total 89,336,380 62,498,199

Table A1.3: Subloans approved under the Project ($)

Srl. Name of Sub-borrower Subloan

Committed Subloan

Disbursed Sector

1 Jindal Thermal Power Company Ltd 30,423,110 30,423,110 Power 2 Jaiprakash Hydro-power Ltd. 62,719,125 50,345,862 Power 3 ST-CMS Electric Co. Private Ltd. 15,636,022 14,062,923 Power 4 Lanco Kondapalli 9,375,000 8,684,672 Power 5 Malana Power 15,471,651 3,206,729 Power 6 Nandi Highways Developers Ltd. 6,504,252 6,481,269 Roads 7 Shyam Telelink Ltd. 9,623,784 8,924,732 Telecom 8 Escotel Mobile Communications Ltd. 66,806,279 66,806,279 Telecom 9 Adani Ports Ltd. 25,072,290 23,562,623 Ports

Total 241,631,513 212,498,199

16 Appendix 2

CHRONOLOGY OF MAIN EVENTS IN PROJECT IMPLEMENTATION

Date Event 1995 8-10 Mar

A Mission visited New Delhi to discuss Government of India’s request to provide loans, guaranteed by the GOI, from ADB’s public sector window to the private sector for infrastructure projects.

23 Apr-6 May Fact-finding. 24 Jul Management review meeting. 31 Jul-11 Aug Appraisal.

1996 15-17 Jan

Contact.

9 Feb Staff review committee meeting. 27 Sep-1 Oct Loan Negotiations. 7 Nov Board Approval. Three separate loans with identical terms and

conditions, totaling $300 million, were granted to three participating financial institutions: Industrial Credit and Investment Corporation of India ($150 million), Industrial Finance Corporation of India ($100 million), and SCICI Ltd. ($50 million). A project development facility, constituting a portion of the loan to each PFI and may be used for capacity building and project preparation.

30 Dec Industrial Credit and Investment Corporation of India (ICICI) and SCICI Ltd. management announced that the two institutions intended to merge, designating ICICI as the surviving institution, with effect from 1 April 1996.

1997 14 Aug

Signing of loan agreements.

25 Sep Loan to ICICI declared effective. 26 Sep Loan to IFCI declared effective. 24 Oct Subloan approved to Jindal Tractabel Power Company Ltd. (JINDAL)

for $9.96 million under ICICI component. 21 Nov Subloan approved to JINDAL for $3.83 million under IFCI component 16 Dec Increase in JINDAL by $1.76 million under the ICICI component. 23 Dec Increase in JINDAL by $2.51 million under ICICI and $1.96 million

under IFCI components.

1998 11 Feb

Increase in JINDAL subloan by $500,000 under ICICI component.

11 Feb Subloan for Gujarat Chemical Port Trust Company Limited (GCPTCL) approved for $6.48 million under ICICI component.

27 Mar Subloan for Adani Ports Limited (ADANI) approved for $12.97 million under IFCI component.

10 May Increase in GCPTCL subloan to $44.21 million. 9 July Increase in JINDAL subloan by $5.19 million under ICICI component. 23 July Increase in ADANI subloan by $12.5 million. 23 Oct Increase in JINDAL subloan by $1.05 million under IFCI component. 26 Oct Subloan for Lanco Kondapalli (LANCO) approved for $18.75 million

under IFCI component.

Appendix 2 17

7-11 Dec First Review. A Mission fielded from HQ to review the progress of implementation of the Project facility and related aspects of operational and financial position of both, ICICI and IFCI.

1999 5 Feb

Reduction in LANCO subloan to $9.375 million.

2 Aug A significant decline in IFCI’s profit and an increase in the level of nonperforming assets (NPAs) were noted from FY1996 to FY1999. NPAs rose from 8.27% in FY1997 to 13.7% in FY1998 and to 21.5% in FY1999. INRM recommended IFCI to submit a detailed business plan for the next five years with realistic projections including cash flows.

1 Sep Administration of the project transferred to INRM. 25 Oct Subloan for JINDAL increased by $0.69 million, totaling $7.491 million

under IFCI component. 26 Nov Subloans approved: (i) Jaiprakash Hydro-Power Ltd. (JAIPRAKASH)

for $26.5 million under ICICI and $6.4 million under IFCI component, (ii) ST-CMS Electric Company Private Ltd. (STCMS) for $16 million; and (iii) Nandi Highways Developers Ltd. (NANDI) for $7.5 million under ICICI component.

2000 9 May

Increase in JAIPRAKASH by $8 million under ICICI component.

28 Jun Increase in JINDAL by $5.9 million under ICICI component. 11-15 Sep Second review. A Mission was fielded to review the progress of

implementation of the project facility and related aspects of operations and financial position of ICICI and IFCI. The Mission noted that ICICI was in full compliance with the major loan covenants while IFCI, as of 31 March 2000, was in violation of Reserve Bank of India (RBI) prudential norms. IFCI’s capital adequacy ratio was at 8.8% as against RBI stipulated ratio of 9%. ADB advised IFCI to submit a credible plan for financial restructuring.

18 Oct Subloan to Malana Power Ltd. (MALANA) approved for $16.2 million and increase in JAIPRAKASH by $26 million totaling $32.4 million, both under the IFCI component.

9 Nov ADB confirmed that the $50 million for SCICI lapsed due to passage of time and with non-existence of SCICI Ltd. after its merger into ICICI.

6 Dec Subloan to Shyam Telelink Ltd. (SHYAM) approved for $9.5 million under the ICICI component.

2001 31 May

ADB advised ICICI that the GCPTCL subproject was ineligible for ADB financing since state-owned companies owned a majority of the shares. Hence, ICICI was requested to substitute an amount of $32.7 million disbursed under the subproject. As a stand-by arrangement, ICICI submitted Escotel Mobile Communications Ltd. (ESCOTEL) subproject as a proposed replacement for GCPTCL.

18 Appendix 2 13 Jul

Subloan to ESCTOEL approved for $31.83 million under ICICI component. An overall commitment of $48.138 million cancelled: (i) $44.211 million under GCPTCL since the subproject sponsor was a public-sector company, (ii) $2.907 million under JINDAL bringing the net loan to $22.932 million, since project constructed completed and commercial operations commenced and no further funds required, and (iii) $1.09 million under NANDI bringing the net loan amount to $6.481 million.

24 Sep Terminal date for commitments under ICICI. 25 Sep Terminal date for commitments under IFCI. 25 Oct Cancellation of $5.28 million under JAIPRAKASH resulting in total

commitment of $28.35 million under ICICI. 29 Oct Increase in ESCOTEL subloan by $5.5 million. 13 Nov Loan to ICICI closed. 6-20 Dec Third review. A Mission from INRM visited ICICI and IFCI and the sub-

project sites of ESCOTEL, STCMS and JINDAL to review the progress made under the Facility. The Mission noted that loan commitments and disbursements by ICICI were satisfactory, with full loan withdrawal. In case of IFCI, its ability to fully utilize the line was restricted due to its strained financial condition and resultant limitation on its ability to expand operations.

2002 30 March

Merger of ICICI with ICICI Bank approved.

16 May In view of IFCI’s inability to comply with the loan covenants, primarily relating to meeting the capital adequacy norms set by the RBI, and its inability to draw down the unutilized loan balance within the loan closing date, IFCI requested cancellation of the unutilized balance of $37.501 million. The request was processed by ADB and loan closed.

7 Nov ADB’s approval for (i) succession of ICICI Bank to the rights and obligations of ICICI; (ii) ICICI Bank, the surviving entity to assume all existing ADB loans to ICICI; (iii) substitution of loan covenant on debt service coverage ratio under the existing agreements with suitable covenants.

19 Nov INRM approved increase in the ESCOTEL subloan by $30.319 million and JAIPRAKASH by $2.439 million to fully substitute the disbursement made under GCPTCL.

