Document of

The World Bank

FOR O'FICIAL USE ONLY

A- A- 3, I- i&J

- 6 - (Al Report N, 7864-IN

STAFF APPRAISAL REPORT

INDIA

INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT

AUGUST 15, 1989

Asia Region

This document has a restricted distribution and may be used by recipierts only in the performance of

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CURRENCY EOUIVAALNTS

Rs 1 - US$o.067Rs 15 - US$1.00

FISCAL YEAR

April 1-March 31

PRINCIPAL ABBREVIATIONS AND ACRONYM1S

APIDC Andhra Pradesh Industrial Development CorporationADB Asian Development BankBIS Bureau of Indian StandardsCanBank Canara BankCanfin CanBank Financial Services Ltd.CCPS Cumulative convertible preference sharesCSIR Council for Scientific and Industrial ResearchCLB Company Law BoardCLRI Central Leather Research InstituteCMRS Central Mining Research StationDFI Direct foreign investmentFERA Foreign Exchange Regulations ActGIIC Gujarat Industrial Investment CorporationGOI Government of IndiaICICI The Industrial Credit and Investment Corporation of IndiaIDBI Industrial Development Bank of IndiaIFCI Industrial Finance Corporation of IndiaIPO Initial public offeringITD Industrial technology developmentLDC Less-developed countryMRTP Monopolies and Restrictive Trade Practice ActMOI Ministry of IndustryNIC Newly industrializing countryNML National Metallurgy LaboratoryNCL National Chemical LaboratoryOECD Organization for Economic Corporation and DevelopmentOTC Over-the-counter marketRI Research instituteR&D Research and DevelopmentRBI Reserve Bank of IndiaSBI State Bank of IndiaSEBI Security and Exchange Board of IndiaSFC State Financial CorporationSIDC State Industrial Development CorporationSOE Statement of expenditureTI Technology ins'itutionTDF Technical Development FundTDICI Technology Development and Information Company of India Ltd.

UTI Unit Trust of IndiaVC Venture capitalVCF Venture capital fundVCC Venture capital companyVCM Venture capital management entity

FOR OFFICAL USE ONLY

INDIA

INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT

STAFF APPRAISAL REPORT

Table of Contents

Page No.

LOAN. CREDIT AND PROJECT SUTMMARY ............................... iii

I. INTRODUCrTON ................................................... 1

II. INDIA'S INDUSTRIAL AND FINANCIAL SETTING ....................... 3

A. Industrial Policy Environment ............................. 3B. The Financial System ...................................... 5

The Capital Market ...................................... 7Venture Capital ......................................... 8

III. INDUSTRIAL TECHNOLOGY DEVELOPMENT IN INDIA ..................... 12

The Nature of ITD ......................................... 12Justification and Forms of Government Intervention ........ 13svchnology Institutional Framework in India ............... 13

R&D in India .............................................. 14The Council for Scientific and Industrial Research (CSIR). 15Fiscal and Financial Policies for ITD ..................... 16Technology Import Policy .................................. 17Recent Developments ....................................... 17Technical Development Fund ................................ 18The Bank's Role in Industry and ITD ....................... 19

This report is based on the findings of the March 6-24, 1989, appraisal missionand the October-November 1988 preappraisal mission. The appraisal missionconsisted of Messrs. M. Goldman (Mission Leader), F. Ettori (PrincipalIndustrial Economist), P. Wogart (Senior Operations Officer), S. Wu (TechnologyManagement Specialist) and S. Puri (Consultant). In addition to the same team,the preappraisal mission included Messrs. K. Mirza (IFC, Capital Markets),G. Nicolaon (Consultant, Chemicals and Technology Management), R. Toth(Consultant, Standards), G. Bouchet (Consultant) and H. Alavi (Economist).Earlier contributions were also provided by S. Trindade (Director, UN Center forScience and Technology for Development), Ms. M. McDonald (Consultant, VentureCapital), J. Bredie (Technology Educator) and C. Frischtak (Senior Economist).This report was prepared by Messrs. Goldman, Ettori, Wogart and Wu.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Page No.

IV. THE PROJECT. LOAN AND CREDIT ................................... 21

Objectives and Scope ........................................... 21Detailed Features of Each Component . . 21A. Technology Venture Financing ........................ 21B. Technology Support Servicas ......................... 24C. Technical Development Fund .......................... 26

Project Cost and Financing .. 27The Loan and Credit .. 28Relenling Terms and Conditions . . 29Procurement .. 31Disbursement .. 32Reporting and Audits .. 33

V. PARTICIPATING INSTITUTIONS. INVESTMENT CRITERIAAND PROJECT BENEFITS ..................... ................... 34

A. Technology Venture Financing ............................. 34Technology Development and Information Companyof India, Ltd ........................................... 34

Canara Bank and CanBank Financial Services, Ltd ........... 35Andhra Pradesh Industrial Development Corporation ......... 35Gujarat Industrial Investment Corporation ................. 36Investment Guidelines ..................................... 36

B. Technology Services Component ............................. 37ICICI ..................................................... 37Bureau of Indian Standards ................................ 39The CSIR Institutes ....................................... 39Shriram Institute for Industrial Research ................. 40Selection Guidelines ...................................... 40

C. Benefits and Risks ........................................ 41 1Benefits .................................................. 41Environment and Safety .................................... 42Risks ... .............................................. 42

VI. AGREEMENTS REACHED AND RECOMMENDATION .......................... 44

ANNEXES

1. Financial System Summary2. India Capital Market3. Venture Capital Guidelines4. Selected Data on Research and Development5. Foreign Collaboration and Technology Payment Data6. Technical Development Fund (TDF) Guidelines7. TDF and Ministry of Industry: Organizational Guidelines8. Technical Assistance for Technology Support Serv4ces9. TDICI10. Canfina11. APIDC12. GIIC13. Technology Institutes and Subprojects14. Sponsored R&D Promotion Fund Guidelines

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INDUSTRIAL TECHNOLOGY DEVELOPNENT PROJECT

Loan. Credit and Project Summar=

Borrover: India, acting by its President

Beneficiaries: Industrial Credit and Investment Corporation of India (ICICI)Canara Bank (CanBank)Andhra Pradesh Industrial Development Corporation(APIDC)Gujarat Industrial Investment Corporation (GIIC)Council for Scientific and Industrial Research (CSIR)Bureau of Indian Standards (BIS)

Amount: US$200 million comprising:(a) an IBRD loan for US$145 million equivalent; and(b) an IDA credit for SDR 44.2 million

(US$55 million equivalent).

Terms: US$100 million of the IBRD loan would be made atthe Bank's standard variable interest rate and berepaid over 20 years including 5 years of grace andthe balance of US$45 million for the venturefinancing component would be repaid over 16 yearsincluding 7 years of grace. The IDA credit for thetechnology services component would be on standardterms with 35 years maturity.

Relending Terms: Venture Financing Component. US$45 million of theLoan would be on-lent in rupees at a rate of 12%p.a. repayable over 16 years including 7 years ofgrace, with interest capitalized during the graceperiod. The Government would bear the foreignexchange and interest rate risks.

Technologv Services Component. ICICI would serveas a managing agent on behalf of the Government forthe US$55 million component. US$40 million of theIDA credit would be on-lent in rupees to researchand standards institutions with no interest chargebut with a service fee consisting of 1% onoutstanding balances and a commitment charge of0.25%. The repayment terms would be for a maximumof 15 years with 4 years of grace. The balance ofUS$15 million of the Credit would be relent inrupees as conditional loans with an interest rateof 6% p.a. during the grace period, and to be

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repaid at an interest rate of 14% p.a. and/or onthe basis of royalty payment after the graceperiod; however, subloans to unsuccessful projectswould be written off. The terms would depend onthe likely period for commercialization of the R&Dresults. ICICI would also receive 2% p.a. from theinterest charges and 15% of royalties to cover thecosts of appraisal and management.

Project Description: The project objectives a:e to boost technologyacquisition, development and commercialization inIndia. It would strengthen a number of domestictechnology institutions (TIs), build effectiveventure capital management institutions, anddevelop better links between the industrial sectorand research institutions. The project comprisesthree complementary components respectively aimedat: (a) financing technology innovation by smalland medium enterprises through four venture capitalschemes; (b) strengthening the capacity of researchand standards institutions to provide technologyservices to industry and promoting collaborationbetween industry and research instittutions; and(c) the import by industry of technology andtechnical know-how through the TechnicalDevelopment Fund, a fast-track procedure forpromoting technology modernization. Technicalassistance and studies would also support the firsttwo components.

Benefits and Risks: The venture capital component is expected tofinance over 400 small, innovative and growth-oriented ventures and lead to the development andcommercialization of many new products andprocesses. The technology services component isexpected to strengthen 10 to 15 research andstandard instit-ates, build their industrial supportprograms and lesd to the development of newtechnologies for industrial firms by about 30institutes and universities. Between 600 and 800firms are expected to benefit from the TDFfacility, and modernize and/or diversify theirproduction line as a result. Such an innovativeproject with untried components involving manyinstitutions is inherently risky with respect toits implementation and repayment by the finalbeneficiaries. The improved policy framework isfostering competition. and stimulating demand fortechnology. First evidence suggests a large pent-up demand for such financing. Furthermore, theinstitutions have been carefully selected andappraised, and are committed to the innovativeprograms they will carry out. Management of the

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technology services component by lCICI alsoprovides confidence that the most difficultcomponent of the project will be efficiently run.Close supervision will be provided throughout thelife of the project.

Estimased Costs:

Logal Foreign r Jtal---- (US$ million) ------

Technology Venture Financing 70.0 100.0 170.0Technology Support Services 49.0 41.0 90.0Technical Devclopment Fund 150.0 150.0

Total Costs 119.0 291.0 410.C

Financina Plan:

Government of India - 50.0 50.0Financial Institutions andInvestors 35.0 55.0 90.0

Project Sponsors 63.0 4.5 67.5Government of Japan 1.0 1.5 2.5IBRD - 145.0 145.0IDA 20.0 35.0 55.0

Total Financing 119.0 291.0 41.\

Estimated Disbursements

Bank Fiscal Year 90 91 92 93 94 95 96

Annual 20 37 50 61 23 6 3Cumulative 20 57 107 168 191 197 200

Economic Rateof Return: Not applicable.

&aR: IBRD 21651

INDIA

STAFF APPRAISAL REPORT

Industrial Technology DeveloRment Project

I. INTRODUCTION

1.1 The gradual reform of India's industrial regulatory environment overthe past decade with its increasing reliance upon market forces andcompetition has already had positive effects. Industrial growth rates haveaveraged nearly 9% p.a. during the past four years, and the growth ofmanufacturing exports has exceeded 25% p.a. in real terms over the past 2years compared with 5.7% p.a. and 1% p.a. during the first half of the 1980s,respectively. Investor confidence is evident from the large growth of foreigninvestment as well as of the number of shareholders and amounts invested inthe domestic capital market. The industrial policy reforms, which aredescribed in part A of Chapter 2, have fostered a more competitive environmentwhich is in turn leading to a raised awareness of the need to improveproductivity and quality. As a result, technological upgrading has become amajor concern of many firms as demonstrated by industry's increased demand forimported and domestic technology and its growing investment in R&D. This hasbeen demonstrated already through the increase in total factor productivity of4.2% p.a. between 1981 and 1987 after two decades of stagnation.

1.2 Previous policies and institutional development efforts forindustrial technology development (ITD), described in the first part ofChapter 3, have focused on technological self-reliance and governmentinvolvement in R&D activities and in the selection of technology on behalf ofindustry. The Government is now evolving a strategy which builds on threefundamental policy thrusts. First, the strategy involves a gradual transferof decision making regarding technology choice arnd R&D from the public sectorto the firms with a concomitant shift in expenditures from the Government tothe enterprises. This is closely related to the second thrust, namely, theincreased emphasis on product and process development, quality improvement,standards diffusion and commercialization of technology in place of basicresearch. Lastly, the strategy recognizes the importance of relying more ontechnology import and thereby using domestic resources more efficiently tocomplement what can be obtained from abroad. Technology policy willultimately rely upon a competitive industrial sector to choose and finance ITDfrom the best available sources with Government supporting an effective andcollaborative technological infrastructure and an incentive structure whichrewards successful ITD.

1.3 The proposed project would support three key aspects of this strategyto stimulate more rapid domestic technology development and provide industrywith easier access to technology from domestic as well as foreign sources.First, it would support the development of new technology ventures throughassistance for four new venture capital initiatives. Second, the project

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would promote increased and more productive supply of technology services byR&D and standards institutions to industry and strengthen selected researchand standards institutions. To help ensure a more balanced recourse toforeign and domestic technology, the project's third component would provideassistance for obtaining easier and increased access by industry to imports oftechnology.

1.4 Since some of the major elements of a technology strategy are stillbeing formulated and others remain to be implemented, Bank participation atthis stage can have a major impact on the long term direction of technologystrategy. This is a unique opportunity to support a major effort by theGovernment to redirect technology strategy to support a more competitiveindustrial environment. Previous Bank studies of various industrialsubsectors and the regulatory environment, culminating in the report onPolicies for Industrial Technology Development (No. 6715-IN, May 11, 1987), aswell as subsequent dialogue on issues and policies related to ITD haveprovided input for the Government's technology policies. Bank involvement inproject preparation has already had an impact on the plans and strategies ofselected research, and the standards, institutes and, with support from theIFC, on the institutional structure for venture capital. More broadly, Bankparticipation in industrial technology development complements other Bankefforts to promote increased industrial competition and modernization, improvecompetitiveness of key industrial subsectors and train technical manpower forindustry.

1.5 Chapter 2 provides the industrial and financial sector context forthe proposed project, emphasizing the recent industrial policy reforms and thebasis for which the Government is attempting to promote venture capital.After a brief discussion of the nature of industrial technology development(ITD) and the Government's role in its promotion, Chapter 3 includes anhistorical account of India's ITD and efforts to evolve the strategy which theproject supports. The reforms adopted in the research network under theCouncil for Scientific and Industrial Research (CSIR, paras. 3.12-3.14) and intechnology import under the Technical Development Fund (TDF, paras. 3.23-3.26)are highlighted since they form the basis for the second and third componentsdescribed in para. 1.3 above. In Chapter 4, a detailed description isprovided of the project and how the loan and credit would operate, whileChapter 5 contains summary descriptions of participating institutions, theinvestment/selection criteria and the project impact. Chapter 6 summarizesthe agreements to be reached with the Government and involved institutions.