2003 18 Mar

With the database adjustments reflected in the LFIS to adjust the disbursement made to the GCPTCL subloan, INRM processed closure of ICICI loan with effect from 13 November 2001, the last date of disbursement under the loan.

Appendix 3 19

PROJECTED AND ACTUAL DISBURSEMENTS

Table A3.1: ICICI’s Projected and Actual Disbursement of Loan Proceeds ($ million)

Calendar Year Projected Cumulative Actual Cumulative

1997 7.5 7.5 26.715 26.721998 19 26.5 37.86 64.581999 20 46.5 30.965 95.542000 13.1 59.6 27.227 122.772001 20.9 80.5 27.234 150.00

Table A3.2: IFCI’s Projected and Actual Disbursement of Loan Proceeds ($ million)

Calendar Year Projected Cumulative Actual Cumulative

1997 1998 17.5 17.5 22.57 22.571999 10 27.5 10.89 33.452000 27.5 55 15.21 48.672001 20.9 75.9 13.83 62.502002 7.4 83.3

20 Appendix 4

SUBPROJECT STATUS Subloan Escotel Mobile Communications Ltd. Project/Product Mobile telephone services in Uttar Pradesh (West), Kerala, and

Haryana. Status Project implemented within estimated costs, and no problems

encountered during implementation. The company had 586,718 subscribers as of 31 March 2003 with market share of 38% in Kerala, 37% in Haryana and 54% in Uttar Pradesh (West).

Subloan ST-CMS Electric Company Private Ltd. Project/Product 250-megawatt (MW) lignite-based power plant at Neyveli, Tamil

Nadu Status Project achieved financial closure on 3 November 1999. The

Project was commissioned on 15 December 2002 with no delays or cost overruns.

Subloan Jindal Thermal Power Company Ltd. Project/Product 260-MW corex/coal-based power plant in Toranagallu, Karnataka Status The project includes two 130-MW units, both of which have been

commissioned. The power plant operated at a plant load factor of 93% for the year ended March 2003. The Jindal Group consumes approximately 60% of the power generated. The remaining 40% is sold to Karnataka Power Transmission Company Ltd (KPTCL).

Subloan Jaiprakash Hydro-Power Ltd. Project/Product 300 MW run of the river hydroelectric power plant on the Baspa

river in Kinnaur district, Himachal Pradesh Status Implementation began in 1995, but a flood on the Sutlej river on 31

July 2000 affected the approach road/bridges leading to the site, delaying project completion. The company later remobilized its workforce and the plant was commissioned on 8 June 2003.

Subloan Shyam Telelink Ltd. Project/Product Basic telephony services in Rajasthan Status The project is under implementation and scheduled for completion

by September 2005. The company commenced its commercial operations in Jaipur in June 2000 and offers services in 18 cities. The company had 73,500 subscribers as of 31 March 2003.

Appendix 4 21

Subloan Nandi Highway Developers Ltd. Project/Product Hubli-Dharwad bypass project on National Highway 4 in

Karnataka, to be built on a build-operate-transfer basis. Status The Project was opened to traffic in October 2000. Traffic has been

lower than projected, resulting into lower toll income. The project lost Rs95 million for the year ended 31 March 2002.

Subloan Adani Ports Ltd. Project/Product Multipurpose captive jetty and associated port backup facilities at

Navinal Island, District Kutch, Gujarat Status The multipurpose port terminal began commercial operations in

October 2001 and the railway line began operating in April 2002. For the 15-month period ending December 2002, the company had net sales of Rs640 million and losses of Rs136 million.

Subloan Lanco Kondapalli Project/Product 355 MW naphtha-based combined cycle power plant at Kondapalli,

Andhra Pradesh Status The project has been commissioned, and modifications have

enabled it to operate on natural gas. Since September 2001, the plant has been operating on natural gas. The plant operated at a load factor of 80% for the year ended March 2003.

Subloan Malana Power Company Ltd. Project/Product 86 MW hydroelectric power plant, Himachal Pradesh Status The project was commissioned in October 2001. Further details

are not available as the company prepaid the debt to Industrial Financial Corporation of India.

ABG agriculture business group JMD joint managing directorED executive director FMG facility management groupRAPG retail asset products group RSPG retail strategy and products groupRCIG retail channel and infrastructure group SPPMG structured products and portfolio management groupRCLG retail channel and liabilities group

ORGANIZATION STRUCTURE OF ICICI

Hoshang SinorJMD

Lalita D GupteJMD

K. V. Kamath MD & CEO

Chanda KochharED

Nachiket MorED

Ananda MukerjiICICI One Source

Subrata MukherjiED

Kalpana MorpariaED

Sanjiv Kerkarorganizational

excellence

V VaidyanathanRAPG

P J V Sarma &Suvalaxmi Chakraborty

Corporate Solutions

Amitabh ChaturvediRCLG

P H Ravikumaremerging corporates &

agriculture business group

M N Gopinathretail operations

Madhabi Puri Buchproduct technology

Anup BagchiRSPG

O P SrivastavaRCIG

N S Kannantreasury

Vishaka MulyeSPPMG

P K Vohraretail technology

Girish Nayaktechnology

management Group

Achintya Karatigovernment

investment solutions

Bhargav Dasguptahead of

international banking

Anand T Kusretechnology lines

V NachiappanS Khasnobis

K M J Raospecial asset

t

Mohit BatraArnab Basu

project finance

R Vedasagarcorporate legal

group

Nagesh Pingerisk, compliance &

audit

Madhabi Puri Buchcorporate branding &

communicationK Ramkumar

human resources

O P SrivastavaFMG

Balaji Swaminathanfinance

Jyotin Mehtacompany secretary

22 Appendix 5

AR Cell - Large NPL

Group

AR Cell - Small NPL

Group

Legal Dept. and Asset Recovery

Group

Large Asset

Management Cell

Credit and RiskManagement Department comprising Credit Audit

Cell and Internal Rating

& Portfolio Risk

Management Cell

Credit Coor-

dination Division

Planning & Research

Dept. comprising

Industry Research Division,

Compliance Division and Library and

Subsi-diaries

Infor-mantion

Technology Department and Budget

and MIS Division

Human Resources including Training

Division and Est. Division

Admin. Deptt.

including Estates Division

and Security

Services Division

Business Develop-

ment, Corporate Communi-

cations Dept. &

Hindi Cell

Vigilance Dept

Inspection & Audit Dept.

Corporate Advisory

Services incl. Fee-based Activities, Corporate Advisory

Services for Overseas

Ventures and Infrastructure

Advisory

Central Accounts

incl. Pension

Cell

Delhi Reg.

Office

Rupee Resources incl. Debt Servicing

Resource raising & Treasury

Operations

Dis- Invest-ment Divn.

Secretary's Department comprising

Board & Co. Law ,

Investors Services

Cell, Nominee Directors

Cell

AR = assets recovery CGM = Chief General ManagerCMD = Chairman & Managing Director DGM = Deputy General ManagerED = Executive Director MIS = management information systemNPL = nonperforming loans

ORGANIZATION STRUCTURE OF IFCI

GM

ED

BOARD OF DIRECTORS

CHAIRMAN & MANAGING DIRECTOR - V.P. SINGH

- EXECUTIVE COMMITTEE - AUDIT COMMITTEE - NPA REVIEW COMMITTEE - INVESTORS' GRIEVANCE COMMITTEE - ENGAGEMENT OF STRESSED ASSET MANAGEMENT SPECIAL COMMITTEE - REMUNERATION COMMITTEE

ED

GM

CGM

GM

DGMDGM DGM

GM

CGM

DGM

GM

CGM

DGMDGM

GM GM

DGM

GM

DGMDGM

GM

DGM

GM GM

DGM

GM GM

Adviser

DGM DGM

GM

DGM

CGM

GM GM

DGM

CGM

GM

GM

DGMDGM

CMD SecretariatDGM

Appendix 6 23

24 Appendix 7

APPROVAL AND DISBURSEMENTS BY ICICI

Table A7.1: Approvals (Rs million)

1998 1999 2000 2001

Item Amount % Amount % Amount % Amount % Infrastructure 74,151 30% 99,238 29% 60,130 14% 118,760 21%Oil, Gas and Petrochemicals 39,547 16% 65,018 19% 37,370 9% 10,150 2%Other Projects in Manufacturing 64,264 26% 65,018 19% 63,580 15% 67,600 12%Corporate Finance a 69,208 28% 112,926 33% 264,780 61% 322,810 58%Retail Finance b 0% 0% 9,370 2% 41,600 7% Total 247,170 100% 342,200 100% 435,230 100% 560,920 100%

Table A7.2: Disbursements (Rs million)

1998 1999 2000 2001 Item Amount % Amount % Amount % Amount %Infrastructure 34,775 22% 28,838 15% 16,060 6% 26,800 8%Oil, Gas and Petrochemicals 26,872 17% 42,295 22% 16,620 6% 2,360 1%Other Projects in Manufacturing 52,163 33% 48,063 25% 37,350 14% 34,540 11%Corporate Financea 44,260 28% 73,055 38% 181,250 70% 221,310 69%Retail Financeb 0% 0% 7,080 3% 34,640 11% Total 158,070 100% 192,250 100% 258,360 100% 319,650 100%aincludes corporate lending to infrastructure, oil, gas, and petrochemicals b includes operations of ICICI Home Finance Limited, a wholly-owned subsidiary of ICICI Similar data is not available for the financial years 2002 or 2003 because RBI does not require banks to disclose this data. Source: ICICI annual report

ICICI ICICI Bank

Item 2003Amount % Amount % Amount % Amount % Amount % Amount %

Lost - 0.0% - 0.0% - - 0.0% - - Doubtful 10,210 2.8% 14,490 3.1% 21,660 4.2% 20,970 3.6% 17,260 3.0% 19,900 3.1%Substandard 18,130 4.9% 22,840 4.9% 17,930 3.4% 8,850 1.5% 9,950 1.7% 12,520 2.0%Standard 341,670 92.3% 425,850 91.9% 481,680 92.4% 545,240 94.8% 548,050 95.3% 609,000 94.9%Total Loans 370,010 100.0% 463,180 100.0% 521,270 100.0% 575,060 100.0% 575,260 100.0% 641420a 100.0%

Note: all lost assets have been written off or provided fora ICICI has made provision for Rs910 million, as a result of which the net level of nonperforming assets as of 31 March 2003 is 4.9%.Source: ICICIs' annual reports, ICICI website (www.icicibank.com).

2002

PORTFOLIO QUALITY ANALYSIS OF ICICI AND ICICI BANK(Rs million)

1998 1999 2000 2001

Appendix 8 25

26 Appendix 9

ASSET MIX OF ICICI AND ICICI BANK

Table A9.1: ICICI Asset Mix

Item 1998 1999 2000 2001 Manufacturing Sector Project Finance 58% 49% 41% 35%Oil, Gas and Petrochemicals Project Finance 9% 13% 13% 8%Infrastructure Project Finance 14% 13% 14% 14%Corporate Lendinga 19% 24% 32% 40%Retail Lending 0% 1% 3% Total 100% 100% 100% 100%a includes corporate lending to infrastructure, oil gas and petrochemicals Source: ICICI annual reports

Table A9.2: ICICI Bank Asset Mix

Item 2002 2003 Retail Finance 6% 18% Project Finance 24% 19% Corporate Finance 24% 20% Reserves and Cash 34% 30% Investments 6% 4% Other Assets (incl Advance Tax, Deferred Tax Assets and Other Current Assets) 6% 9% Total 100% 100%

Source: ICICI Bank annual reports, ICICI web site (www.icicibank.com)

ItemAmount % Amount % Amount % Amount % Amount % Amount %

Iron and steel 12,072 16% 3,781 4% 2,362 12% 7,114 40% 1,014 13% 7,468 39%Petroleum refining 2,993 4% 4,000 5% 2,400 12% 1,666 9% 500 6% 307 2%Synthetic resins 0 0% 0 0% 689 3% 1,100 6% 0 0% 225 1%Ports 1,090 1% 2,196 3% 1,200 6% 1,000 6% 0 0% 473 2%Textiles 7,254 9% 5,682 7% 3,549 18% 944 5% 222 3% 717 4%Metal/steel products 0 0% 0 0% 1,893 9% 663 4% 0 0% 173 1%Misc. food and beverage 0 0% 0 0% 118 1% 559 3% 64 1% 0 0%Sugar 834 1% 1,763 2% 839 4% 453 3% 100 1% 84 0%Cement 2,252 3% 2,346 3% 347 2% 450 3% 0 0% 460 2%Misc. chemicals 0 0% 0 0% 204 1% 350 2% 72 1% 0 0%Telecom services 2,360 3% 9,770 11% 82 0% 330 2% 500 6% 0 0%Basic chemicals 0 0% 0 0% 1,092 5% 254 1% 58 1% 109 1%Power generation 21,871 28% 31,060 36% 575 3% 164 1% 943 12% 1,189 6%Transport equipment 0 0% 0 0% 538 3% 127 1% 0 0% 0 0%Nonferrous metal 0 0% 0 0% 442 2% 41 0% 120 2% 99 1%Hotels 630 1% 4,915 6% 0 0% 65 0% 49 1% 126 1%Others 25,576 33% 21,325 25% 3,929 19% 2,382 13% 4,164 53% 7,814 41%Total 76,932 100% 86,838 100% 20,259 100% 17,662 100% 7,806 100% 19,244 100%Source: IFCIs' Annual Reports

APPROVALS AND DISBURSEMENTS BY IFCITable A10.1: Approvals

(Rs million)

2002 200320011998 1999 2000

Appendix 10 27

ItemAmount % Amount % Amount % Amount % Amount % Amount %

Iron and steel 6,560 12% 6,238 13% 8,094 25% 3,189 15% 1,126 10% 123 1%Petroleum refining 7,050 12% 2,617 6% 935 3% 1,506 7% 1,127 10% 174 2%Synthetic resins 0 0% 0 0% 867 3% 719 3% 967 9% 209 3%Ports 2,138 4% 2,212 5% 395 1% 269 1% 487 5% 970 12%Textiles 5,647 10% 5,376 11% 3,144 10% 2,212 10% 605 6% 129 2%Metal/steel products 0 0% 0 0% 2,227 7% 678 3% 202 2% 20 0%Misc. food and beverage 0 0% 0 0% 289 1% 213 1% 384 4% 0 0%Sugar 824 1% 898 2% 658 2% 821 4% 70 1% 6 0%Cement 2,606 5% 1,151 2% 739 2% 642 3% 52 0% 97 1%Misc. chemicals 0 0% 0 0% 517 2% 64 0% 36 0% 94 1%Telecoms services 2,371 4% 1,633 3% 1,639 5% 185 1% 100 1% 0 0%Basic chemicals 0 0% 0 0% 881 3% 809 4% 97 1% 0 0%Power generation 4,497 8% 8,207 17% 5,908 18% 5,802 27% 1,403 13% 558 7%Transport equipment 0 0% 0 0% 572 2% 225 1% 70 1% 0 0%Nonferrous metal 0 0% 0 0% 629 2% 477 2% 15 0% 0 0%Hotels 899 2% 603 1% 945 3% 192 1% 52 0% 1 0%Others 23,912 42% 18,515 39% 4,552 14% 3,567 17% 3,962 37% 5,852 71%Total 56,504 100% 47,450 100% 32,990 100% 21,570 100% 10,755 100% 8,233 100%Source: IFCIs' Annual Reports

Table A10.2: Disbursements(Rs million)

2002 20031998 1999 2000 2001

28 Appendix 10

PORTFOLIO QUALITY OF IFCI ($ million)

Item 1998 1999 2000 2001 2002

Amount %

Amount % Amount % Amount % Amount %

Lost

0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0%Doubtful 12,473 6.5% 15,808 7.9% 19,257 9.7% 29,631 15.8% 30,024 17.1%Substandard 14,160 7.4% 26,768 13.4% 21,769 11.0% 9,740 5.2% 8,952 5.1%Standard

165,958

86.2%

157,924

78.8%

157,378

79.3%

148,179

79.0%

136,502

77.8%

Total loan assets 192,590 100% 200,500 100% 198,403 100% 187,549 100% 175,478 100%Note: All lost assets have been written off or provided for.