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II. INDUSTRIAL AND FINANCIAL SECTOR

A. Industrial Policy Environment

2.1 The Indian industrial sector has achieved considerable success inattaining the post-Independence goal of self-sufficiency, and has developedproduction capability across virtually the entire spectrum of industrialactivity. This success has not been without considerable cost. Theindustrial growth rates were consistently below Plan tagets andsubstantially lower than in many other industrializing nations. Growth inmanufacturing output, wl'tch averaged about 4% p.a. between FY74 and FY81,increased to only 5.7% in FY81-FY85 period. Rigid investment licensing andcontrols on output and technology acquisition led to a state of permanentproduct shortages that inhibited competitive behavior. Furthermore, thehigh import barriers created by widespread quantitative restrictions andhigh tariffs effectively isolated many Indian industries from thetechnological developments in the rest of the world. The rigiditiescreated by the regulatory system not only constrained firms' ability toenter new markets and expand, but also limited their ability to restructureand/or close down. In many sectors, continued production by financiallyweak--"sick"--firms, via subsidies, undermined the viability of theremaining more efficient units. The heavy indirect taxes on all stages ofproduction had a cascading effect that raised domestic prices, furtherconstraining firms' ability to expand markets and achieve economies ofscale. As a result of these policies, Indian firms in many industrialsubsectors are below international standards in terms of techr.ology, scaleand efficiency, and offer products at high prices and variable quality.This environment has also contributed to India's disappointing exportperformance. Lack of incentives for export activities and the maintenanceof the rupee at an artificially high exchange rate during the first half of1980s led to an environment where manufactur^d exports (which account forabout 70% of India's tota. exports) grew on average at less than 3% p.&. inreal terms over the period FY80 to FY86, and represented a small anddec'lining share of industrial output (less than 5% in FY85).

2.2 The Seventh Plan (1984/85-1989/90), annual budgets, the Long-TermFiscal Policy and recent official policy statements have set out a seriesof policy reform objectives designed to address some of the major problemsindicated above. Since 1985, GOI has initiated a series of discrete policyactions which when taken together have already made significantimprovements in the industrial policy environment. The reforms inindustrial policies have been complemented by some liberalization of thefinancial sector especially in the capital markets (paras. 2.14-2.15). Thepolicy reforms implemented since FY85 can be grouped under four broadareas. The first is the liberalization of the domestic regulatory systemby: (a) removing license requirements for investments first up to aboutUS$4 million and more recently up to US$11 million in developed areas, andup to US$37 million in backward areas, as well as reducing significantlythe number of subsectors that require a license; (b) giving firms much moreflexibility to adjust botb output mix and capacity; (c) allowing greater

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import of capital goods and technology by permitting a majority of capitalgoods to be imported under open general licenses (OGL) and easingrestrictions on technology imports (discussed in detail in paras 3.24-3.29); (d) reducing the number of products reserved for production by smallscale industries; and (e) easing the monopoly regulations by increasing thethreshold level and expanding the product areas in which firms classifiedas monopolistic can invest.

2.3 The changes in the regulatory framework have been complemented bya policy of licensing more capacity (relative to estimated domestic demand)compared to earlier practice, to induce greater domestic competition andexportable surpluses. Minimum import content of 15% for projects whichrequired a license has been increased to 30%. The phased manufacturingprograms have been modified to reduce the targeted domestic content from90% to 70%. Minimum economic scales have been established in many productgroups to reduce inefficient import substitution. As elaborated inChapter 3, licensing for foreign technology collaborations has also beeneased to allow Indian industry to catch up with the rest of the world.

2.4 Taxation. The second area of reform is a series of measures toimprove the tax system including: (a) reduction and simplification ofincome and corporate taxes; (b) implementation of a modified value addedtax that facilitates indirect tax deduction for exports; and (c)rationalization of tax incentives for small scale industries.

2.5 Exit. The third area of reform has been attempts to deal moreconstructively with the increasing problems of sick firms and industries,especially after deregulation and increased ease of entry. Until recently,financial institutions and state governments had been constrained tomaintain "sick" industrial enterprises functioning through differentschemes thus burdening their portfolios. To deal more effectively withobstacles to closure, restructuring and rehabilitation of firms, the SickIndustrial Companies (Special Provisions) Act, 1985, established proceduresfor identifying and resolving the worst cases of financial difficulties.The Act established the Board for Industrial and Financial Reconstruction(BIFR), with quasi-judicial powers to order and speed closures, mergers,and other changes, including the power to override some other industriallegislation, in particular the Monopolies and Restrictive Trade PracticesAct (MRTP). The current obligation of a company with completely eroded networth to report to the BIFR, and the coordination of all involved partiesto arrive at a rapid recommendation, should rationalize and speed up thedecision-making process on the rehabilitation or closure of sick units.While the creation of the BIFR is a major step forward, its ability to actefficiently is likely to be constrained by the fact that its activities areconfined to firms where net worth is already fully eroded. Considerationis now being given to allowing BIFR to become involved earlier before afirm's financing plight has become so difficult.

2.6 Exports. The last area of reforms is export policies andadministration where the most fundamental and consistent changes have beenmade. The most important change has been the adoption of a flexible andrealistic exchange rate policy conducive to export growth. The realeffective exchange rate has depreciated more than 30% since the end of

1985. At the same time the Government has introduced and streamlined theduty exemption schemes for imports used 'n export production, and nowalmost all inputs are importable by exporters without restrictions andpayment of duties. For firms still using duty paid inputs and domesticinputs, the Government has streamlined the administration of the dutydrawback and the refund of excise taxes on domestically produced inputs toreflect actual tax incidence.

2.7 As a result of these policies and an expansionary macroeconomicpolicy, industrial growth has accelerated to an average of nearly 9% p.a.during the last four years (85-88) compared to less than 6% over thepreceding five years. While this rapid growth was partly in response tothe expa;ision of public spending which has created increased demand forindustrial products, the improved policy environment has contributedsubstantially by enabling firms to adjust the volume and composition ofoutput to meet this increased demand.

2.8 Although recent policy improvements have been far reaching andimpressive, more remains to be done to increase the competitiveness ofIndian industry. With the exception of export policy, where fundamentalchanges have been made, the incremental nature of other reforms havecreated pockets of improved competition coexisting with subsectors wherethere has been little improvement. Import liberalization has beenprimarily in capital goods, technology, some intermediate products and allirputs for exports. Severe constraints on public resources and foreignexchange availability, the complicated structure of existing industrialpolicies and strong political sensitivity have necessitated a gradual,step-by-step approach to liberalization in India. Rapid growth of exportsas well as industrial restructuring caused by greater competition can beexpected to reduce these constraints significantly over the next few yearsand allow the Government to accelerate its reform program, especially inthe more difficult areas of greater import liberalization and industrialexit policies.

B. The Financial Secto 1/

2.9 During the last 25 years, India's financial sector has been part ofthe fiscal and planning process of a highly regulated economy. Resourcemobilization has been a notable success. National saving rates have been inthe 22%-24% range in the 1980s with household saving 15%-17%. Householdsavings have been both rising and passing increasingly through the formalfinancial sector since the 1970s. Broad money is now about 45% of GDP, a highfigure for a developing country and particularly notable given India's low percapita tncome. In addition to bank deposits, there are substantial postoffice savings and a wide choice of other forms for saving, including one ofthe largest capital markets in the developing world. Maintenance ofreasonable, slightly positive, real interest rates for deposits, less than

I/ The World Bank Report, India: Credit and Capital Markets Study(No. 6661-IN, February 27, 1987) provides a comprehensive analysis ofthe Indian financial sector.

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double digit inflation, and the spread of banking offices (which have grownfrom about 8,300 in 1969 to over 55,000 currently) have been important factorsin the resource mobilization. This growth and the increasing financializationof private saving have permitted India to finance the decline in public sectorsaving and growing central government deficit (now about 9% of GDP) with lowinflation and scant evidence of crowding out of private investment.

2.10 The Indian financial system is highly segmented with different rolesclearly earmarked for the various institutions. A summary description of thefinancial system is presented in Annex 1. The Reserve Bank of India (RBI)performs the traditional central banking role as well as a development role byproviding refinanv.e lines and promoting new specialized development financeinstitutions. The financial sector is dominated by the banking system, whichas of June 1988 had total assets of over Rs 1,420 billion, of which 91% wereaccounted for by the 28 public sector banks and the rest by the 20 privateIndian banks and 30 foreign banks.

2.11 The industrial develogment finance system comprises national- andstate-level development banks and investment institutions. At the nationallevel, the predominant development banks are: Industrial Development Bank ofIndia (IDBI), Industrial Credit and Investment Corporation of India Limited(ICICI), and Industrial Finance Corporation of India (IFCI). Theseinstitutions sell financial assets directly to the public, raise theirresources from banks, the domestic capital market, bilateral and multilateralscurces, as well as some commercial borrowings from abroad. Their majoremphasis is on channeling long term finance to private and joint (mixed)sector companies. Since the early 1980s and increasingly since 1985, thedelicensing policy of the Government has forced these institutions to evaluatetheir borrowers more carefully and offer an increasing array of otherfinancial services, ranging from merchant banking and leasing to more recentattempts of providing venture capital. The State Finance Corporations (SFCs)and State Industrial Development Corporations (SIDCs) are the state-leveldevelopment banks. The SIDCs are promotional agencies of the StateGovernments that extend loans and take equity participations. Their mainshareholders are the respective State Governments and the IDBI, and theyreceive most of their resources from the ILEI and the GOI/RBI.

2.12 In India, the financial system has evolved to support primarilyindustrial projects carried out by existing firms. Development banks financeprojects essentially with debt. Many SIDCs provide equity to new firms toallow them to meet the minimum equity requirements to secure the debtfinancing needed for their projects. Thus, many medium sized Indian firmswanting to expand can finance most of the expansion with debt from thedevelopment banks. However, a growing number of young firms, particularlyknowledge intensive technology companies, have capital needs that are notcovered by tangible assets and have advisory, planning and representationalneeds not normally provided by traditional lending institutions. Despite themore liberal lending policies of development banks, the standard approach tofinancing has become increasingly inadequate for small and new Indiancompanies focusing on innovation and growth.

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The Csaital Market

2.13 India's 14 regional stock exchanges, of which Bombay's is by far themost important, are markets for shares and debeutures of private firms and forlong-term Government securities. There is also a growing market in Treasurybills, and a money market for interbank funds and commercial paper. Thegovernment securities market, although largely captive to the banks andinsurance corporations, forms the largest segment of the market. Thestructure of the capital market and its past development are described in moredetail in Annex 2.

2.14 Measures to diversify the markets and improve the attractiveness ofissues by start-up firms have included the introduction of new instrumentsruch as Cumulative Convertible Preference Shares (CCPS). These securitiescount as equity, carry a 10% dividend and are convertible into straight equityafter three to five years. Also liquidity has increased--particularly in thedebt markets--with the major public sector investment institutions playing animportant role in maintaining secondary markets. Finally, the Government hasintroduced legislation to protect investors and boost confidence in themarkets, and new institutions such as a stock holding corporation have beenset up to simplify the purchase of securities.

2.15 In response to the various changes in regulations and fiscalincentives the capital markets have grown rapidly in the 1980s, andparticularly since 1985. The volume of equity issued (including rights andpreference shares) increased fivefold to Rs 8.8 billion in 1986 fromRs 1.77 billion in 1982. The debenture market also grew significantly overthe same period when the amount issued more than doubled to Rs 5.9 billionfrom Rs 2.4 billion. The average price index on Bombay's Stock Exchangejumped from 188 in 1981 to 583 in 1986 and about 600 in 1988. In general, therelaxation of guidelines controlling debenture issues brought down financingcosts to companies, especially the cost of working capital, in comparison tobank loans. At the same time the yields to investors on these securities havebeen higher than those paid on comparable bank deposits. These capital marketdevelopments have encouraged finarcial institutions to expand their activitiesto leasing, mutual funds, credit cards and other higher income earningactivities to compensate for the declining margins on their basic lendingactivities.

2.16 The capital market also displays a number of problems common to otherdeveloping countries, which are likely to constrain its further development.Although overall volume in the secondary market is fairly large by LDCstandards, active trading is confined to a small number of issues. In theBombay exchange, less than a quarter of the listed shares are traded everyweek. Second, settlement procedures are weak relative to the fairly largevolumes of trades. Third, market makers do not seem to function efficiently,resulting in wide swings in prices and large margins between quoted bid andasked prices. Fourth, insider trading is not regulated, which has justifiedthe intervention of the Controller of Capital Issues (CCI) of the Ministry ofFinance in the pricing mechanism for new issues (see para. 2.26). Fifth,there is a general lack of information on both the markets' activities and theissues themselves. To help remedy this latter problem, a rating agency waslaunched recently as a subsidiary of ICICI. Finally, the stock exchange is

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not multitiered, which restricts the trading essentially to well-establishedcompanies which comply with stringent criteria for disclosure and pastrecords. The need has emerged for a second- and third-tier or an over-the-counter (OTC) market for privately held companies with little or no tradingrecord. A regulatory body, the Securities and Exchange Board of India (SEBI),was recently established to address these issues and ensure the stability andefficiency of the capital market.

2.17 Many young Indian firms now turn to the capital markets to raise aportion of their funds. However, the public equity markets are not the mostappropriate source of capital for small young companies. Firstly, companieswishing to be listed must have a minimum e-nuit) of Rs 30 million and a minimumpublic offer of Rs 18 million (US$1.2 million). The costs associated with apublic issue are disproportionately high for a company raising a small amountof capital, often reducing the proceeds by 10% or more. Furthermore-, once acompany has made a public offering, it must comply with stringent reportingrequirements and deal with outside shareholders, which can divert management'sattention from the important issues associated with launching and building anew company. And finally, the markets have not been receptive to young growthcompanies needing new capital, making them an unreliable source for growthcapital.

Venture Canital

2.18 Venture capital (VC) has characteristics which makes this instrumentof investment finance particularly well-adapted to the development of theIndian stock market and to the needs of the emerging small and medium sizedindustries with a focus on technology/market innovation. First, it involvesequity or quasi equity investment, which means that the investor shares therisk, since his investment will be unsecured. Second, it is a long terminvestment. The venture capitalist invests with the objective of making asignificant capital gain over time (and hence a superior return on hisinvestment) through the growth and success of the companies he finances.Third, VC is an active (rather than passive) form of investing. To realize anattractive return, the investor must be prepared to be involved actively withthe companies financed, and to contribute expertise and assistance, inaddition to capital, to maximize the potential for success. Finally, VC canbe used at all stages of the corporate development cycle. It can be used asseed capital, when there is little more chan a prototype in place, as start-upcapital to enable a new venture to move into commercial production, or tofinance expansions, acquisitions, or management buy outs.

2.19 The growth of the venture capital industry worldwide, where it hasthrivel, has been driven primarily by the emergence of innovative and growthoriented small and medium sized businesses. While the culture and theeconomic environment surrounding such firms in India is different than in manyindustrialized countries, the investment opportunity is the same. Indiaalready appears to have generated a class of technologically innovative growthoriented firms that need capital to grow, and as the government proceeds withits liberalization policy, even more such firms are likely to emerge. Bymaking VC more readily available to these firms, more of them will be able torealize their potential, creating significant benefits for the economy whiledelivering attractive returns to their investors.

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2.20 VC has a significant role to play in India. Given the IndianGovernment's policy to encourage the commercialization of new technologies,the integration of existing technologies and the adaptation of foreigntechnologies, there is an increasing need to finance a company's growth,rather than a particular project. In many technology intensive sectors (e.g.,the software industry), capital is required to pay for the development of theproduct, to study the market and to establish distribution networks. Thesefront-end working capital requirements, critical to the growth of thecompanies involved, cannot be readily accommodated by the development orcommercial banks.