PROVISIONS FOR ASSETS Loan assets and other items (including debentures in the nature of advances) are classified based on the recovery record as standard, substandard, doubtful, and lost. Provisions are made as per Reserve Bank of India guidelines: Standard assets 0.25% of the loan/assistance is set aside Substandard assets 10% of loan/assistance is set aside Doubtful assets 100% of unsecured portion plus an additional 20%, 30%, or 50% of the secured portion, depending how

long the loan/assistance has remained doubtful Lost assets The entire loan is written off

Appendix 11 29

30 Appendix 12

BALANCE SHEETS Table A12.1: ICICI Ltd.

(Rs million)

Item 1998 1999 2000 2001Liabilities Share capital Issued, subscribed and paid-up Share capital 4,760 4,784 7,853 7,854Less: calls in arrears 2 0 23 5Redeemable preference shares 2,851 13,489 13,077 3,500Share capital suspense (shares to be issued on amalgamation) Equity share capital 24 17 Preference share capital 3,500 338 Subtotal (A) 11,133 18,628 20,907 11,348Reserves and surplus Capital reserve 5,481 5,325 8,259 8,259Capital redemption reserve 900 1,110 1,860 11,437Share premium 12,890 12,878 31,271 31,143Debenture redemption reserve 100Investment allowance reserve 6 17 Deferred tax credit reserve 4,388 5,188 6,388 5,488Contingency reserve 474 Amalgamation reserve 599 Special reserve under Section 36(1)(viii) 6,911 9,103 9,200 9,900General reserve 9,742 12,250 14,500 5,423Revenue account 532 682 918 129Subtotal (B) 41,922 46,551 72,395 71,879Unsecured loans Rupee loans Loans and advances from Government 10,386 9,715 8,569 7,735Bonds guaranteed by Government 29,170 26,625 24,072 21,653Tax-free bonds 1,300 1,300 800 800Bonds and debentures 181,844 285,133 310,906 362,753Loans from banks and financial institutions 18,983 16,330 20,720 35,165Commercial paper 1,059Deposits 30,852 37,271 50,243 68,177Subtotal (C) 272,535 376,374 415,309 497,341Foreign currency loans Multilateral/bilateral credit agencies 20,003 21,809 21,244 21,473International banks/institutions 42,453 40,449 37,897 52,226Bonds and notes 39,495 37,954 34,364 27,310Subtotal (D) 101,951 100,212 93,504 101,008Current liabilities and provisions 31,662 43,703 51,781 52,561Total 459,202 585,467 653,896 734,137

Item 1998 1999 2000 2001ASSETS Investments Equity shares 16,537 18,752 13,215 16,526Equity shares of subsidiaries 3,328 4,196 4,506 6,705Preference shares 2,542 3,691 7,246 7,748Debentures 48,934 57,466 75,737 69,803Others 1,960 2,139 8,933 17,301Less: provisions 3,342 4,038 6,567Subtotal (A) 73,300 82,902 105,598 111,516 Loans and Other credit facilities Rupee loans to industrial concerns 201,382 265,458 312,213 385,801Rupee loans to subsidiaries 2,008 2,727 5,288Foreign currency loans 92,054 88,558 89,905 84,747Assistance by way of securitization 1,866 17,109 9,835 9,360Retail finance operations 602 4,537 20,395Less: provisions 6,219 8,553 10,722 13,042Subtotal (B) 289,084 365,182 408,496 492,548 Current assets 42,211 74,235 71,470 55,640Loans and advances 20,432 22,612 19,888 20,186Fixed assets 31,119 37,343 44,987 51,104Miscellaneous expenditure 3,056 3,194 3,456 3,144Total 459,202 585,467 653,896 734,137

Appendix 12 31

Source: ICICI annual reports

Table A12.2: ICICI Bank

(Rs million) Item 2002 2003Liabilities Share capital Issued, subscribed and paid-up Share capital 2,204 6,130Less: calls in arrears 4Redeemable preference shares 3,500Share capital suspense (shares to be issued on amalgamation) Equity share capital 3,927 Preference share capital 3,500 Subtotal (A) 9,630 9,627Reserves and surplus Statutory reserve 2,494 5,514Debenture redemption reserve 100 Special reserve 10,940 11,440Share premium 8,045 8,022Investment fluctuation reserve 273 1,273Capital reserve 2,000Revenue and other reserves 34,307 34,907Balance in profit & loss account 196 51Subtotal (B) 56,355 63,207Borrowings Borrowings in India Reserve Bank of India 1,409 Other banks 26,876 24,469Other institutions and agencies (a) Government of India 6,009 5,210(b) Financial institutions 13,883 25,658Deposits taken over from ICICI 42,508 5,063Commercial paper 5,495 Bonds and debentures (a) Debentures guaranteed by Government of India 18,240 14,815(b) Tax-free bonds 800 800(c) Bonds 304,208 208,092Subtotal (C) 419,428 284,107Borrowings outside India Multilateral/bilateral credit agencies 25,214 25,418International banks/institutions 29,348 27,948Bonds/notes 18,198 5,551Subtotal (D) 72,759 58,917Deposits 320,851 481,693Other liabilities and provisions 162,076 170,569Total 1,041,099 1,068,120

32 Appendix 12

Appendix 12 33

Table A12.3: ICICI Bank (Rs million)

Item 2002 2003 Assets Cash and balance with Reserve Bank of India 17,745 48,861 Balances with banks and money at call and short notice 110,119 16,029 Investments Government securities 227,223 255,486 Other approved securities 705 344 Shares 19,086 16,424 Bonds and debentures 64,364 56,899 Subsidiaries and joint ventures 6,082 7,807 Others 41,451 17,663 Subtotal (A) 358,911 354,623 Advances Bills purchased and discounted 16,541 4,376 Cash credit/overdraft and loans repayable on demand 24,025 31,340 Term loans 421,477 489,028 Securitization/financial lease/hire purchase etc. 8,306 8,049 Subtotal (B) 470,349 532,794 Fixed assets 42,393 40,607 Other ssets 41,583 75,205 Total 1,041,099 106,8120 Source: ICICI Bank annual reports, ICICI Bank website (www.icicibank.com)

34 Appendix 13

Item 1998 1999 2000 2001Income from Operations (a) From Loans and Other Credit Facilities 37,810 47,451 51,825 60,579(b) From Investment 7,906 9,550 12,067 11,627(c) From Leasing and Other Operations 10,694 15,299 17,223 16,156Profit on Sale of Investment (Net) 1,396 444 2,934 3,438Total Income 57,807 72,744 84,049 91,800

Expenses Interest and Commitment Charges on Loans 38,476 50,791 57,852 63,768Expenses on Loan Funds and Revaluation 375 153 138 218Discounts, Premiums and Expenses on LoansFunds Written Off 609 805 838 969Provision for Interest Tax 845 1,050 1,120 Depreciation on Assets Given on Lease 2,856 3,548 3,669 3,496Management Fees 47 34 107 618Bad Debt Written Off 1,080 1,031 2,099 5,426Provisions for Doubtful Debt 1,083 1,290 1,626 436General Provision Against Substandard Assets 1,314 792 220Payments to and Provisions for Employees 549 634 709 990Establishment and Other Expenses 1,028 1,334 1,951 2,456Depreciation (Other Than Assets Given on Lease) 181 276 315 478Profit from Operations 10,677 10,484 12,833 12,724

Add: Other Income 1,136 475 545 1,181 Appropriated from Capital Reserve 290 Appropriated from Special Reserve 1,888 1,208 Appropriated from Reserve for Loan Loss 54 Appropriated from Allocation in Terms of 214 Appropriated from General Reserves 2,800Less: Provisions Against Standard Assets 1,100 100 Provisions Against Bad and Doubtful Debt 4,956 398 8,133

Profit Before Tax 11,813 10,958 13,278 5,773Tax 950 950 1, 400Profit After Tax 10,863 10,008 12,058 5,373

INCOME STATEMENTSTable A13.1: ICICI Ltd.