2.21 It is estimated, on the basis of the number of technologies andlicenses transferred and contracted out by the various sources of localtechnology that the total demand in India for VC financing to commercializelocally sourced technologies would amount in the next 2-3 years to Rs 1-2billion (US$67-133 million) p.a. Of the latter estimate, Rs 500 million p.a.would be for technologies developed in government-sponsored and universitylaboratories and Rs 0.5-1.5 billion p.a. from the R&D units of industrialassociations and enterprises. There is an additional significa't unquantifieddemand for adapting and commercializing technologies licensed from abroad.The most conservative estimates project a demand for VC financing of at leastRs 1 billion (US$67 million) p.a.

2.22 VC has become an increasingly attractive activity for institAtionaland other investors. Some SIDCs have made equity at.d quasi-equity investmentsin start-up high tech firms over the past 15 years. Pilot VC schemes havebeen set up recently by all-India development banks (IDBI, IFCI and ICICI).With the changes in the industrial regulatory environment and theestablishment of a regulatory framework for venture capital in late 1988,initiatives have been recently taken, or announced, by a number of financialinstitutions. Unit Trust of India (UTI) and ICICI jointly established inMarch 1989 a Venture Capital Trust Fund (VCF) of Rs 200 million, to supporttechnology/innovation ventures. SBI and Canara Bank announced also thecreation of VCFs with initial amounts of Rs 150 and Rs 100 million,respectively.

2.23 The Controller of Capital Issues (CCI) published in November 1988Venture Capital Guidelines (see text in Amnex 3) establishing the frameworkunder which venture capital companies/funds (VCC/VCFs) would be officiallyrecognized and granted fiscal exemptions. The Guidelines reflect a cautiousapproach designed to maximize the likelihood of success of VC financing fortechnology-innovation ventures during the initial peri_l of experimentationand thereby demonstrate the viability of VC in India. For this reason, duringthe initial phase the Guidelines focus on promoting VC under the leadership ofwell-established financial institutions.

2.24 The Guidelines also allow for a significant role to be played by theprivate sector. First, funds mobilized by the VCFs can be raised throughpublic issues and/or private placements for up to 60% of the VCF resources.Second, the shareholdings of foreign investors and of promoters in the equityof VCCs and Venture Capital Managing bodies (VCMs) can amount to up to 25% and20%, respectively. Finally, private and foreign banks are eligible toinitiate VC under the Venture Capital Guidelines and thus receive the samestatus and benefits as other financial institutions.

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2.25 VCF investments are expected to focus on technology-inrovationprojects. At least 75% of funds should be invested in "eligible" ventures,i.e., projects promoted by professionally and technically qualifiedentrepreneurs which use technologies which 'are new or relatively untried orclosely held cr taken from pilot to commercial stage, or incorporatesignificant improvements over the existing ones in India" (para. 3(i)(b) ofAnnex 3). Investments by VCFs would be made mainly through equity and quasi-equity instruments; supplementary support in the form of loans and quasi-loanswould also be possible.

2.26 Disinvestmeat by VCC/VCFs of their equity (or convertible quasi-equity) investments should permit such institutions to be compensated fortheir high risk and early stage assistance by sale prices commensurate withthe risks taken. The main routes for disinvestment in most countries includerepurchase by the promoter (or the investee company) at an agreed price,initial public offerings (IPO) on the Stock Exchange (including the OTCmarket) or sale on the secondary market, and private sale to another party orcompany. There have been, or are, limitations with each of these exit routesin India. Prices allowed for IPOs in India have been regulated by theController of Capital Issues (CCI), which generally does not permit premiumprices reflecting fully the future growth potential of the company issuing theshares.2./ Sale of shares at market prices which incorporate such potentialwould be possible only on an OTC or the secondary markets. An OTC market doesnot yet exist and access to the secondary market presupposes that the investeecompany has become publicly held, which is not easily achievable for mostsmall young companies in which VC is generally invested. Finally, India'sCompany Act excludes the exit route of the investee corporation (but not thepromoters as individuals) buying back its own shares from a VC investor.

2.27 The key issues have been, or are being, addressed adequately. First,the Venture Capital Guidelines have given to the officially recognized VentureCapital Institutions the freedom to fix the IPO price of equity sharespublicly sold at disinvestment, on the basis of objective criteria such asbook value, profit earning capacity, and expected future earnings. Suchpricing freedom represents a substantial reform over the past controlsexercised by the CCI. Second, ICICI, together with UTI, SBI and Canara Bank,has taken all preparatory measures, with the Government's concurrence, to openby June 1989 an OTC market for small/start-up companies. The OTC market willoperate under the aegis of a new company, to be created jointly by the aboveinstitutions with some assistance and involvement from the SEBI. With thesetwo major innovations, it is expected that the disinvestment by the VCFs canbe accomplished effectively and profitably through IPOs on the stock exchange.

2.28 The tax concession approved in the 1989-90 Budget Law grants to VCCsa 60% deduction on long-term capital gains which represents an improvement in

/ The CCI has the authority to fix the price of IPOs, either at bookvalue (without any premium), or according to formulae permitting amaximum premium of 100% over book value.

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the tax incentive framework for venture cap: al in India. Other VC income(royalties, interest earnings, dividends) would be taxed at the normal ratesof 50-60%, depending on the exact legal status of the VCC/VCF.

2.29 In order to minimize their tax liability, practically all existingand forthcoming VC schemes have chosen the formula of a Trust Fund forchannelling resources to VC. This mechanism provides two advantages. First,Funds do not fall under the Company's Act and the Company Law Board (CLB)regulations, some of which could limit the freedom and flexibility of VCCs'investing and disinvesting activities..I/ Second, Funds mobilizing resourcesfroi- several investors and promoted by financial institutions can berec.gnized by the Ministry of Finance as Mutual Trust Funds, and granted thetotal tax exemption already given to existing investment mutual funds. TheMutual Trust Fund formula provides a satisfactory legal, regulatory and fiscalframework for the initial phase of VC operations in India.

2.30 However, to ensure that VC operations will remain unimpeded bypotentially counterproductive regulations or prior approval requirements,assurances have been provided that the Government will continue to provide anadequate framework for the promotion and efficient operations of VentureCapital, and in particular that VCCs and VCFs will have the freedom to:

(a) invest in equity shares of their clients without approval from anyauthority or regulatory body;

(b) sell their equity shares on the capital market without priorapproval of any authority or regulatory body at prices which theywill determine, based on objective criteria including marketprices and expected future earnings; and

(c) use, in addition to common equity shares, all other financialinstruments ranging between equity and loans, such as conditionalloans or income notes, which they judge to fit the needs of eachinvestment.

J Section 372 of the Company's Act normally precludes intercorporateshare investments above 25% (10% until recently) of the investee'sequity without prior approval of CLB.

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III. INDUSTRIAL TECHNOLOGICAL DEVELOPMENT (ITD) 1/

3.1 Prior to the mid-1980s, India's industrial development had beencharacterized by capital intensive import substitution, leading to steady butrelatively slow growth during most of the preceding twenty five years.Despite the development of a broad and sophisticated technologicalinfrastructure and large expenditure on R&D, empirical studies havedemonstrated / that overall productivity growth of industry through theearly 1980s was marginal. As a consequence, the GOI has made the enhancementof productivity and quality in industry--i.e., technology development--a majorobjective of the broad reorientation of industrial strategy currently underway.

The Nature of Industrial Technology DeveloRment

3.2 Industrial technology development (ITD) comprises activities aimed atthe utilization of specialized technical knowledge for developing or improvingindustrial products and processes. While governments can provide a favorableframework for stimulating technological change, ITD takes place largely withinindustrial firms. Building up ITD capability, and achieving a balance betweenforeign and local sources of technological change, are essential components indeveloping an industrial sector which is efficient, and is able to adjust tochanging markets and resources, and to export. In most less developedcountries (LDCs), ITD is confined to the selection, acquisition and operationof technology and minor improvements in the course of operation. Technologyis largely acquired from abroad, mainly embodied in imported industrialplants, equipment and intermediate goods.

3.3 Leading firms in India and other newly industrialized countries(NICs) add considerable domestic value to imported technology through localdesign and engineering, adjusting input parameters to local factor endowmentand market characteristics. For this, they utilize a mix of in-houseresources and services provided by local engineering firms, R&D organizationsand sometimes higher education centers. Technology is imported moreselectively, mainly as product and process licenses, designs, technicalservices to solve specific problems, as well as quality assurance methods,instrumentation and reference standards. A stock of technological knowledge,expertise and management skills is built up in the firms and specializedinstitutions and gradually disseminated in the economy.

i/ The World Bank Report, India: Policies for Industrial TechnologyDevelopment (No. 6715-IN, May 11, 1987) provides a comprehensiveanalysis of major elements of India's Industrial Technology Policy.

2/ Ahluwalia, I. Industrial Growth in India, Stagnation Since the Mid-Sixties. (New Delhi; Oxford University Press, 1985).B. Goldar, "Import Substitution, Industrial Concentration andProductivity Growth in Indian Manufacturing;" Oxford Bulletin ofEconomics and Statistics, 48(2), 1986.

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Justification and Forms of Government Intervention

3.4 Governments in all industrialized nations, most NICs and some LDCshave adopted policies and incentives to stimulate ITD. This is justifiedmainly on the grounds that social returns from ITD are generally higher thanprivate returns. External benefits associated with ITD include the diffusionof specific knowledge, development of specialized manpower and innovativemanagement skills, and contribution to building up a competitive businessenvironment. At the same time, investments in ITD are considered to beriskier than those for other industrial activities, because of greatertechnical as well as market uncertainties. Even where ITD is not at thefrontier of industrial innovation, considerable risk is associated withdeveloping new products and processes and achieving adequate quality andprices in large scale production. ITD may be unprofitable, therefore, toindividual firms, despite being desirable to society as a whole in the contextof a large and more diversified investment portfolio. Even when entrepreneursare willing to invest in ITD, gaps in the capital market inhibit financingthese activities.

3.5 Government support for ITD comprises a mix of policy, investment, andinstitutional development measures. Industrial, trade, credit, foreigninvestment and taxation policies, although not specifically directed to ITD,strongly influence the firms' demand tor ITD and the relative use of foreignand domestic resources to meet these needs. Policies and progr-ms in theeducation sector, while also normally not directed at ITD, have a major long-term impact on industry's technological capability to define their needs andcontribute to ITD. Explicit ITD policies include fiscal and financialincentives such as grants and low cost credits for ITD investment, publicsector procurement used to promote development of domestic suppliers,regulation of technology import, and protection of intellectual propertyrights. Simultaneously, governments promote ITD by investing in the R&Dcapabilities of public and parastatal industries, developing an infrastructureof industrial standards, R&D and information services to support industry ingeneral, and funding and/or encouraging specialized ITD financing agencies.

Technologv Institutional Framework in India

3.6 Beginning in the early 1940s. but principally since independence, awide array of institutions have l-'en built largely within the public sector tosupport the development and di eision of technology. Their activitiesencompass virtually all those generally found in the industrialized countriesand advanced NICs. They now include a Min,stry of Science and Technology,over one hundred research and development (R&D) institutes, as well asinstitutions responsible for: stat.dards and product certification; patents andother forms of intellectual property; technology diffusion to small-scaleindustry; technical consulting at the state level; and regulating the inflowof foreign technology. These institutions were established largely betweenthe 1940s and 1960s as part of the Government's thrust of industrial andtechnological self-sufficiency. Their establishment and growth was intendedto lead industrial modernization, and also to encourage Indian scientists andengineers to remain in, or return to, the country.

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3.7 With notable exceptions, these institutions have by and large notlived up to their expectations. There are pockets of world-class R&D, a welldeveloped standards institution, and a number of R&D and technical consultinginstitutions which transfer substantial technical knowhow to industry. Thereis also widespread recognition that the resources, human and capital, of thoseinstitutions constitute a large endowment of technological capability.Nevertheless, it is increasingly recognized in India that these institutionshave on the whole not provided the benefits to the economy warranted from theoutlays of funds over the years. The task at hand, therefore, is to mobilize'more effectively that endowment to serve economic objectives.

R&D in India

3.8 What distinguishes India's technology infrastructure from that ofother NICs and LDCs is the extensive network and, consequently, largeexpenditure of predominantly public sector R&D institutions.!/ ResearchInstitutes (RII) exist in virtually every sphere of economic activity --agriculture, space, defense, and in most subsectors of industry. India spends0.9% of its GDP on R&D, a significantly higher percentage than nearly alldeveloping market economies including Brazil and Mexico, and second only toSouth Korea, which reached India's current level only in 1982, but has since1987 exceeded 2% of GDP. (For reference, industrialized countries ge-ne;allyspend 2% to 3% of their GDP's on R&D).

3.9 The vast majority of the R&D expenditures in India are financed bythe central government budget and used in public sector institutes. Thepublic sector accounts for over 85% of R&D expenditures, while industry,public and private, accounts for between 21% and 25% (see Annex 4, Table 1).The actual figure is probably around 30% when contract research is properlyaccounted for. Furthermore, while public and private R&D investments havegrown rapidly in real terms, the Government's has grown even faster (Annex 4,Table 1) with a consequent reduction in the private and overall industrialshare of total R&D spending. This pattern of expenditures reflects theGovernment's push for self-reliance in the postindependence era and thelimited concern by industry to develop technology.

3.10 Industry's concern is changing. Reported industrial R&D expenditureshave increased rapidly, at over 21% p.a. in nominal terms, between 1976/77 and1986/87, partly perhaps in response to fiscal incentives (see paragraph 3.17),while over the same period, the number of firms with recognized R&D units hasrisen from 125 to 950. The growing recognition of the value of in-houseresearch by industrial enterprises is also corroborated by a survey of about200 firms, in which the number of firms performing R&D and the level ofexpenditures increased steadily over the 10-year period 1975-84.Nevertheless, the volume and intensity of R&D efforts among India's industrialfirms remain low, even in technology-intensive sectors. Although organizedin-house research is indeed concentrated in a few subsectors (electrical andelectronic industries, chemicals, pharmaceuticals, and engineering goods,which together accounted for 775 of the recognized R&D units), even in thesesubsectors (with the exception of pharmaceuticals), firms have average R&D

i2/ Some advanced countries, most notably France, have similar networks.

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intensities below 1% of sales (see Annex 4, Table 3), which is much lower thanthat of their counterparts in Korea or Brazil.

3.11 To shift more R&D spending to industry while encouraging the RIs toseek to provids greater economic impact, GOI is attempting to change theorientation of public sector RIs by encouraging industry to shoulder more ofthe financial burden and therefore to help define the activities of the RIs.

Council for Scientific and Industrial Reserach (CSIR)

3.12 The governument approach to changing the previous pattern ofrelatively small projects of basic and applied R&D carried out in relativeisolation from potential users is illustrated by the example of the Council ofScientific and Industrial Research (CSIR), an important beneficiary of theproposed project. CSIR is the largest pool of R&D infrastructure for

| industry, spends 6.5% oF the total resources devoted to R&D and includes manywell-qualified, and some outstanding, scientists and engineers. The CSIR,which now comprises 42 industrial research laboratories (including two whichare jointly run with industry), was founded during World War II with a mandateto carry out applied research to find substitutes for imports from local newmaterials. This emohasis, which fit well1 with the post-independence era goalsof import substitution and self-relianze, is still a major thrust of CSIRresearch.

3.13 While it can boast a number of important accomplishments, the CSIRdisplays many of the characteristics typical of publicly funded researchlaboratories in many countries. The organization and incentive structure ofCSIR institutions have discouraged close collaboration with industry, whichpreviously was not formally represented in their governance. Contractresearch forms only a small part of their work. Projects are typicallyformulated at the initiatives of the researcher, often with insufficientmarket testing and involvement by potential users during the R&D phase. As aresult, industrial firms which are aware of the activities of the CSIRlaboratories and avail themselves to some extent of their personnel, trainingcourses and specialized facilities, have let these institutions go theirseparate way.

3.14 The disparity between the RIs' output and industrial needs becameincreasingly apparent. It was also clear that with industry's expanded demandfor and competence to deal with improved technology, CSIR laboratories mightfind a more responsive chord if they strengthened their formal and informallinks to industry and demonstrated that they had something to offer. Thus,the recommendations of the Fourth Review Committee on the CSIR became officialpolicy in February 1988 when the CSIR Society, chaired by the Prime Minister,decided that by 1992/93 one third of RI revenues would be generated fromsources other than the budget and the percentage should reach 40% by 2000.Further measures adopted to build links between industry and the RIs includeincreased representation of industry on the governing board of CSIR;encouraging more effective technology transfer to industry through buildingengineering design capability and links with engineering design organizations;encouraging the RIs to do their own technology marketing and to establishtheir own marketing cells; and encouraging researchers to consult withindustry by permitting them to augment their incomes substantially. There has

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also been an effort in recent years to strengthen management of theinstitutes, including attracting managers with extensive experience inindustry, both in India and abroad. In a number of the RIs, there is alreadya notable change in outlook, but cultural and institutional reorientation onthe scale envisaged will require large, sustained and creative efforts.

Fiscal and Financial Policies for ITD

3.15 By comparison to nearly all industrialized countries and NICs,India's fiscal and financial incentives for firms to engage in R&D have beenfew and relatively small. Until recently, the fiscal regime permitted firmswith recognized R&D facilities to deduct 100% of capital expenditures(including land) for R&D from taxable ,'ncome in the year incurred. Further,sponsored research in technology institutions was eligible for a weighteddeduction of 133% for tax purposes until 1984. Users of indigenouslygenerated technology received an extra 10% investment allowance. Variousother benefits existed for shorter periods of time. Most of these taxincentives have either been lowered or withdrawn during the last three to fouryears. The only remaining incentive is accelerated depreciation allowance forequipment, whose technology has been developed in "approved" firms with "In-House' R&D.

3.16 In theory, since tax incentives should be automatic, minimizebureaucratic interference, and facilitate business planning when predictablewithin a stable fiscal regime, they should be an efficient route to stimulateR&D by firms. In practice, in many cases fiscal instruments do not achievetheir goal, since they work only to the extent that firms pay taxes and theadministration system is effective and transparent. Moreover, they aresubject to interpretation and administration, susceptible to misuse, andgenerally biased in favor of established, large and diversified firms. Evenwhen they seem to work, their indirect nature makes it difficult to unraveltheir impact and analyze their overall effectiveness. In sum, while India hasused the fiscal system to promote industrial innovation directly, their impacton R&D is probably limited, particularly if fiscal incentives are granted andwithdrawn as rapidly as they have been in the last ter years.

3.17 India's direct financial support for technology development byindustry has also been limited, particularly in comparison to countries suchas South Korea and the US. Financial institutions have been providingfinancing at preferential interest rates for upgrading and modernizingtechnology in the two largest subsectors: textiles and capital goods. Inaddition, the IDBI also provides rupee financing for modernization andtechnological improvement of existing firms through the Technical DevelopmentFund (TDF) (see paragraphs 3.23 to 3.26 below) as well as for variousmachinery subsectors under the recently created Technology Upgradation Scheme.The small "Productivity Fund" in ICICI created under the Bank financedengineering export project finances software imports for technologicalupgrading of Indian firms.

3.18 Two complementary initiatives supported under the proposed projectwould begin to address the inadequacy of financing to firms for ITD. First,the experimentation with and recent promotion of venture capital (Chapter 2)is considered to be an appropriate unsubsidized financial approach for

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stimulating commercialization of innovative products and processes by small,growth-oriented firms. The second is an attempt to stimulate industrial,principally medium- and large-scale firms to use the existing R&Dinfrastructure by financing sponsored R&D and increasing the amount ofresources that firms spend in existing centers.

Technology Import Policies

3.19 The consequence of India's build-up and heavy expenditures fordomestic technology infrastructure has been, until recently, the limitedreliance on foreign technology. GOI deliberately limited direct foreigninvestment (DFI), restricted imports of capital goods, and controlledtechnology licensing, technical assistance and other forms of disembodiedtechnology imports. Attempts to integrate local ard imported technolo6y andambitious programs of indigenous technology development were often hampered byinefficiencies and delays, leading to an approach of importing technology inthe context of large-scale turn-key contracts. These imports were typicallynot based on the latest designs and were not accompanied by adequateprovisions for assimilating the technology by the importing firm. Theyultimately led to undue dependence on foreign sources of technology, which,after becoming obsolescent, led to a repetition of the cycle. The policy andinstitutioaial changes :required to break this cycle and promote effectivetransfer and absorption of industrial technology in India are now slowlyemerging in the context of general liberalization of industrial policies.

3.20 Cumbersome procedures were established to regulate the import of"disembodied technology," i.e., licenses, royalties and technical services,despite India's reliance on licensing as the major conduit of foreigntechnology. As a result, payments for disembodied technology as a percent ofGNP in 1979 was .08 compared with .40 for Brazil, .20 for South Korea, and .30for Mexico. The set of relatively restrictive regulations found in India,combined with a limited market, lacking dynamism and strong competitiveforces, have not stimulated firms to update their technologies, modernize andinnovate. Although some restrictions on technology imports may have fosteredthe development of certain local technological capabilities, they have moreoften curbed their effective use.

Recent Developments

3.21 Although there have been no fundamental changes in either foreigqinvestment laws and/or the regulations governing foreign collaborations andimports of capital goods, there has been a gradual but significantstreamlining and speeding up of the bureaucratic process. Time taken fordecisions on foreign investments and collaborations as well as on imports hasbeen cut significantly. The Import-Export Policies of 1985-88 and 1988-1990increased by over 30% the number of machinery items on OGL (Open GeneralLicense for imports). An interministerial committee is meeting regularly withrepresentatives of foreign countries to iron out problems arising in foreigninvestment and collaborations.

3.22 Those and similar efforts have increased the inflow of foreigncapital investments significantly in the early 1980s, and--after reaching aplateau in the mid-1980s--are showing new signs of rapid growth (see Annex 5,

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Tables 1 and 2). Average annual direct foreign investment (DFI) approvalsrose from an average of about Rs 60 million in the late 1970s to over Rs 1billion p.a. in 1984/86; in dollar terms this represented a twelvefoldincrease. In 1988/89, DFI approvals reached Rs 2.32 billion for the year,double that of each the previous 4 years. Similarly, the number of foreigncollaboi.itions (including those without DFI) experienced a quantum jump in1980/82 from an average in the late 1970s of 275 to over 500 per year, andreached around 950 per year in 1985 to 1988.

Technical Development Fund

3.23 With the recent expansion in the scope of the Technical DevelopmentFund (TDF), the Government has taken a significant step in improving thetechnology import regime. The TDF was set up in 1976 with the support of aBank loan to provide funding and rapid approval of imports for technologymodernization. The TDF is no longer a fund, but rather an automatic foreignexchange allocation for foreign technology acquisition under a specialprocedure. The procedure is administered by a Ministry of Industry-ledcommittee and provides all necessary approvals/licenses for firms requestingtechnology from aLroad. Firms with TDF-approved imports can also obtain rupeefinancing from IDBI (see para. 3.17). Until recently, firms could make use ofthe TDF under severely restricted circumstances, with the result that during1986 and 1987 TDF technology imports amounted to only about US$40-50 millionannually, roughly equally divided between technical know-how and capitalgoods. There were many constraints on the TDF facility use--the permittedquantities of imports by each industrial unit were low and rigidly applied;the scheme was available only for technological upgrading by firms, withcapacity expansion permitted only up to 10%; and it was not available for newproducts, for certain types of capital equipment, more than once per year,etc.--which made it impracticable for most forms of technologicalmodernization based on imports.

3.24 These major limitations have now been removed. With the issuance ofnew guidelines in April 1988, a quiet but important opening to foreigntechnology was approved--the TDF is open to most forms of technology importand can become a major window for small and medium sized technology importswhich do not involve DFI. Implicit in the liberalization of the TDF is GOI'sdesire to concentrate its reviews on major, high-cost technology collaborationincluding foreign investment, permitting relatively easy access of existingfirms to most of their foreign techrological needs. This is a major stepwhich is in line with recommendaticns made in the Bank's sector work andpolicy discussions. A further liberalization of the TDF incorporated inrevised guidelines of March 1989 opens the door even wider, raising theceiling per industrial unit further, removing capacity constraints and certainindustrial licensing requirements. Based on the growth in demand in thelatter part of 1988 (Table 1, Annex 7) and very conservative projections forfuture years, it is expected that imports under the scheme will rise rapidlyfrom US$45 million in 1987/88 to US$150 million by 1991/92, and for the 21/2-year period, from September 1989 to harch 1992, would exceed US$300million, compared to less than US$150 million projected if there had been norevisions.

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3.25 The TDF removes most impediments to the import of technology. Itdoes not discriminate by kind of firm. It promotes technological competitionamong firms, since it permits explicitly for the first time imports oftechnologies already available in India for quality, reliability or pricereasons. Processing is rapid and there are no limits on the number ofapplications made by each firm. It provides for rapid approval forcontracting a technical specialist from abroad, importing a part of atechnical package, or entering into a low cost licensing agreement even fornew products. Plant expansion is also no longer constrained and there is no"restricted" list of capital goods. The TDF can be used by firms provided thecost for all technology imports under the scheme by an industrial unit is nogreater than Rs 30 million (about US$2 million) p.a. and 50% higher forexporters--even those limits are applied flexibly.

3.26 Annex 6 contains the full text of the two guidelines. These twomajor reforms of the TDF are the basis for the TDF component of the projectand consequently confirmation has been obtained that any revisions of theguidelines and procedures of the TDF which limit access of industrial firms tothe TDF would be subject to Banl approval.

The Bank's Role in Industry and ITD

3.27 The Bank has made 19 development finance loans amounting toUS$1.4 billion through financial intermediaries (mainly ICICI and IDBI), foron-lending to private and joint sector firms engaged in all aspects ofindustry. Three were channelled through IDBI to SFCs and SIDCs for relending.Two (Loans 2629/30-IN and 3058/59-IN) have been specifically for exportdevelopment, while the most recent development finance loan (Loan 2928-IN)also involves US$50 million to the major government steel company. SAIL, fortechnical assistance to upgrade technology and improve efficiency. The Bank'sexperience with IDBI and ICICI in implementing past projects has beendiscussed in recent Project Completion Reports (PCRs). T.he most recent PCRfor the Fourteenth Industrial Credit and Investment Project (Loan 2051-IN)indicated that while the 14 loans were successful in supporting ICICI'sinstitutional development, they did not seriously address the policyenvironment within which its lending took place. As highlighted inpara. 3.30, recent and future projects, and in particular the proposedproject, integrate institutional development with support for industrial andfinancial policy reforms in the subsector or generic area (e.g., technology,exports) of the respective projects.

3.28 The Bank Group has also provided US$3.2 billion for projects in thefertilizer, cement and petrochemicals subsectors where opportunities existedfor the Bank to support policy reforms at the subsector level and financeeconomic investments using modern technology. Implementation of theseprojects has been generally satisfactory. All projects currently underimplementation are expected to have satisfactory rates of economic return and,despite some initial delays, to be fully disbursed by the respective closingdates.

3.29 The Bank has had an active industrial sector work program andprepared a number of sector reports on such subjects as industrial regulation,technology policy, export promotion, public enterprise management and credit

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and capital markets and a number of subsector reports including electronics,automotive products, steel, capital goods and fertilizer. Most of thesereports emphasize the need for policies and incentives which promoteaodernization and technological upgrading of industry. Many of the issues inthese reports will continue to be discussed with the Government in the contextof future operations.

3.30 The ongoing and future lending program for industry is primarilybased on the sector work program and will thus include:

(a) industrial finance projects which will serve as a focal point forevaluating and discussing with Government overall progress onindustrial and financial policy reform, as well as addressing issuesin the financial institutions;

(b) technology, export, industrial energy conservation and industrialpollution projects which will seek to improve the policy, financialand institutional support for activities in these key areas; and

(c) subsector projects which will provide policy, technical and financialsupport for economic investments in areas where improved technologyand efficiency will have implications for the growth of the wholeindustrial sector (e.g., petrochemicals, electronics, cement andcapital goods).

In all of these areas, the lending strategy invol res supporting investments inareas where policy improvements have already ber indertaken.

3.31 With respect to ITD, the Bank strategy is built on governmentinitiatives to promote more efficient use of the country's technologicalcapability. Bank efforts are aimed at helping to consolidate and expand theinstitutional and regulatory reforms related to ITD and thereby encourage amore balanced recourse of industry to foreign technology on the one hand anddomestic efforts on the other. Discussions relating to the Sector Report,"India: Policies for Industrial Technology Development," (No. 6715-IN,May 11, 1987) and the preparation work related to the proposed project havealready helped define and expand the institutional and policy reforms neededfor sustained ITD. However, the institutional reforms as well as regulatorychanges needed for India to increase the effectiveness of its technologysystem require consistent and long-term commitment.

3.32 The proposed project will complement other contemporary projectswhich deal with related issues. The Electronics Industry Development Project(Loan No. 3903/4/5-IN) aims to support the modernization and expansion of asubsector critical for the technology upgradation of the industrial sector atlarge. The Export Development Project (Loan No. 3058/59), approved by theBoard on May 12, 1989, includes financing of technical assistance intechnology-intensive areas with promising export potential (e.g., software).The recently approved Vocational Training Project (Credit NO. 2002 and LoanNo. 3045) as well as two technical education projects currently being prepareds-upport the training of the technical manpower required by Indian industry.

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IV. THE PROJECT. LOAN AND CREDIT

O')lectives and Scope

4.1 The overall objective of the project is to facilitate the acquisitionand development of technology by industrial firms in India. The project aimsat promoting within industry a balanced recourse between existing domestictechnological capability and increased and easier import of foreign technology.The project also aims to reduce the financial constraint to new technologyventures and the foreign exchange constraint to technology import.Specifically, the project would (a) help small, innovative firms obtaininvestment resources by building the regulatory and institutional framework forventure capital in India; (b) provide industry with increased access todomestic technclogical capacity by strengthening the capability of selectedresearch and standards institutions to support technological development inindustry and promoting directly collaboration between industry and technologyservice institutions; and (c) provide industry with easier and greater accessto foreign technology through support to the TDF.