(Rs million)

220

Appendix 13 35

Table A13.2: ICICI Bank (Rs million)

Item 2002 2003

Income from Operations Interest 21,519 93,681

Total 21,519 93,681

ExpenseInterest 15,589 79,440Payments to and Provisions for Employees 1,472 4,030Rent, Taxes, and Lighting 663 1,116Printing and Stationery 353 747Advertising and Publicity 80 582Depreciation on Bank Property & Leases 641 5,059Directors’ Fees, Allowances, and Expenses 2 1Auditors’ Fees and Expenses 3 15Legal Fees 15 85Postage, Telegrams, Telephones etc. 377 1,042Repairs and Maintenance 783 1,449Insurance 141 252Other 1, 5,739Provisions and Contingencies (incl. Income tax) 2,868 13,650

Profit from Operations (3,164) (19,526)

Add: Other Income 5,747 19,678Profit on Sale of Shares of ICICI Bank Ltd. Held by ICICI Ltd. 11,911

Profit after tax 2,583 12,062

696

36 Appendix 14

CASH FLOW STATEMENTS

Table A14.1: ICICI Ltd. (Rs million)

Item 1998 1999 2000 2001 Source of Funds Profit After Tax (Including Income Tax, Interest & Wealth Tax) 8,347 13,258 3,667 Depreciation/Provisions 5,591 12,889 10,959 22,549Increase in Preference Shares 5,601 6,978 (750) (9,577)Increase in Equity Capital + Share Premium 3 14 22,156 135Premium on Conversion of Advance, in Terms of Merger with Anagram Finance Limited 1,250 Increase in Net Borrowings 63,532 87,268 30,211 83,883Increase in Current Liabilities 4,699 4,325 11,223 526 Total 91,789 121,071 87,057 101,183 Uses of Funds Increase in Fixed Assets 5,761 8,152 12,205 10,268Increase in Investments 17,646 10,076 23,465 7,320Increase in Current Assets 2,805 15,271 4,107 (7,774)Outstanding and Deferred Interest Added to Loans 1,900 4,057 2,932 4,287Net Disbursements 53,752 67,292 42,345 90,623Deferred Expenditure Against Borrowings 533 944 1,100 656Share Issue Expenses Adjusted Against Share Premium 24 733 245 Dividend Payment 2,248 3,462 4,457 3,822 Total 84,654 109,278 91,343 109,448 Opening Cash Balance 20,450 27,817 39,611 35,326Surplus/Deficit 7,135 11,794 (4,285) (8,264)Closing Cash Balance 27,586 39,611 35,326 27,061 Source: ICICI annual report

Appendix 14 37

Table A14.2: ICICI Bank (Rs million)

Item 2002 2003 Source of Funds Profit After Tax (Including Income Tax, Interest & Wealth Tax) 1,631 1,533Depreciation/Provisions 3,194 22,967Increase in Subordinated Debt 2,285 (18)Increase in Equity Capital + Share Premium Increase in Net Borrowings (14,704) (149,162)Increase in Deposits 157,069 160,842Increase in Current Liabilities 10,395 3,267Cash and Cash Equivalents on Amalgamation with ICICI 68,437 Total 228,308 39,429 Uses of Funds Increase in Fixed Assets 244 4,517Increase in Advances (23,033) 74,579Increase in Current Assets 5,071 24,500Increase in Investments 153,128 (1,193)Net Disbursements Deferred Expenditure Against Borrowings Share Issue Expenses Adjusted Against Share Premium Dividend Payment 971 Total 136,381 102,402 Opening Cash Balance 35,937 127,863Surplus/Deficit 91,927 (62,973)Closing Cash Balance 127,863 64,890 Source: ICICI Bank annual report, ICICI Bank

38 Appendix 15

RATIO ANALYSIS OF ICICI AND ICICI Bank

<-----------------------------ICICI---------------------------> <---------ICICI Bank----> Item 1998 1999 2000 2001 2002 2003 Return on Average Net Worth (%) 21% 20.30% 16.80% 16.40%a 17.74% 18.30%Return on Average Assets (%) 2.40% 2.10% 2.10% 2.10%a 1.10% 1.20%Earnings per Share (Rs) 18.2 18.20 17.00 17.00a 11.61 19.70Book Value (Rs) 91.3 100.30 98.00 97.50 102.04 113.10Average Cost of Borrowings (%) b 11.64% 12.05% 12.07% 11.71% 7.52% 8.90%Gross Yield (%) c 14.88% 14.59% 13.90% 13.54% 9.68% 10.20%Net Interest Margin (%) 3.24% 2.54% 1.83% 1.83% 2.16% 1.30%Debt-Equity Ratio 7.49 7.69 5.66 7.47 5.73 4.28Capital Adequacy Ratio (%) 12.90% 12.50% 17.20% 14.60% 11.44% 11.10%Net NPAs/Total Loan Assets(%) 7.60% 8.10% 7.60% 5.20% 4.73% 4.92%

a computed after adding back accelerated provisions and write offs of Rs8130 million b total interest expense (including interest tax) divided by average interest-bearing liabilities. c equals interest income divided by average interest-earning assets. d difference between gross yield and average cost of borrowings. Source: ICICI/ICICI Bank annual reports, ICICI Bank website (www.icicibank.com)

Appendix 16 39

BALANCE SHEETS Table A16.1: IFCI

(Rs million)

Item 1998 1999 2000 2001 2002LIABILITIES Paid-up Share Capital Share Capital 3,536 3,536 6,387 6,386 6,386Less: Calls in Arrears 7 1 Add: Shares Forfeited 9 Redeemable Preference Shares 1,000 4,369 4,569 4,492 4,292Subtotal (A) 4,529 7,905 10,964 10,879 10,679Reserves and surplus Capital Reserve 9 9Capital Redemption Reserve - Preference 77 77Debenture Redemption Reserve 50 50Government Grants 480 1,472 1,694 1,598 1,845Share Premium 2,721 1,991 1,346 707 453Special Reserve Under Section 36 (1)(viii) 1,467 17 17 17 17Revaluation Reserve 2,586 2,548 2,484Benevolent Reserve Fund 56 46 44 42 42Surplus 7,715 5,836 3,382 4 Subtotal (B) 12,439 9,361 9,068 5,051 4,977Rupee Loans Convertible Debentures Issued to Government 4,000Convertible Debentures (Other) 2,000Bonds Guaranteed by Government 38,553 35,326 33,356 32,812 29,839Other Bonds 89,761 118,766 116,358 121,994 123,164Government of India in Terms of KfW Agreement for Interest Differential Fund 284 309 315 308 337.43Fixed Deposits 213 1,322Others (Long-Term) 5,831 3,795 1,687 703 5,332Certificates of Deposit 6,132 972 807 2,120 1,811Others (Short-Term) 2,598 4,898 12,648 7,989 6,584Funds Placed With the Company Jute Development Fund 1 0 1 5 6.91Employees’ Provident Fund 418 487 552 425 445Staff Welfare Fund 46 46 47 47 47Subtotal (C) 143,624 164,599 165,772 166,615 174,892Foreign Currency Loans KfW 5,685 5,989 5,310 5,029 5,035ADB 919 735 411 2,914 3,004Other Foreign Banks 977 1,142 999 911 873Commercial Borrowings 28,975 29,267 28,432 24,882 14,083Subtotal (D) 36,557 37,133 35,153 33,736 22,995Current Liabilities and Provisions 12,541 11,678 12,755 11,507 13,013Total 209,690 230,676 233,712 227,788 226,556