4.2 The project has three components:

(a) Support to four venture capital entities for financingtechnologically innovative and growth oriented small enterprises.

(b) Assistance for technology service institutions (TIs), principallyresearch and standards institutes, to serve industrial needs and forindustry to utilize the existing TIs for R&D.

(c) Support for expansion of and easier access to the TDF.

The three components are an integrated program that helps build improvedaccess of Indian entrepreneurs and firms to technological know-how, domesticas well as foreign, and capital which they require in India's increasinglycompetitive environment.

Detailed Proiect Description

A. Technology Venture Financing

4.3 US$45 million of the loan would be relent by the Government to fourfinancial institutions to finance part of their equity investments in theventure capital funds (VCFs) established by them or their subsidiaries. EachVCF would consist of investments made by the respective financialinstitutions, as well as when feasible, funds raised from the public andinstitutional, including foreign, investors.

4.4 Each VCF will be managed either by ani affiliate or by a specializedunit of the participating institution (the "parent" institution) as detailedin Chapter 5. Assurances have been provided that for each participatinginstitution, staff allocated to venture capital operations would be selected

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on the basis of their experience with previous technology projects and equityinvestments, as well as their business orientation. Appropriate on-the-jobtraining in VCCs abroad would be provided to selected staff under acomprehensive TA program (para. 4.9). The managing institution, i.e., theVCM, would earn management fees between 1% and 2.5% of the VCF or theinvestment portfolio as well as a share of the profits paid out from the VCFs'earnings. Each VCM has opted for a slightly different fee structure givingvaried weight to profit-sharing and fixed management fees. All of them areacceptable.

4.5 The initial allocation of the component between the four financialinstitutions would be:

- US$20 million to ICICI, an all-India DFI;

- US$5.25 million to Canara Bank, a commercial bank;

- US$3 million to APIDC, the Andhra Pradesh SIDC; and

- US$5.25 million to GIIC, the Gujarat SIDC.

An additional unallocated amount of US$11.5 million would be available to bedrawn upon on a "first come, first ser-sed" basis by each of these institutionsafter it has exhausted its initial allocation. The allocation as well as thecorresponding size of the respective VCFs were calculated on the basis ofconservative projections of likely demand as well as the absorptive capacitiesof the respective institutions. Based on the current pipelines of each entity,the demand appears likely to exceed greatly the initial availability ifresources. Bank-financed subloans would finance one third of the VCFs' totalamount. This share of one third would be in line with the share of expecteddebt and quasi-debt instruments in the VCFs' portfolio (See Table 4.1).

4.6 The VCFs would be invested primarily in equity and quasi-equityinstruments such as CCPSs, convertible conditional loans, income notes andother convertible debentures.j,' A minor part of the VCF could be used toextend normally convertible medium-and long-term loans; such loans would not bemade in isolation of equity and quasi-equity investments to a client company

1/ (a) CCPS: Cumulative Convertible Preference Shares (see para. 2.14).

(b) (Convertible) conditional loan: an advance repayable fromroyalties on sales if the project is successful, and written offif not.

(c) Income note (or bond): a debenture with a repayable principal andwith interest payments above a floor level linked to the project'ssales or cash flow.

(d) Convertible: any instrument which can be converted into commonequity at, beginning or by some agreed future date, normally atthe option of the holder of the instrument.

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and would not substitute for traditional lending activities of the VCFs' parentcompanies. A mix of financial instruments provides the VCMs with theflexibility to tailor their financing to the circumstances of each investment.In many new ventures, for example, percentage financing requirements are large,and thus, to avoid holding majority ownership in such ventures, while sharingin profits and risk requires alternatives to simple equity, which can includefuture convertibility options, a fixed interest or dividend stream, and/orincreased guarantees for recouping the initial investment. The mix ofinvestment instruments projected by each of the participating institutionswould be as follows:

Table 4.1: PROJECTED MIX OF INVESTMENT INSTRUMENTS BY THE VCFs

(%)

Investment Instrument APIDC GIIC Canfin TDICI Total

Equity 75 50 60 27 40Conditional loans - 10 15 51 34Income notes - 20 12 - 5Standard loans 25 20 13 22 21

Total 100 100 100 100 100

4.7 The basic parameters used in the financial projections prepared by theVCFs' parent companies are more conservative than those experienced by VCCs inindustrialized countries, reflecting the expected relative infrequency of buy-outs of investee companies, slower anticipated market response to successfulcompanies and produc,s, and remaining constraints on earnings in India's stockexchanges. In broad terms, 40% of equity investments and conditional loans areassumed to be entirely written off, resulting from failure of the investees.One fifth of the equity investments are expected to be highly successful andgenerate at disinvestment (7 years after investment) a capital gain of 5 to 8times the par value, and dividends of 12-17% p.a. in years 5 to 7. Theseparameters for capital gains reflect conservatively the past experience ofsuccessful new companies in India. The other 40% of equity investments wouldonly generate a capital gain of 2 times the par value at disinvestment.Complementary debt instruments (standard loans and income notes) are expectedto carry lower risks.

4.8 Projected returns on the various instruments reflect the fact that theriskier instruments yield the higher returns. The overall returns on total VCFfunds, after accounting for the operating expenditures of the managing units,are in the 15-18% p.a. range, which is in line with the returns earned in Indiaon other financial investments. The parameters used along with projectedincome and cash flow statements for each VCF are presented in the respectiveAnnexes 9-12.

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4.9 Technical Assistance. To assist the four VCMs in learning how venturecapital operations are handled successfully in other countries, an amount of upto US$500,000, which is expected to be provided from the proceeds of a grantfrom the Government of Japan (para. 4.24), would finance the foreign exchangecosts (travel, subsistence, fees) of a training or internship program andrelated technical assistance for the staff selected or designated by the VCFs'parent companies to manage VCF operations. The program would comprise on-the-job training or internship in selected US, European or Asian VCCs of two tothree professionals for up to 1.5 man-years from each VCM. Arrangements,including terms of reference of interns and any further training as well asfees, would be subject to Bank approval. In order to minimize the disruptionof its operations, each VCM would send abroad one staff at a time. The detailswould need to be worked out and negotiated with individual VCCs aboard. Theprogram is estimated to total the equivalent of some 50 man-months, at anaverage cost of up to US$10,000 per man-month.

B. Technologv Support Services

4.10 Of the US$55 million IDA credit, US$40 million would finance 12-15technology service institutions (TIs) and the remaining US$15 million wouldsupport a Sponsored R&D Promotion Fund for financing R&D projects contracted byindustrial firms with TIs. US$2 million of the grant from the Government ofJapan is expected to finance technical assistance, training and studies forCSIR, ICICI and BIS for institutional development. The entire component wouldbe managed by a technology group (TG) in ICICI.

4.11 Technology Institutions. Of 15 TIs submitting proposals, six wereselected and appraised. The six are the Bureau of Indian Standards (BIS); fourresearch institutes (RIs) affiliated with the CSIR (see paras. 3.12-3.15), andone private, contract-research RI; they are described in paragraphs 5.18-5.23and Annex 13. With the exception of BIS which is India's preeminent standardsand testing institute, the remaining institutes' main function is research,though each carries out other activities including testing, consulting andtroubleshooting for industry. Project funds earmarked for the aboveinstitutions amount to about 60% of the subcomponent and are based on detailedcost estimates including physical and price contingencies.

4.12 Subloans made to the TIs by ICICI would finance: (i) equipment forpilot plants, laboratory and testing facilities; (ii) common R&D facilitiesjointly owned and managed with industry; (iii) technology collaboration fees;(iv) training and exchange programs with industry and foreign collaborators;(v) upgrading of management systems, safety and marketing capabilities; and(vi) other R&D expenditures such as special samples, materials and consultantfees. The technology development programs to be financed under the projectwould stand alone as viable investments. They must, however, also fit into anoverall institutional plan for the corresponding TI which demonstrates clearinstitutional focus on activities which contribute to and are supported by itsindustrial clientele. Based on the plan, measurable indicators such as revenuegeneration, cost recovery ratio, productivity and number of licenses sold willbe monitored during project implementation.

4.13 The remaining 40% (approximately US$16 million) will be available foradditional qualifying TIs. These TIs would have to follow similar procedures

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and satisfy the selection guidelines (paragraph 5.18) as the first six,submitting an institutional plan with a technology development program thatwould justify project financing. Instead of the Bank carrying out appraisalwith ICICI support, the TG in ICICI would appraise the institutional plans andtechnology programs and submit them to a newly created technology board (TB)for approval (para. 5.14). It is expected that the loan proceeds would financesimilar goods and services as for the first six TIs. While the component isopen to TIs generally, it is expected that most of the institutions will be RIsin the CSIR network, sinca their policy framework is broadly already in place,their resource growth has been constrained and their various governing bodieshave been restructured (see paragraph 3.14).

4.14 For the first time, the TIs would receive loans rather than grants.This is intended to support Government efforts to promote greater financialdiscipline within the TIs. In addition, cost accounting systems would be setup by the end of 1990 for the first six TIs and one year after firstdisbursement for TIs selected subsequently. Minimum performance parameters-related to external revenue generation and productivity, inter alia, would beclosely monitored for each institute during project execution. Performanceparameters have been established for the first six TIs. The parameters for thefour CSIR TIs are included in Annex 13.

4.15 SDonsored R&D Promotion Fund. The project would also stimulateindustrial demand for using the technology service institutions for R&D with aFund to be managed by ICICI. This pilot program involving US$15 million and anequivalent amount of funds from the participating firms would support projectscarried out jointly by the firms and TIs or contracted entirely to the TIs.Selected subprojects would be for R&D of products or processes and would haveclearly identifiable and feasible goals. Project resources would be passed onto participating enterprises as conditional loans, with an initial nominalinterest and eventually repaid with market interest rates and/or royalties ifsuccessful, and written off if the firm can demonstrate to the satisfaction ofICICI that it was not successful.

4.16 TIs, including public and private (noncaptive) research institutes,universities and other similar institutions with the capacity of achieving theresults would be eligible partners of, and selected by, the firms. Industrialfirms can receive conditional loans for up to 50% of the project costs of eachproject and for all projects up to US$500,000. In order to achieve theobjectives of the component, namely, to stimulate increased sponsored researchand collaboration between TIs and industry, the firm's sponsored R&D projectshould represent incremental expenditures in or with TIs. Specifically, thefirm should increase, by at least the amount of the subloan, its overall levelof contract research with/in TIs generally beyond the average annual amountthat the firm spent for contract research in the previous two years. The aboveprovisions are all incorporated into Operating Guidelines for sponsored R&D(Annex 14), which are acceptable to the Bank and have been formally approved byICICI.

4.17 During preparation, ICICI carried out a firm-level survey anddetermined that the demand exists for financing of sponsored research. Thestructure, terms and conditions set out above represent the best judgement of

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ICICI and the Bank as to the parameters of this component. However, carefulmonitoring during project implementation will be necessary.

4.18 Each subproject will be closely monitored. For most projects, ICICIintends to identify at the appraisal stage a technical advisor who will serveas a resource person for a particular subproject. In addition, adequate reviewprocedures including joint review meetings with industrial sponsors and TIswould be adopted for monitoring subprojects. With these provisions as well asthe determination of ICICI to define narrowly achievable results in subloanagreements for each R&D subproject, a success ratio of greater than 80% isexpected.

4.19 Technical Assistance. A number of TI subprojects include relatedtechnical assistance. In addition, grant support is expected to be provided bythe Government of Japan for studies and technical assistance which havepotentially broad institutional and policy impact. US$2 million would financetechnical assistance for institutional development of CSIR, ICICI and BIS andsupport for a series of studies on the contribution to ITD of various policiesand institutions. For CSIR, the project would support (a) improvement of thelaboratory safety system for the CSIR network; (b) technical assistance toimprove CSIR capacity to examine client R&D needs and market its activities;and (c) upgrading the National Chemical Laboratory's management information andplanning system to serve as a model for other RIs. ICICI would receiveexposure to, and technical assistance from, comparable programs overseas.Technical assistance for BIS would be primarily for helping exporters relatedr'mestic standards to international ones. The studies on ITD will analyze keyareas and policies of ITD in an attempt to identify their contributions toindustrial growth and ways of bolstering their usefulness. Terms of reference,procedures and contractual conditions for all studies and technical assistancewould be satisfactory to the Bank and would be incorporated in an agreementgoverning the use of the funds from the Government of Japan. The content andestimated costs of the various components of technical assistance are given inAnnex 8.

C. Technical Development Fund

4.20 This component would support increased and more rapid import ofvarious forms of technology with US$100 million equivalent of loan proceeds.This would help support a doubling in the size of the fund from its presentlevel of $150 million. Support would be provided solely for imports requiredfor technology upgrading which are approved under the TDF scheme, a "fast-track" system whereby all Government clearances are carried out quickly on aone stop basis. The component would cover the equivalent of 33% of estimatedtotal TDF requirements during the September 1989-March 1992 period. About onehalf of the imports are expected in the form of "disembodied" technology--designs, drawings, know-how, licences and technical assistance--and the otherhalf "embodied" technology, i.e., capital goods for upgrading andmodernization.

4.21 The technology must be for upgrading or product diversificationinvolving the introduction of new and more sophisticated products. Technologyimports of all firms, whether MRTP, FERA or small-scale industry, would beeligible for project financing, provided of course that the technology

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originated from an eligible countr;. The great majority of the firms areexpected, however, following past experience to be medium or large-scale.After negotiating with the foreign supplier, the firm would submit anapplication with pertinent materials to the MOI which chairs the committeereviewing TDF applications. (The composition of the TDF Committee along withthe organization of the MOI are presented in Annex 7.) Since representativesof the relevant agencies sit on the committee, once approval is given, theimport, technology license or technical assistance is approved in all respects,as is the foreign exchange allocation. The review is meant to guard againstspurious imports and inflated prices and to verify that the purpose istechnology modernization and diversification. The entrepreneurs' commercialbank can then issue a letter of credit or authorize payment and notify RBIaccordingly.

4.22 The above procedures are judged to be satisfactory and would befollowed under the loan.

Proiect Costs and Financing

4.23 Summary project costs are presented in Table 4.2.

TABLE 4.2: PROJECT COSTS

Comoonent Local Foreign Total Local Foreign Total

- (Rs ilion) ------- ------ (US$ Million)------

Technology Venture Financing 1,050 1,500 2,550 70 100 170

Technology Support Services 735 615 1,350 49 41 90

(i) Technology Institutions/ 405 495 825 27 33 60

Studies

(ii) R&D Promotion Fund 330 120 450 22 8 30

Technical Development Fund - 2,250 2,250 - 150 150

Total Estimated Costs 1.785 4.365 6i150 119 291 410

The financial requirements for technology venture financing and supportservices presented in Table 4.2 are based on estimates of demand combined withthe appraisal mission's judgments about the absorptive capacity of theinstitutions concerned. In all cases, the number of subprojects andinstitutions to be financed would be adjusted to reflect the funds available.Consequently, physical and price contingencies have not been calculated. TheTDF component estimate is based on a conservative estimate of the projectedincreased demand for such imports under the TDF.