Item 1998 1999 2000 2001 2002ASSETS Investments With Assisted Units Equity Shares 5,175 5,420 5,820 6,825 9,128Preference Shares 796 925 1,218 2,708 3,119Convertible Debentures 295 1,196 1,623 2,039 1,787Nonconvertible Debentures 13,256 17,480 19,954 20,940 23,650Other Investments 1,387 2,635 3,338 2,931 6,650Less: Provisions 209 306 210 1,065Subtotal (A) 20,908 27,447 31,647 35,232 43,270 Loans Industrial Concerns Rupee Loans 128,005 137,382 132,957 124,906 118,426Foreign Currency Loans 40,153 42,814 40,902 36,975 35,671Other Institutions 1,114 1,118 1,034 961 100Less: Provisions 5,038 2,895 2,083 1,264 6,681Subtotal (B) 164,233 178,419 172,809 161,578 147,516 Current Assets and Advances 17,855 18,453 20,586 22,166 20261Fixed Assets 5,293 5,107 7,732 8,248 6318Miscellaneous Expenditure 1,401 1,250 937 563 348Profit & Loss Account 8843Total 209,690 230,677 233,712 227,788 226,556

40 Appendix 16

ADB = Asian Development Bank, KfW = Kreditanstalt für Wiederaufbau. Source: IFCI annual reports

Appendix 17 41

INCOME STATEMENTS OF IFCI (Rs million)

Item 1998 1999 2000 2001 2002 Income from Operations (a) From Lending Operations 20,621 21,695 22,045 22,298 16,067(b) From Investments 2,259 2,836 3,577 3,942 4,053(c) From Leasing and Other Operations 1,715 1,582 1,772 1,601 1,190(d) Business Service Fees and Commissions 297 518 434 552 407(e) Interest/Discount on Other Deposits 414 305 374 348 120(f) Exchange Rate Gain/Loss 581 86 76 (19) 32(g) Provisions/Writeoffs Written Back (36) 997 704 77 316 Total Income 25,851 28,019 28,982 28,799 22,185 Expenses Interest and Commitment Charges on Loan Funds 19,565 23,684 25,357 25,201 23,934Payments to and Provisions for Employees 211 358 327 534 349Establishment and Other Expenses 228 232 235 267 265Depreciation on Assets Given on Lease 420 555 490 599 507Less: Transferred from Revaluation Reserve 760 732 701 (38) (37)Provisions for Bad and Doubtful Debt 230 209 148 29 6,264Bad Debt Written Off 2,928 7,936 3,921 5,825 52Provisions for Standard Assets 44 4.4 Less: Transfer from Special Reserve (2,870) (1,450) Less: Transfer from General Reserve (1,462) (2,164) Less: Transfer from Provision for Bad and Doubtful Debt (2,143) (900) Profit from Operations 4,379 (631) (77) (2,724) (9,148)Add: Other Income 166 866 671 105 301Profit Before Tax 4,545 235 594 (2,619) (8,847)Tax 840 Profit After Tax 3,705 235 594 (2,619) (8,847) Source: IFCI annual reports

42 Appendix 18

CASH FLOW STATEMENTS OF IFCI

(Rs million) Item 1998 1999 2000 2001 2002Sources of Fund

Profit after tax 2,343.5 176.0 894.8 (3,094.7) (9,068.7)Depreciation/Provisions 2,307.6 3,370.5 2,749.7 5,894.2 7,000.4Increase in Preference Shares 1,000.0 3,369.2 200.0 (76.5) (200.0)Increase in Equity Capital + Share Premium 4.5 6.5 2,865.1 0.1Increase in Net Borrowings 33,787.0 21,551.3 (807.0) (574.2) (2,463.5)IDF/BRF/SWF (27.4) 224.2 220.4 (98.2) 247.0Increase in Current Liabilities 1,264.0 1,372.1 1,560.9 (888.2) 604.2

Total 40,679.1 30,069.8 7,683.7 1,162.6 (3,880.6)

Uses of Funds

Increase in Fixed Assets 399.4 261.2 573.7 1,442.5 36.7 Increase in Investments 6,762.9 4,607.2 5,137.9 5,462.9 9,627.6 Increase in Current Assets 586.1 855.6 479.7 459.8 692.8 Net Disbursements 33,848.3 20,448.2 (415.5) (7,117.3) (8,616.2) Share Issue expenses adjusted against share premium 542.6 730.5 650.7 638.2 254.1 Payment of Dividend 1,268.2 1,391.7 865.9 566.3 109.5

Total 43,407.5 28,294.4 7,292.4 1,452.4 2,104.5

Opening Cash Balance 7,462.2 4,733.8 6,509.2 6,900.5 6,610.7 Surplus/Deficit (2,728.4) 1,775.4 391.4 (289.8) (5,985.1) Closing Cash Balance 4,733.8 6,509.2 6,900.5 6,610.7 625.6

Source: IFCI annual reports

Appendix 19 43

RATIO ANALYSIS OF IFCI Item 1998 1999 2000 2001 2002 Return on Net Worth (%) 23.82% 1.49% 3.65% (18.13%) (105.31%)Return on Assets (%) 1.93% 0.11% 0.26% (1.15%) (3.89%)Earnings per Share (Rs) 10.28 (0.07) 0.09 (5.09) (14.57)Book Value (Rs) 41.28 32.94 18.67 13.04 (0.49)Gross Yield (%) a 14.90% 12.78% 12.81% 13.74% 11.31%Interest Margin (%)b 2.92% 0.38% 0.21% 1.18% (0.83%)Debt-Equity Ratio 11.57 12.60 12.17 15.61 48.80Capital Adequacy Ratio (%) 11.57% 8.37% 8.80% 6.22% 3.12%Net Nonperforming Loans/Total Loan Assets (%) 21.50% 21.23% 20.68% 20.99% 22.21%a Interest income divided by interest-earning assets. b Gross yield over cost of borrowing.

Source: IFCI

44 Appendix 20

STATUS OF COMPLIANCE WITH MAJOR LOAN COVENANTS BY ICICI

Covenant Reference in Loan Documents

Remarks

1 The Borrower shall carry out the Project with due diligence and efficiency, and in conformity with sound banking, administrative, financial, technical, environmental, social, and business practices.

LA, Sec. 5.01 (a) Complied with.

2 In carrying out the Project and in the conduct of its business, the Borrower shall perform all the obligations set forth in Schedule 5 to the extent that they are applicable to the Borrower.

LA, Sec 5.01 (b) Complied with.

3 The Borrower shall at all times make adequate provision to protect itself against any loss resulting from changes in the rate of exchange between rupees and the currency or currencies in which the Borrower’s outstanding obligations must be met.

LA, Sec. 5.02 Complied with.

4 The Borrower shall not make a Subloan to any Qualified Enterprise unless such Qualified Enterprise has at its disposal, or has made appropriate arrangements to obtain as and when required, all local currency funds and other resources required for the Project in respect of which the Subloan is to be made.

LA, Sec 5.03 Complied with.

5 The Borrower shall maintain records and accounts adequate to record the progress of the Project and of each Qualified Project (inclusive of the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, the operations and financial condition of the Borrower.

LA, Sec 5.04 Complied with.