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4.24 The financing plan for the project is presented in Table 4.3 bycomponent. For the technology venture financing, it is estimated that theindustrial venture promoters will finance about 20% of the investments onaverage. The US$90 million raised by the VCFs is expected to come in largepart from the parent financial institutions, but also from private sectorinvestors as well as from international institutions such as the IFC, the AsianDevelopment Bank and the Commonwealth Development Corporation. The US$2.5million of cofinancing for the technical assistance elements of the first twocomponents is expected to be approved in the form of a grant by the Governmentof Japan. GOI will finance the balance of incremental foreign exchange,estimated at $50 million, for the TDF component. Industry would finance onehalf of the sponsored R&D Promotion Fund, while the participating TIs wouldfinance the balance of their respective investments in the TI component frominternally generated and budgetary resources.

Table 4.3: FINANCING PLAN

(USS million)

Co-

Bank IDA financing la GOI DFIs lb Industry TIs Total

Technology venture 45 0.5 90 34.5 170

financing

Technology support 55 2 15 18 90

services

Technical development 100 50 150

fund

Total financing 145 55 2.5 50 90 49.5 18 410

/a Expected to be a grant from the Government of Japan.

lb Includes resources raised from corporations, individuals and other fund investors.

The Loan and Credit

4.25 The Bank loan of US$145 million would be made to GOI at the Bank'sstandard variable interest rate. Repayments of the US$10C million for the TDFwould be made over 20 years with 5 years of grace. The US$45 million forventure financing would have a repayment period of 16 years with 7 years ofgrace. The modified repayment schedule for this component reflects theearnings profile of the VCFs which are expected to begin to earn substantialreturns only from around the seventh year (para. 4.6). The US$55 millioncredit for technology support services would be made to the GOI on standard IDAterms. IDA funds are being provided for this component because it wouldfinance investment in basic human and science and technology infrastructure.

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4.26 The legal arrangements would involve loan and credit agreementsbetween the Bank and GOI. Project agreements would be signed with ICICI (withTDICI) and IDBI. The ICICI project agreement includes the various provisionsrelated to the technology services component as well as VC while the IDBIagreement covers the VC arrangements for the three other institutions. Inaddition, to define tIe basis upon which funds would be relent for VC, asubsidiary loan agreement would be entered into between GOI and IDBI; asubsidiary Loan Agreement would be entered into by GOI with ICICI to providethe basis for relending of VC as well as for managing on behalf of Governmentthe technology services component. IDBI's role is to channel and advance fundsas necessary to state-level institutions, APIDC and GIIC, with whom it isclosely tied and would sign financial agreements, and to channel Bank resourcesto Canara Bank. The signing of the subsidiary and financial agreements and afinancial agreement with Canara Bank would be conditions of effectiveness,while the signing by IDBI of financial agreements with APIDC and GIIC would beconditions of their respective disbursements.

Relending Terms and Conditions

4.27 The US$45 million for venture capital would be relent in rupees by GOIto the 4 parent institutions (see para. 4.5) at 12% p.a. interest withrepayment over 16 years including a grace period of 7 years. This rate is inline with the cost of alternative sources of rupee funds to the financialinstitutions. The Government would bear the foreign exchange and interest raterisks as it would be unreasonable to burden the parent companies withadditional variability given the risks already associated with the VCinvestments. Interest during the grace period on the subsidiary loans would becapitalized since the income from dividends, interest and royalties can beexpected to be low in the initial years and inadequate to cover interestpayments to the Government. The terms and conditions under which the fundswould be invested in ventures are detailed in para. 4.6.

4.28 GOI would establish a revolving fund for the US$55 million equivalentIDA credit for technology services and would transfer the funds in rupees toICICI, which would manage them on behalf of the Government. ICICI would lendto TIs about US$40 million equivalent interest-free, but with a 1% servicecharge and a commitment fee of 0.25% p.a. to be repaid over 15 years including4 years of grace. The interest and commitment charges would be ICICI'smanagement fee. The Government would also bear the foreign exchange risk. Formost of the TIs this would be the first time that they will be receiving a loanrather than a grant, which is intended to support government policy to instillfinancial discipline in the TIs. Market rates of interest would beunrealistically ambitious at this stage in the development of the TIs. The TIsare, in any case, basic human and science or technology infrastructure, inwhich softer lending terms are justified.

4.29 For sponsored R&D projects, ICICI would lend, on behalf of theGovernment, the remaining US$15 million of the proceeds of the IDA credit tofirms for a maximum of twelve years with a grace period corresponding to theR&D subproject period. The interest rate would be 6% p.a. during the graceperiod. From the date of expected subproject completion (i.e., the graceperiod), the firm would be required to pay 14% p.a. and/or royalty payments;however, if the firm demonstrates to the satisfaction of ICICI that the project

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is unsuccessful then the subloan may be written off. ICICI would receive as amanagement fee 158 of royalty charges and 2% p.a. of the outstanding loanamount from the interest payments. These conditions are intended to providesome assurance and incentive to the firms that sponsoring R&D by or with TIscan be successful. The vast majority of the subloan resources would be usedfor TI-related expenditures.

4.30 Table 4.4 below presents the terms and conditions under which fundsare passed on to each recipient for the techn.ology venture financing andservices components. The last column also presents the fee structure ofmanaging institutions for the two components. Relending arrangements are notapplicable for the TDF, since it is a foreign exchange facility, nor for theUS$2.5 million of technical assistance (paras. 4.9 and 4.19), which is passedon as a grant.

Table 4.4 LENDING AND ON-LENDING TERMS AND CONDITIONS

Bank Government to FIs VCFto Financial to to VCM manage-

Component Government institutions VCF Venture ment fees(FI) (paid

from VCF)

I

Venture Standard Bank 12% in ru- Invest- Equity, Generallyfinancing interest, 16 pees, 16 ment quasi-equity, 1-2% ef

years, 7 years, 7 quasi-debt, VCF plus ayears grace years grace loans, (terms share in VCF

interest and condi- profitscapitalized tions accord-

ing to marketand needs)

II

Technology IDA Benefici ICICI Manage-services to aries (paid ment fees

Government to revolv- (paid by bene-ing fund) ficiaries)

Technology Standard IDA 1% p.a., Entireinstitutes service fee Commitment

0.25% p.a. and servicecommitment fee.charge,15 yrs, 4 yrsgrace

Sponsored Standard IDA 6% p.a. during 2% fromR&D Fund grace period, interest

an/ p.a. payments andand/or 15% of roy-royalties alties.thereafterMaximum re-payment 12 yrs.If demon-stratedunsuccess-ful, loanwill bewritten off.

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4.31 Since venture capital financing and technology lending is new toIndia, the Bank would review and approve initially nearly 30 investments andsubloans. For VC investments, prior approval by the Bank would be requiredfor the first five investments by each VCM as well as for those ventures whosetotal financing exceeds $900,000 for APIDC, $1 million for GIIC and Canfin and$1.5 millton for TDICI. In all, the Bank would approve about 12% of the totalnumber of subprojects representing approximately 20% of the amount invested.In addition, during supervision missions, Bank staff would review and commenton additional projects before they are approved. For sponsored R&D, the firstfive subloans would require prior Bank approval as would the first two TIs tobe appraised by ICICI and all subloans exceeding US$4 million equivalent.Remaining investments and subloans would be approved by the respectiveinstitutions according to procedures already agreed.

Procurement

4.32 Under the technology venture financing component, it is expected thatthe average investment (including subloan) would be relatively small (aboutUS$ 400,000 equivalent) and would finance specialized hardware and softwareitems available from a limited number of suppliers (at times only one) inaddition to working capital and other needs of new technology orientedventures. Since each of the approved operating guidelines of the VCFs limitsinvestment in any one firm to 10% of the VCF, procurement packages beyond$1.6 million for three of the funds and $4 million for the fourth would not bepossible. Furthermore, since the VCMs will be "hands on" investors andsupervising each investment closely in the companies utilizing the loanproceeds, they can be expected to ensure that cost-minimizing procedures areadopted for procurement of goods and services. Commercial practices,therefore, are acceptable for this component.

4.33 For the TI portion of the technology financing component, since mostof the equipment would be highly technical with known and a limited number ofsuppliers, limited international bidding (LIB) procedures according to BankProcurement Guidelines would be used for equipment packages exceedingUS$200,000 equivalent estimated to total about US$10 million equivalent.ICICI and the Bank would agree on standard procurement documents andprocedures for LIB. The first 5 packages and any exceeding US$500,000equivalent would be subject to prior review by the Bank. ICICI would reviewall LIB packages on behalf of the Bank. For items below US$200,000 and forthe sponsored R&D subcomponent, procurement would be done according to theICICI's internal procedures which have been used in a number of previous Bankprojects and are acceptable to the Bank. ICICI requires all of its borrowersto solicit three competitive and responsive quotations for all procurement.

4.34 For the TDF, more than half of the imports including all of the"software"--technology licences, designs, etc.--and some of the capital goodsare expected to be proprietary and unique. The remaining capital goods areexpected to be highly specialized with limited sources and it can be expectedthat the purchasing companies will have determined the optimum technology forthem, based on consideration of price, quality, size, reliability, maintenanceand follow-up assistance by the provider. The average import is not expectedto exceed US$500,000, while the existing maximum for one industrial unit for

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all imports in any year is US$3 million equivalent. Future imports under thescheme are expected to follow a similar pattern. Historically, technologypurchases under the TDF have come from many Bank member countries and thepractices of Indian technology importers have tended to be highly priceconscious. Consequently, commercial procedures would be acceptable under thiscomponent.

4.35 Employment of consultants by the managers of VCFs, TIs, CSIR andICICI would all be in accordance with the Bank's "Guidelines for the Use ofConsultants by World Bank Borrowers and by the World Bank as ExecutingAgency." Appointment of all consultants and their terms of reference would besubject to the prior approval of the Bank.

Disbursement

4.36 Under the technology venture financing component, the Bank loan wouldbe disbursed for 100* of the investments made by the VCFs up to one third oftotal investments in each phase of implementation. The VCFs would be financedin three phases, with the Bank financing one third in each phase against VCFinvestment commitments. For the TI subcomponent and the sponsored R&D Fund,the IDA credit would be disbursed for 100% of subloan amounts. For the TDFcomponent, the Bank loan would be disbursed for 33% of actual foreign exchangepayments for all eligible technology imports under TDF scheme. For thetechnical assistance and studies, 100% of costs are expected to be financed bythe Government of Japan.

4.37 There is no precedent upon which to base the expected disbursementprofile because of the innovative character of the project. Based onconservative projections taking into account the profile of projects carriedout by some of the institutions involved, it is expected that all of the fundswould be committed in three years and disbursed in six years. A projecteddisbursement schedule is included in the Loan, Credit and Project Summary.The closing date would be December 31, 1995.

4.38 A special account (SA) for the project would be established in USdollars by GOI in RBI for US$20 million equivalent which corresponds to fourmonths estimated disbursements of the project. Assurances have been providedby the Government that funds would be transferred promptly from the SA toproject recipients upon GOI receipt of appropriate documentation and requestsfrom beneficiary institutions. In addition, replenishments of the SA would berequested quarterly or whenever the SA reaches 50% of the initial deposit.

4.39 Disbursements on the TI subcomponent for subloans valued more thanUS$4 million equivalent and on TDF imports exceeding US$500,000 would be madeagainst full documentation. Disbursements on the VC component for investmentsby (a) ICICI valued more than US$1.5 million equivalent; (b) CanBank and GIICvalued more than US$1 million equivalent; and (c) APIDC valued more than $0.9million equivalent would also be made on the basis of full documentation.Disbursements under the sponsored R&D Promotion Fund along with remaining TDF,VC and TI expenditures would be made on the basis of statements of expenditure(SOEs). Since supporting documentation for TDF imports are not currentlycentralized, assurances were obtained that, by March 31, 1990 GOI willestablish a mechanism for centralizing documentation to ensure prompt flow of

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such documentation and consequently, disbursements from the Bank. For theremaining components, documentation would be maintained and withdrawalapplications prepared by the respective managing institutions, ICICI and thefour VCMs. Supporting documentation for SOEs would be subject to review byBank supervision missions and to in annual audit by auditors acceptable to theBank, such audit to be submitced within four months after the close of eachfinancial year.

ReDorting and Audits

4.40 Progress reports would be submitted semiannually for each component.For the venture financing components, each of the four participatinginstitutions would submit, in addition to a financial summary of theiroperations, detailed summaries of each new investee in the previous six-monthperiod. The latter summaries would include, inter alia, description ofprospects, risks, and reasons for choice of financial instruments. Eachreport would also include brief status reports on previous investments as wellas the status of the technical assistance contracts and the staff developmentprograms. ICICI would submit status reports for each TI receiving a subloan,describing progress on their respective projects and on the institutionaltargets which have been agreed upon. In addition, ICICI would provide asummary report of all contracts for technical assistance and studies as wellas subloans to industry for R&D. CSIR would submit directly to the Bankreports on progress on its program for marketing and laboratory safety. Forthe TDF, MOI would be responsible for submitting the semiannual reports ontechnology import approvals and rejections, while the RBI would report onactual imports. Both reports would segregate TDF from other imports,including technology collaboration agreements and would categorize them bytype and by cWintry of origin.

4.41 Audited financial statements would be submitted to the Bank by theVCMs for the VCFs and the managing companies. These audits would be preparedin accordance with the Bank's standard reporting requirements by independentauditors acceptable to the Bank. Independent audits of each TI by auditorsacceptable to the Bank would be submitted within six months of the close ofthe fiscal year. Audits for all SOEs would be submitted by the respectiveinstitutions within four months of the close of the fiscal year. Uponcompleting the project, each VCM and MOI's TDF committee would submit to ICICIan operational audit of their respective activities during the project. Onthe basis of these reports and ICICI's operational audit on the technologyservice component, ICICI would prepare an overall project audit report withinfour months after the closing date, December 31, 1995.

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V. PARTICIPATING INSTITUTIONS, INVESTMENT CRITERIA, BENEFITS AND RISKS

5.1 The three components, as described in the previous chapter, involvedistinct institutions. The only overlap is ICICI which will manage thetechnical support services component and also invest Bank resources in VCFs tobe managed by its affiliate TDICI under the venture financing component. Inaddition to ICICI, this chapter presents briefly the four venture financinginstitutions and each of the six technology institutes which have beenappraised. Other participating institutions include CSIR detailed inChapter 3 (paras. 3.12-3.14) and the four CSIR institutes presented in greaterdetail in Annex 13. The organization of MOI and the composition of the TDFcommittee are included in Annex 7. Supplemental information on the variousinstitutions is available in the project file.

A. Technology Venture Financing

5.2 The first of the four financial institutions selected jointly by theGovernment and the Bank is the Industrial Credit and Investment Corporation ofIndia, Ltd. (ICICI), a well-run and profitable DFI which has had a longrelationship with the Bank. The second is Caniara Bank, a large commercialbank noted for its profitability and readiness to innovate. The StateIndustrial Development Corporations (SIDCs), of Andhra Pradesh (APIDC) andGujarat (GIIC), selected in view of their past records, and theresearch/technology infrastructure in their respective states, are included inthe project with a view to promote some technology development on a regionalbasis.

5.3 The institutional arrangements for each VC scheme involve thecreation of one or more VCFs and a managing entity, VCM. Each VCF would beestablished by a Deed of Trust and invested according to its OperatingGuidelines. The VCMs (either specialized affiliates such as TDICI, APIDCVenture Capital, Ltd., and GIIC's intended subsidiary, or the existing unit inCanFin and GIIC) will enter into a contract agreement with the VCFs andoperate under separate but related operating guidelines. Drafts of thesedocuments have been reviewed for the four VC schemes and in final form will beestablished and maintained satisfactory to the Bank. Moreover, assuranceshave been provided that VCMs will be adequately staffed and operateautonomously on a commercial basis.

Technology Development and Iniormation Company of India. Ltd. (TDICI)

5.4 TDICI was created by ICICI with UTI in August 1988 and based inBangalore (India's electronics and software center), with the mission of'accelerating the technology development process in India through theprovision of capital, financial and other support services." Its initialobjective is to provide venture capital to commercial, market-orientedtechnology ventures; it will provide at a later stage technology informationand consultancy services to its clients. TDICI would manage a series of VCFsto be subscribed by financial institutions and corporate and privateinvestors. Its first VCF of Rs 200 million (US$13 million), created in March1989 under a new tax-exempt VC scheme of UTI and subscribed equally by ICICI

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and UTI, has been largely committed to some 30 ventures initially financedwith ICICI resources. TDICI has a pipeline of about 20 projects in the finalstages of processing, with total investment requirements of Rs 135 million(US$9 million). In addition, it has a portfolio of some 45 propusals for anestimated Rs 390 million (US$26 million). To finance those projects, ICICIintends to float in September-October 1989 a second VCF of Rs 300 million(US$20 million), of which a high percentage would be reserved for corporateand individual investors, and a third VCF of Rs 600 million in 1990. TheAsian Development Bank (ADB), the Commonwealth Development Corporation (CDC)and other international agencies (including IFC) have been approached for, andexpressed interest in, subscribing to these funds. TDICI's strong humanresources (nine full-time experienced professionals in Bangalore, and fourpart-time professionals in ICICI-Bombay) are adequate to administer theresources to be invested by TDICI during the next 3 years. Projecteddisbursements and returns on the second and third VCFs of TDICI are providedin Annex 9.

Canara Bank (CanBank) and CanBank Financial Services. Ltd. (Canfin)

5.5 The parent institution, Canara Bank, is currently the third largestcommercial bank in India, with a staff of about 49,000, some 2,000 branches,and total assets of about Rs 120 billion (US$8 billion). Its net profits in1987/88 represented an 18% return on equity (its accouuts are s=mmarized inAnnex 10). CanBank has satisfactorily participated in two Bank projects forExport Development (Loans 2629-IN and 3-58-IN). CanBank Financial Services,Ltd. (Canfin), a wholly-owned profitable subsidiary established in July 1987,would manage VCF of Rs 250 million (US$16.6 million), through its IndustrialConsultancy Division, well staffed with 12 experienced engineers andinvestment bankers. It already has a pipeline of eight projects representingtotal investments of Rs 172.5 million (US$11.5 million). Canfin has alsoapproached CDC for subscribing to its VCF. Projected operations of Canfin'sVCF are attached to Annex 10.

Andhra Pradesh Industrial DeveloRment Corioration (APIDC)

5.6 APIDC, an autonomous corporation created in 1960 to promote andfinance in its state, has been profitable. Equity investments, which were itspredominant activity until 1980, generate on average one third of its income.The yield on its investment portfolio, built up primarily for industrialpromotion purposes rather than profit maximization, has averaged about 7% inrecent years, most of it from capital gains. Its rich experience in investingin medium-scale industrial projects, coupled with Andhra Pradesh's well-developed technology infrastructure, constitute a sound basis for APIDC'sdecision to create a VCF for technology-innovative projects. APIDC VentureCapital, Ltd., a subsidiary, was created in April 1989 to manage VCFs, thefirst one of which would total Rs 135 million (US$9 million). It has apreliminary pipeline of eight projects totalling Rs 100 million(US$ 6.7 million). APIDC has approached Indian corporations, ADB and CDC forsubscribing to its VCF. Fin-4icial projections tor APIDC's VCF, along with asummary of APIDC's past performance and accounts, are attached to Annex 11.

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Gujarat Industrial Investment Corporation (GIIC)

5.7 GIIC, created in 1968, has been another successful and profitableSIDC. The bulk of its financial activities has been in lending. Its equityinvestments, however, increased recently, and it has an equity portfolio insome 70 enterprises. As shown in Annex 12, the return on its investmentportfolio averaged 10.8Z over the past four years (33Z in 1986/87). Theperformance record of GIIC and its efficient and businesslike managementprovide a sound basis for the creation by GIIC of a VCF of Rs 240 million(US$16 million) to finance technology-innovative projects in its traditionalareas of investment (chemicals, pharmaceuticals) and in electronics andengineering. To ensure greater automony of the manager, GIIC now intends toestablish a VCM subsidiary. Other VCF investors approached by GIIC include anumber of Gujarat corporations and the CDC.

Investment Guidelines

5.8 The CCI Venture Capital Guidelines (see para. 2.24 and Annex 3) setbroad guidelines within which VCFs must operate. They stipulate, inparticular, that at least 75% of their funds should be invested throughventure capital instruments in technologically innovative, growth orientedfirms. In addition, each participating VCF-maraging entity has prepared itsown Operating Guidelines, which stipulate its internal policies on how toinvest and operate. These comprehensive Guidelines (available in the ProjectFile) cover the areas of: VCF objectives; nature/area of investment;investment criteria (size, targeted return, decision and criteria standards,investment instruments, divestment, monitoring); financial and operatingmanagement (portfolio diversification, portfolio valuation, borrowing limits,distribution of profits, management of temporary/liquid resources); andreporting and involvement in investee's management.

5.9 The VCFs' Operating Guidelines establish in particular that:

(a) the primary target groups for investment would be privateindustrial firms with above average Value Added in sectors whereIndia has or will have a comiparative advantage and/or exportpotential. Investments would avoid heavily protected industriesand those subject to stringent price controls;

(b) the key factors to be considered in evaluating the investeecompanies would be: (i) the quality and experience of theirmanagers; (ii) the long-term growth prospects of demand andmarket; (iii) the innovativeness of the product and its potentialto provide a competitive edge; and (iv) the financial needs of theinvestee for development of new products and/or growth;

(c) investments will be made with a view to build up a VCF portfoliowith an internal rate of return of at least 20% p.a.; and

(d) investment portfolios would be diversified so that no more than10X of the VCF is committed to a single company and itsaffiliates, and with limits on the percentage to be invested in

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one industry. Moreover, the VCF would not take more than 49Z ofthe total voting stock of each investee company.

These guidelines would help ensure adequate selection and evaluation of theinvestee companies, and sound management of the portfolio. Assurances havebeen provided that the participating VCFs will follow Operating Guidelinessatisfactory to the Bank.

5.10 The institutions involved, with Bank assistance, during the past oneand one-half years have carefully developed the various institutional andoperating arrangements, surveyed the demand and selected appropriate staff torun their venture capital operation. Further institutional developmentassistance of the Bank will involve prior review of a significant portion ofinvestments (para. 4.31), close supervision of the operations and assisting inarranging for training or internship with VCCs abroad (para. 4.9).

B. Technology Services Component

5.11 As outlined in Chapter 4, this component would involve 12-15 TIs andperhaps 60 firms collaborating in R&D with the TIs and universities. Tomanage this array of institutions carrying out programs never before attemptedin India requires the leadership of an institution with a proven managerialrecord, Lechnical and financial capabilities and knowledge of Bank operations.ICICI was the logical choice and already has contributed significantly to thedevelopment of the component. For the TI subcomponent, the first 6institutions were selected after visiting 15 and receiving proposals frommost. While each is very different in respect of their areas of focus and themix of activities, they all have a clear vision of their role and thecapability, including human resources, to achieve the objectives. To varyingdegrees and in different ways in each of them, initial steps have been takenbefore Bank involvement to increase their focus on industrial service andneeds. In the four CSIR institutes, the process was facilitated by the policychanges adopted in February 1988 (para. 3.14). The institutions are describedbriefly below along with an outline of the kinds of programs to be financed.An account of each institution, subproject and performance indicators areincluded in Annex 13, with more detail available in the project file.

ICICI

5.12 Since its establishment in 1955, ICICI has developed into one of thecountry's major financial institutions and the main provider of foreigncurrency term loans to Indian firms. It offers a wide range of financialservices and in recent years has diversified into areas such as merchantbanking, leasing, hire purchase, venture capital and credit-rating services.In addition to its operational activities, ICICI plays an importantdevelopment role. It advises the Government on industrial issues, carries outsector studies and develops new ideas and methods of improving the financialmarkets. ICICI is a profitable, well-managed and arofessional institution.As of March 31, 1988, total assets had reached Rs 36 billion, while equity wasRs 3.2 billion and net profits were Rs 770 million. The Bank has made 16previous loans to ICICI, including a US$ 105 million facility under the

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Industrial Finance and Technical Assistance Project and US$162 million for on-lending under the recently approved Export Development Project.

5.13 As one of its efforts to diversify and support industrialdevelopment, ICICI has been in the forefront of promoting ITD through variousfinancial and advisory mechanisms. The institution has long been recognizedfor the quality of its technical appraisals and personnel. In 1985, ICICIbecame the executing agency for the innovative USAID-sponsored Program for theAdvancement of Commercial Technology (PACT). PACT finances joint venturesbetween Indian and US firms for the development of innovative technologieswith significant commercial potential. The US$10 million PACT project hasbeen considered thus far successful and ICICI's role exemplary. Based on thePACT experience, some experimentation with venture capital and the far-sightedness of its leadership, ICICI embarked upon a substantial effort todevelop the capability to promote and finance technology development in Indianindustry. Initially, ICICI intended to use TDICI as the vehicle for all ofits ITD activities, including technical consulting to industry, an informationservice on technologies available in India and abroad, commercialization oftechnologies from RIs and PACT. It subsequently became apparent that thecultures required for carrying out many of these activities was fundamentallydifferent from that of VC and that the TDICI should initially concentrate onVC. ICICI then decided to set up a technology group (TG) within ICICI toincorporate activities already initiated and to begin building its expertise,using the Bank's technology project as a vehicle. Over the long term, ICICIaims to develop the TC's capability to advise firms where to go in India andabroad for technology, to finance R&D in and by industry and to serve as aconduit of new ventures and ideas ripe for commercialization to ICICI'sventure capital arm, the TDICI. Some of the activities will be shiftedgradually to TDICI, as it becomes appropriate.

5.14 The TG would be the managing arm of the Technology Support ServicesComponent of the project. It would consist of ICICI staff with technicalbackground and banking experience. The TC's small staff of at least fivefull-time professionals would be supplemented by specialist consultants andguided by a Technology Board (TB). The latter would be presided over byICICI's Chairman and composed of four experienced techno-industrialists whoare respected in the technical/scientific as well as industrial community andwith sufficient time to provide the necessary advice. The TB would approveTIs to be financed under the project and provide guidance to the TG onprojects to be financed for sponsored R&D. ICICI's past performance invirtually every new activity in which it has embarked and the seriousness withwhich it is gearing up to technology development leadership providessufficient assurance that it will perform commendably as manager of thetechnology support services component. ICICI has prepared draft operatingguidelines for the component and organization and Management guidelines forthe TG and TB and expects to nominate the members of the TB shortly.Assurances have been provided that ICICI will maintain the above twoguideli'es satisfactory to the Bank. These will provide for, inter alia,appropriate and adequate staffing, a staff development program, and proceduresfor appraisal and supervision of TI and sponsored research subprojects.

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Bureau of Indian Standards (BIS)

5.15 BIS is the primary agency in India with a mandate to develop and setstandards, test and calibrate, certify products as well as promote quality inindustry. It has 2360 staff of which 650 are professionals in science,agriculture and engineering. The goal of BIS's institutional plan as well asthe project is to gradually shift its primary attention from formulating newstandards and testing quality of particular products to one of training andleadership with industrial groups and firms for adopting standards and qualityassurance methods. The detailed project description is well prepared andincludes, inter alia: (a) training its own and industrial firms' staff inquality control and registering at least 150 Indian companies as complyingwith the international quality assurance (ISQ 9000) standards, (b) providingservice to exporters on foreign standards, (c) upgrading its laboratories sothat their certification will be accepted internationally, (d) streamliningthe standards development process, and (e) increasing its resources devoted todirect industry-related programs and maintaining at least its prtsent costrecovery ratio of 85% (of recurrent costs), which is high compared withstandard organizations in most industrialized countries.

The CSIR Institupes

5.16 The Bank has appraised four CSIR institutes: the NationalMetallurgical Laboratory (NML) in Jamshedpur, Bihar, The National ChemicalLaboratory (NCL) in Pune, the Central Mining Research Station (CMRS) inDhanbad, Bihar, and the Central Leather Research Institute (CLRI) in Madras.The institutes were founded in the early 1950s and have a substantial humanresource base and effective leadership. NML has already made substantialprogress in transforming a relatively unproductive institution into one whichprovides useful services to, and generates increasing revenues from industry.The project will provide support for a system to detect potential failure inlarge scale industrial systems, which would be financed in part by industrialfirms. NCL is an institute noted for world class basic research as well asfor development of a number of new technologies. Progress has been made intransferring technology to industry, particularly in polymers and catalysiswith the assistance of a technology management group responsible forlicensing, patents, and maintaining contacts with industry. Project supportwill help NCL develop and upscale technologies which are more economic andusable by industry. CMRS research and development has focused on miningmethods, mining environment and health, mining engineering and explosionsafety. Under this project, CMRS will develop an international standardflameproof and testing facility to increase the quality of services to itsmining clients. CLRI, like NCL, has a high international scientificreputation, but it has not focused adequately on service to leather productenterprises. The various investments to be supported by the project--pilottraining facilities, a common facilities center, a quality control andenvironmental program--are expected, along with the other measures beingadopted by CLRI, to reorient the institute to applied and industry activities.

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Shriram Institute for Industrial Research (SIIR)

5.17 SIIR was formed in 1947 as an independent, nonprofit, self-financingprivate contract research organization. It has a staff of 250, including 60scientists and engineers, and an annual budget of Rs 20 million. Since SIIRis completely self-financing, it follows a strategy that anticipates thedemand of industry and prepares the institute for maintaining a competitiveedge in the early stages of the technology cycle in selected targeted areasidentified in extensive market studies. Following this strategy, SIIRinitially started with but virtually phased out of textile and fiber research.It currently concentrates on polymers, analytical chemistry, environmentalscience, toxicology and recently radiation technology and silk research. Theproposed project would provide badly needed investment resources for (a)strengthening SIIR's current R&D programs in materials, analytical chemistry,environmental protection and toxicology; (b) improving laboratory safety andutilities; and (c) initiating new R&D programs in standard reference materialsand electronic grade chemicals.