6 The Borrower shall furnish to the Asian Development Bank all such reports and information as the Bank shall reasonably request concerning (i) the Loan, and the expenditure of the proceeds and maintenance of the service thereof; (ii) the Project; (iii) the Qualified Enterprises, the Qualified Projects and Subloans, including reports and information concerning debentures and other securitized debt issued by each Qualified Enterprise in connection therewith and the application of the proceeds of resale, if any, thereof by the borrower; (iv) the administration, operations and financial condition of the Borrower; and (v) any other matters relating to the purposes of the Loan.

LA, Sec 5.05 (a) Complied with.

Appendix 20 45

Covenant Reference in Loan

Documents Remarks

7 Without limiting the generality of the foregoing, the Borrower shall submit to the Bank (i) semiannual reports on the execution of the Project and on the operation, management and financial performance of the Borrower; and (ii) an annual report to the Bank, within ninety (90) days of the close of each fiscal year until maturity of the Loan, on the status and performance of each Qualified Project.

LA, Sec 5.05 (b) Complied with, after follow-up.

8 The Borrower shall have its accounts and financial statements (balance sheets, statements of income and expenses, cash flow and related statements) audited annually in accordance with the appropriate auditing standards consistently applied by independent private auditors whose qualifications, experience, and terms of reference are acceptable to the Bank; shall furnish to the Bank, as soon as available but in any event not later than six months after the close of the fiscal year to which they relate, (i) certified copies of its audited accounts and financial statements published under the Indian Companies Act 1956 and (ii) the auditors’ long-form report containing their opinion, inter alia, on the use of Loan proceeds, on the adequacy of the Borrower’s accounting and internal control procedures, on the status of compliance by the Borrower with the financial covenants set forth in subparagraphs (c) and (d) of paragraph 1 of Schedule 5, on investment in debentures, long-term debt securities or securitized debt set forth in subparagraphs (b) and (c) of paragraph 6 of Schedule 5 and on compliance with the Guidelines referred to in Section 3.05 relating to the imprest account, all in the English language.

LA, Sec 5.06 (a) Complied with. Part (ii) of the Covenant explained in detail in para 48.

9 The Borrower shall enable the Bank’s representatives to inspect any Qualified Enterprise, any Qualified Project, the goods financed out of the proceeds of the Loan, and any relevant records and documents maintained by the Borrower.

LA, Sec. 5.08 Complied with.

46 Appendix 20

Covenant Reference in Loan Documents

Remarks

10 Except as the Bank may otherwise agree, the Borrower shall, at all times, continue to adhere to the following criteria, to the satisfaction of the Bank, in order to allow ongoing participation by the Borrower in the Project:

(a) ensure adequate deployment of financial and manpower resources for identification, evaluation and financing of infrastructure projects in the power, telecommunication, roads, and ports subsectors;

(b) mobilization of long-term resources and undertaking of infrastructure finance in the aforesaid subsectors;

(c) compliance with all applicable prudential guidelines established by; (i) Reserve Bank of India (RBI) on capital

adequacy and supervisory practices including, but not limited to, statutory liquidity ratio and capital adequacy ratio as amended from time to time; and

(ii) RBI regarding, inter alia, recognition of income, classification of assets, and debt provisioning;

(d) undertake its operations so as to ensure that (i) it conforms to the interest cover whereby its profit before interest, provision for bad and doubtful debts, depreciation, and other noncash charges for the relevant current fiscal year are at least 1:1 times the interest and commitment charges payable by it for the relevant fiscal year; (ii) it conforms to Asset Liability Management/Liquidity Management of RBI; and shares with ADB, the internal norms and risk management policies adopted by its management, along with status of conformity to such guidelines; and (iii) it maintains a debt to equity ratio of not more than 12:1.

Schedule 5 para I Complied with.

11 The Borrower shall commence capacity building, with the assistance of consultants, within six months of the Effective Date in order to (a) develop the expertise of the Borrower to raise funds from the domestic capital market to finance Qualified Projects; (b) strengthen the technical capabilities of the Borrower to prepare, develop, appraise, and implement Qualified Projects, including review of documentation and identification of policy constraints; and (c) assist the Borrower in incorporating social dimensions and environmental considerations in evaluation and implementation of Qualified Projects.

Sch 5, para III (3) Complied with.

Appendix 20 47

Covenant Reference in Loan

Documents Remarks

12 The Borrower shall monitor the financial and economic aspects of the Project and benefit monitoring and evaluation procedures shall be in accordance with Bank’s Guidelines for Benefit Monitoring and Evaluation (A Handbook for Bank Staff, Staff of Executing Agencies and Consultants, March 1992).

Sch 5, para V Complied with.

13 The Borrower shall ensure that all Qualified Projects comply fully with all applicable environmental regulations and legislation in India, including compliance with environmental quality standards and requirements for environmental impact assessments, and shall further ensure that adequate environmental safeguards and equipment for environmental compliance are provided in respect of each Qualified Project. Where appropriate, Qualified Enterprises shall have an in-house capacity for pollution control and environmental monitoring. The Borrower shall maintain, or engage on a case-by-case basis, an environmental expert to address the environmental aspects of Qualified Projects and shall provide assistance to the concerned Qualified Enterprise in environmental matters in respect of the Qualified Project.

Sch 5, para VI. Complied with.

48 Appendix 21

STATUS OF COMPLIANCE WITH MAJOR LOAN COVENANTS BY IFCI

Covenant Reference in Loan Documents

Remarks

1. The Borrower shall carry out the Project with due diligence and efficiency, and in conformity with sound banking, administrative, financial, technical, environmental, social, and business practices.

LA, Sec. 5.01 (a) Complied with.

2. In the carrying out of the Project and in the conduct of its business, the Borrower shall perform all the obligations set forth in Schedule 5 to the extent that they are applicable to the Borrower.

LA, Sec 5.01 (b) Complied with.

3. The Borrower shall at all times make adequate provision to protect itself against any loss resulting from changes in the rate of exchange between rupees and the currency or currencies in which the Borrower’s outstanding obligations must be met.

LA, Sec. 5.02 Complied with.

4. The Borrower shall not make a Subloan to any Qualified Enterprise unless such Qualified Enterprise has at its disposal, or has made appropriate arrangements to obtain as and when required, all local currency funds and other resources which are required by such Qualified Enterprise for the carrying out of its Qualified Project in respect of which the Subloan is to be made.

LA, Sec 5.03 Complied with.

5. The Borrower shall maintain records and accounts adequate to record the progress of the Project and of each Qualified Project (inclusive of the cost thereof) and to reflect, in accordance with consistently maintained sound accounting principles, the operations and financial condition of the Borrower.

LA, Sec 5.04 Complied with.

6. The Borrower shall furnish to the Bank all such reports and information as the Bank shall reasonably request concerning (i) the Loan, and the expenditure of the proceeds and maintenance of the service thereof; (ii) the Project; (iii) the Qualified Enterprises, the Qualified Projects and the Subloans, including reports and information concerning debentures and other securitized debt issued by each Qualified Enterprise in connection therewith and the application of the proceeds of resale, if any, thereof by the Borrower; (iv) the administration, operations and financial condition of the Borrower; and (v) any other matters relating to the purposes of the Loan.

LA, Sec 5.05 (a) Complied with.

Appendix 21 49

Covenant Reference in Loan

Documents Remarks

7. Without limiting the generality of the foregoing, the Borrower shall submit to the Bank (i) semiannual reports on the execution of the Project and on the operation, management and financial performance of the Borrower; and (ii) an annual report to the Bank, within ninety (90) days of the close of each fiscal year until maturity of the Loan, on the status and performance of each Qualified Projects.

LA, Sec 5.05 (b) Partly complied with, after follow-up. Details in para 49.

8. The Borrower shall have its accounts and financial statements (balance sheets, statements of income and expenses, cash flow and related statements) audited annually in accordance with the appropriate auditing standards consistently applied by independent private auditors whose qualifications, experience and terms of reference are acceptable to the Bank; shall furnish to the Bank, as soon as available but in any event not later than six months after the close of fiscal year to which they relate, (i) certified copies of its audited accounts and financial statements published under the Indian Companies Act 1956 and (ii) the auditors’ long-form report containing their opinion, inter alia, on the use of the Loan proceeds, on the adequacy of the Borrower’s accounting and internal control procedures, on the status of compliance by the Borrower with the financial covenants set forth in subparagraphs (c) and (d) of paragraph 1 of Schedule 5, on investment in debentures, long-term debt securities or securitized debt set forth in subparagraphs (b) and (c) of paragraph 6 of Schedule 5 and on compliance with the Guidelines referred to in Section 3.05 relating to the imprest account, all in the English language.

LA, Sec 5.06 (a) Partly complied with. Details in para 49.

9. The Borrower shall enable the Bank’s representatives to inspect any Qualified Enterprise, any Qualified Project, the goods financed out of the proceeds of the Loan, and any relevant records and documents maintained by the Borrower.

LA, Sec. 5.08 Complied with.

50 Appendix 21

Covenant Reference in Loan

Documents Remarks

10 1. Except as the Bank may otherwise agree, the Borrower shall, at all times, continue to adhere to the following criteria, to the satisfaction of the Bank, in order to allow ongoing participation by the Borrower in the Project:

(a) ensure adequate deployment of financial and manpower resources for identification, evaluation and financing of infrastructure projects in the power, telecommunication, roads, and ports sub-sectors;

(b) mobilization of long-term resources and undertaking of infrastructure finance in the aforesaid sub-sectors;

(c) compliance with all applicable prudential guidelines established by; (i) the Reserve Bank of India (RBI) on capital

adequacy and supervisory practices including, but not limited to, maintenance of capital adequacy ratio of at least eight percent; and

(ii) the RBI regarding, inter alia, recognition of income, classification of assets, and debt provisioning;

(d) undertake its operations so as to ensure that the consolidated internal cash generation for debt service for each fiscal year shall be at least 1.1 times the consolidated debt service requirement for that fiscal year.

LA, Sec 5.09 (c) Partly complied with. Details in para 49.

11 The Borrower shall commence capacity building, with the assistance of consultants, within 6 months of the Effective Date in order to (a) develop the expertise of the Borrower to raise funds from the domestic capital market to finance Qualified Projects; (b) strengthen the technical capabilities of the Borrower to prepare, develop, appraise and implement Qualified Projects, including review of documentation and identification of policy constraints; and (c) assist the Borrower in incorporating social dimensions and environmental considerations in evaluation and implementation of Qualified Projects.

Sch 5, para I Complied with.

12 The Borrower shall monitor the financial and economic aspects of the Project, and benefit monitoring and evaluation procedures shall be in accordance with Bank’s Guidelines for Benefit Monitoring and Evaluation (A Handbook for Bank Staff, Staff of Executing Agencies and Consultants, March 1992).

Sch 5, para III (3) Complied with, after follow-up.

Appendix 21 51

Covenant Reference in Loan Documents

Remarks

13. The Borrower shall ensure that all Qualified Projects comply fully with all applicable environmental regulations and legislation in India, including compliance with environmental quality standards and requirements for environmental impact assessments, and shall further ensure that that adequate environmental safeguards and equipment for environmental compliance are provided in respect of each Qualified Project. Where appropriate, Qualified Enterprises shall have an in-house capacity for pollution control and environmental monitoring. The Borrower shall maintain, or engage on a case-by-case basis, an environmental expert to address the environmental aspects of Qualified Projects and shall provide assistance to the concerned Qualified Enterprise in environmental matters in respect of the Qualified Project.

Sch 5, para V. Complied with.

52 Appendix 22

ASSESSMENT OF DEVELOPMENT AND POVERTY REDUCTION IMPACT

1. Private sector participation in infrastructure has assumed greater significance as the sustainability of public investment has come into question. Aside from facilitating growth by removing impediments to infrastructure development, the poverty impact of private-sector investment may be assessed from two other perspectives: (i) the opportunity cost of government expenditure (freed for investment in social sectors), and (ii) the direct and indirect effects of infrastructure investment on poverty reduction.1 2. Investment in infrastructure directly generates jobs and improves incomes. Investment in power creates jobs in building, operation, and maintenance, and supports industrial development where there is significant employment. Investment in transport, particularly road construction, leads to substantial job creation for semiskilled and unskilled workers, particularly in the rural areas. 3. Indirect effects would include improved cost efficiencies and service quality through the private infrastructure operation. The poor would benefit from cheaper commodities, quicker travel time, less pollution, fewer accidents, better penetration of development effects to rural areas, and general improvements in quality of life. The development of power and roads also indirect boosts the nonfarm sector. If the nonfarm sector expanded, it could boost wages in the agriculture sector, where a large proportion of the poor work.2 4. Benefit monitoring and evaluation undertaken for the various subprojects financed under the Facility indicate the following developmental impacts:

Subproject Impact Escotel Mobile Communication Ltd. Jaiprakash Hydro-Power Ltd. Lanco Kondapalli Power Private Ltd.

Increase in teledensity across the three states where the project operates: 0.5% increase in penetration in Haryana; 0.7% increase in penetration in Kerala; and 0.36% increase in penetration in Uttar Pradesh (West) The project has provided jobs to 700 people, with an additional 250 contract labor positions. Escotel also has more than 1,000 dealers and franchisees. The project was commissioned on 8 June 2003 and is expected to generate 1.15 billion units per annum. The total manpower engaged during construction is estimated at 3,500. The plant would employ 144 people. This power project achieved a load factor of 80% for the year ended March 2003, generating 2.5 billion units. It employs 100 people..

1. ADB. 2000. RETA 5947: Assessing the Impact of Transport and Energy Infrastructure on Poverty

Reduction. 2. Sharif, Abusalleh, “Role of Rural Non-Farm Employment in Poverty Alleviation” presented at the

Poverty Round Table Conference at NCAER, New Delhi. 30 April, 2001.

Appendix 22 53

Subproject Impact

Shyam Telelink Ltd.

Increase in teledensity across the areas where the project operates: 0.88% increase in penetration in Jaipur 0.68% increase in penetration in Jodhpur 0.06% increase in penetration in Ajmer 0.22% increase in penetration in Kishangarh 0.25% increase in penetration in Beawar 0.75% increase in penetration in Pushkar 0.03% increase in penetration in Alwar Shyam Telelink has about 350 employees and 300 contract laborers, as well as more than 170 dealers and franchisees.

ST-CMS Electric Company Private Ltd.

The plant is operational with a load factor of 85%, and is expected to generate about 1.8 billion units per annum, an amount equivalent to 5% of the electricity supplied by Tamil Nadu Electricity Board. About 3,500 people have been employed for the construction of the project, including employees, contract labor, and contractors’ staff.

Jindal Thermal Power Company Ltd.

The project utilizes corex gas from a steel plant for to generate power. The plant is operational and is expected to generate 2.05 billion units per annum. Of the energy generated, about 700 million units is expected to be supplied to Karnataka Power Transmission Company Limited (KPTCL), an amount which would be about 2% of the electricity it purchases. The balance would be utilized for captive consumption by the steel plant. Jindal employs about 100 people for the operation of the plant.

Nandi Highway Developers Ltd. Road safety has significantly improved, with number of accidents on the alternate toll-free route reducing from 849 in 1998 to 550 in 2001. Congestion is also expected to improve, and commuters will save time and fuel while traveling on the bypass road vis-à-vis the alternate toll-free route.

Gujarat Adani Ports Ltd. The project directly employs about 375 people.

Various contractors have employed an additional 1,000 people. Indirect employment to more than 3,000 people has been generated due to various other port services nearby. Apart from jobs, the project has helped the local community by providing a school, residential colony, road and rail infrastructure, and a fully-equipped medical center.

Malana Power Data is not available as the company prepaid its debt

to Industrial Financial Corporation of India.