Selection Guidelines

5.18 Before ICICI first disburses to respective TIs already appraised,each TI will be expected to demonstrate to ICICI that it is meetingsubstantially its institutional goals for 1989/90. Selection and appraisal ofnew TI proposals by ICICI will be based on the same general selectionguidelines used for the first six TIs and include analysis and judgments inthe following broad areas:

(a) An institutional plan that demonstrates the TI's intention andspecific steps to serve industry more effectively. Theinstitutional plan would be evaluated in terms of: (i) priorityand resource allocation of technology application to industry vis-a-vis general research; (ii) revenue generation experience andappropriate, realistic targets for the following three years; and(iii) new project and program initiatives reflecting the needs ofindustry;

(b) Technical capability. Demonstration that the TI has the technicalcapability to perform its role and provide the services outlinedin its plan. An evaluation would be made of the quality of humanresources, equipment installed, maintenance and safety standardsas well as the working environment and utilization of thefacilities;

(c) Management. TI management should have a track record of effectiveleadership and of implementing effective changes in the TI. Itshould also have the capability of obtaining the necessary supportfrom the staff of the institutes, industry and Government forcarrying out the institutional plan.

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(d) Financial Appraisal. The TI would need to demonstrate that(i) the loan will be repaid by unt'.ed revenue generated by the TI;(ii) revenue generation from services is already at acceptablelevels or is increasing; and (iii) the capability of instituting acost-accounting system.

The first two subloans to be appraised by ICICI for a new TI would be subjectto Bank approval as would others above US$4 million equivalent. ICICI's TBwould approve all TI subloans, including those not subject to prior review bythe Bank.

C. Benefits and Risks

Benefits

5.19 Overall, the project would support an integrated and comprehensiveapproach to developing technology in Indian industry. It would expand theoptions of entrepreneurs and firms for obtaining and developing technology.It would also bolster the Government's policies of promoting increasedindustrial competition, greater operness to technology import, a larger rolefor industry firms and the private sector in R&D and technology selection anddecreased control and financing of all aspects of ITD. Institutionally, Indiamay begin to achieve what few countries have been able to promote effectively,namely collaboration between industrial firms, the technology infrastructure,the financial sector and the Government. Although many institutions willcontribute to such an achievement, ICICI's leadership role is pivotal here.With the strengthening of ICICI's capability to support technologydevelopment, the achievement of such collaboration is even more likely. Theultimate effect of the proposed project would then be a more productive ardefficient industrial sector producing higher quality products.

5.20 The proposed project would help build venture capital in India. Withassistance from the Bank over the past one and one-half years, four venturecapital schemes have now been formulated and organized. Project preparationhas also made a contribution to the Government's approach to venture capital.The experience during the project will provide a basis for further developmentof VC in India. The VC entities are expected to support more than 400 well-selected small growth-oriented companies largely in emerging high-techsectors. These companies would probably develop or grow much more slowly, ifventure capital were not promoted.

5.21 The project would result in increased activity by the technologyinfrastructure in support of industrial needs and services. The TIs supportedby the project would have a much greater capacity than at present to provideservices to industry. Those already appraised have developed during the past18 months institutional programs which can achieve the desired industrialcollaboration. At the same time, industry can be expected to demand increasedand better service from TIs as a result of the experience under the sponsoredR&D promotion fund. With the development of technology management cells inCSIR laboratories and the Government's policy of limiting budgetary support toTIs, the transformation process followed by TIs supported by the proposed

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project can be expected to be emulated by others. Hundreds of firms areexpected to benefit from the investments in the TIs, particularly in BIS, CLRIand NML, which have a potentially large client base.

5.22 The project is also expected to result in easier access of firms toforeign technology. Support to the TDF is expected to benefit between 600 and800 firms and provide an impetus to further liberalize the technology importregime. More liberal technology imports would also stimulate the domastictechnology infrastructure to be more efficient and to help absorb andcomplement, rather than duplicate, foreign technology.

Environme-at and Safety

5.23 The project would fund environmental protection activities in twoRIs--CLRI and SIIR--as well as support laboratory and industrial safetythrough a number of interventions. CLRI's activity relates to pollutionresulting from tannery effluents (chromium), while the environment constitutesan area of specialization for SIIR and for which approximately US$1 million ofthe Bank loan will be provided. The flameproof and safety testing facility tobe built at CMRI is expected to be a major contributor to industrial safety,particularly in, but not limited to, coal mines. MIRS's program for componentintegrity evaluation (which, inter alia, would attempt to, detect potentialfailures in major industrial plants, including chemical and power) could helpprevent serious environmental disasters. With respect to laboratory safety,which is frequently deficient, CSIR has reconstituted its overall safetyoversight committee, in part at the Bank's urging, and intends to issueguidelines for its laboratories. As a condition of disbursement for each RIunder the project, one senior technical person will have been designated assafety officer for the RI and a safety protocol will have been issued.Progress reports will also include a section on improvements in laboratorysafety. The technical assistance program for CSIR includes a major effort todevelop a safety program for all CSIR laboratories.

Risks

5.24 An innovative project like this one is inherently risky with respectto its implementation and repayment by the final beneficiaries. It iscomplicated involving three major components, each involving a number ofinstitutions and one with several subcomponents. Furthermure, this is thefirst experience of this kind in India or in the Bank. The project, however,has been structured so that it can work and have a substantial impact.Nevertheless, substantial supervision by the Bank will be required. Fortechnology support services, an effective system for managing the component isbeing developed by ICICI. Its role, which is in line with ICICI'sinstitutional plan to provide a range of services to its industrial clients,will be carried out in a clearly structured manner and with due compensation.Based on the appraisal of the first six research and standards institutes,there is a high probability that their transformation to technologydevelopment and support institutions can be gradually accomplished. In thecase of the venture financing component, each of the four institutions hasbeen thoroughly appraised and, with the advice of IFC, organizationalarrangements have been modified so that they can operate effectively and

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profitably. Furthermore, two of the institutions have had extensiveexperience with ventures, investments and share divestiture similar to VC, andanother has more than a year of good experience with VC after previousexperimentation. This component, as well as the project as a whole, nowrequires close supervision and patience, since the pay-back will only come inseven to ten years.

5.25 The major effort under way in India to transform the industrialenvironment and technology development strategy is in itself complex andrisky, but clearly merits the Bank's support. Any back tracking on theliberalization of general industrial policy can have a serious impact on thesuccess of this project since ITD will only result if the industrial andcompetitive environment foster the need for it. All indications are, however,that the Indian Government will continue to take steps to encourage bothdomestic and interational competition in the industrial sector.

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VI. AGREEMENTS REACHED AND RECOMMENDATIONS

6.1 Assurances have been provided in the Legal Documents that theGovernment:

(a) with respect to VC, (i) would ensure that each VCF managemententity will be free to (1) invest without seeking approval foreach investment; (2) sel& their shares on the capital markets atprices that they determine; (3) invest in the range of equity,quasi-equity and quasi-loan financial instruments (para. 2.30);(ii) relend proceeds of the Bank loan to IDBI and ICICI in rupeesat 12% p.a. for 16 years including 7 years of grace with interestcapitalized during the grace period (para. 4.27); (iii) causeIDBI to relend to APIDC, GIIC and CanBank according to the sameterms and conditions and advance funds as necessary (para. 6.3);

(b) with respect to the TDF, (i) would ensure that no revisions areundertaken which limit access of industrial firms (para. 3.26);(ii) establish a mechanism that ensures forwarding ofdocumentation to one central location (para. 4.39);

(c) with respect to the flow of funds under the project, (i) wouldestablish the Special Account (para. 4.38); and (ii) transferfunds from SA promptly to beneficiary institutions upon receiptof appropriate documentation and requests (para. 4.38).

6.2 Assurances have been provided by the Government in the CreditAgreement that (a) IDA funds would be placed in a Fund to be managed by ICICI(para. 4.28); and (b) the Subsidiary Loan Agreement with ICICI wouldincorporate the basis upon which ICICI will manage the Fund, including thecriteria, terms and conditions of on-lending to TIs and to industry forsponsored research in or with TIs (para. 4.26).

6.3 Assurances have been obtained from ICICI in a Project Agreement that:

(a) for the TI subcomponent (i) terms, conditions and fee structurewould be followed (para. 4.28); (ii) additional TIs (not alreadyappraised) to be financed would satisfy the selection guidelinesincluded in para. 5.18; (iii) subloan agreements with the firstsix appraised TIs would be disbursed after demonstratingsubstantial compliance with 1988/1989 targets (para. 5.18);(iv) for all TIs, safety and cost accounting requirements wouldbe followed (paras. 5.23, 4.14); (v) Bank approval of additionalTI subloans would be required for the first two ICICI appraisedsubloans and for those exceeding US$4 million equivalent(para. 4.31); (vi) all additional subloans will be approved bythe TB (para. 5.14); and (vii) LIB procedures according to Bank

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Procurement Guidelines would be followed for equipment packagesexceeding US$200,000 (para. 4.33).

(b) for the sponsored R&D promotion fund, except as the Bank shallotherwise agree, (i) subprojects to be financed would followcriteria and procedures set out in Operating Guidelinesacceptable to the Bank (para. 4.16); (ii) adequatL subprojectreview procedures would be adopted (para. 4.18);

(c) for the TG, ICICI will maintain organizational managementguidelines satisfactory to the Bank and assign adequateappropriate staff to manage the component (para. 5.14).

6.4 Assurances have been provided for ICICI, CanBank, APIDC and GIIC inICICI and IDBI project agreements that the respective: (a) VCM functionsprimarily as a VC management entity whose main objectives would be to promoteand support start-up and growth-oriented technology companies, and maximizereturns on VCFs managed (para. 5.3); (b) VCM employ staff with a profile ofadequate background and industrial experience (para. 5.3); (c) the VCMs wouldfollow prior Bank review arrangements (para. 4.31); (d) that terms andconditions and operating guidelines for the VCFs in which the proceeds of theBank loan would be invested are acceptable to the Bank (paras. 5.3 and 5.11);(e) terms and conditions and operating guidelines of the VCM are satisfactoryto the Bank (para. 5.3); (f) reporting, audit and operational auditrequirements will be followed (paras. 4.40-4.41).

6.5 The signing of subsidiary loan agreements between the Government andICICI and IDBI, respectively, and financial agreement between IDBI and CanBankwould be conditions of effectiveness of the proposed loan (para. 4.26). Thesigning of financial agreements by IDBI with APIDC and GIIC, would beconditions of APIDC's and GIIC's respective disbursement from the proposedloan (para. 4.26).

Recommendation

6.6 The proposed Industrial Technology Development Project constitutes asuitable basis for a Bank loan of US$145 million and an IDA credit of SDR 44.2million (US$55 million equivalent) to India. The Loan and Credit would bemade on standard Bank and IDA terms with the exception that US$45 million forventure capital would be repaid over 16 years including 7 years of grace.

ANNEX 1Page 1

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INDIA

INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT

Financial System Summary

1. The Indian financial system is highly segmented with different rolesclearly earmarked for the various institutions. The Reserve Bank of India(RBI) performs the traditional central banking role of note issuer and bankerto the government and the commercial banks. In addition, it formulates andmanages monetary and credit policy, supervises the commercial banks, andprovides deposit insurance through a subsidiary. Moreover, the RBI has'qsumed a development role by providing refinance lines and promoting-cialized development finance institutions. Finally, the RBI manages the

foreign exchange market and the exchange control system.

2. The Banking System. The financial sector is dominated by the bankingsystem. The commercial banks, mainly government-owned, have the lead role inresource mobilization. The most important bank is the State Bank of India(SBI). As of June 1988, the Scheduled Commercial Banks had total assets ofover Rs 1,420 billion, of which 91% were accounted for by the 28 public sectorbanks and the rest by the 20 private Indian banks and 30 foreign banks.Table 1 summarizes the patterns of resource mobilization and allocation in thecommercial banking system.

Table 1: SUMMARY BALANCE SHEET OF COMMERCIAL BANKS (DOMESTIC BUSINESS)(% of total assets, June 1988)

Assets Liabilities

Cash and RBI Deposits 14.5 Deposits and Similar Liab. 98.8Investments (Liq. Req.) 34.8 RBI Borrowing 0.6Credit: Total 50.7 Other (including Caittal) 0.6o.w.: Priority Sectors (21.0) /a

Food Credit (1.5)Other (28.3)

Total 100.0 100.0

Memo Item: Total assets covered - Rs billion 1,420.5

/ Priority sectors estimated using March 1988 share of priority credits.

Source: RBI, Annual Report 1987/88.

ANEX 1[ ~~~~~~~~~~~~~~~~~~~~Page 2

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3. The Commercial Banks' scope for creating credit is strictly limitedby reserve and liquidity ratio requirements which currently channel abouthalf of deposits into compulsory investments in the securities of Governmentand public sector institutions at below-market rates. Furthermore, they havelimited discretion over the direction of their lending as RBI creditallocation guidelines account for about 77% of total deposits. The systemhas a negative impact on commercial banks' profitability as the net interestincome they receive is only slightly more than their administrative costs.Their profits are derived largely from unfunded items such as fee income oninternational trade, foreign exchange commissions and gains on portfoliotrading activities.

4. The development finance system comprises national- and state-leveldevelopment banks and investment institutions. At the national level, thepredominant development banks are: Industrial Development Bank of India(IDBI), Industrial Credit and Investment Corporation of India Limited(ICICI), and Industrial Finance Corporation of India (IFCI). In addition,the Export-Import Bank of India (Eximbank) was set up in 1982 to take overthe export finance operations of IDBI, and the Industrial Reconstruction Bankof India (IRBI) was established in 1984 to assume responsibility forrehabilitating sick units. These institutions generally do not takedeposits, but either sell financial assets directly to the public, or raisetheir resources from banks, in many cases under the liquidity requirements.They also obtain resources from the domestic capital market, bilateral andmultilateral sources, as well as some commercial borrowings from abroad.Their major emphasis is on channeling long term finance to private and jointsector companies. Since the early 1980s and increasingly since 1985, thedelicensing policy of the Government has forced these institutions toevaluate their borrowers more carefully and offer an increasing array ofother financial services, ranging from merchant banking and leasing to morerecent attempts of providing venture capital.

5. The All-India investment institutions are: Life Insurance Corpor-ation of India (LIC), General Insurance Corporation of India (GIC), and UnitTrust of India (UTI). The latter is a tax-exempt mutual fund that raisesresources from households and invests the proceeds in the stock market. Ithas provided basic support to the stock market and has gradually become oneof the dominant buyers, along with the LIC and GIC.

6. The State Finance Corporations (SFCs) and State Industrial Develop-ment Corporations (SIDCs) are the state level development banks. Their mainshareholeers are the respective State Governments and the IDBI, and theyreceive most of their resources from the IDBI and the GOI/RBI. The SIDCs arepromotional agencies of the State Governments that extend loans and takeequity participations. Many of the SIDCs suffer from high arrears and poorrecoveries, and consequently have poor debt-service coverage ratios as shownin Table 2. Those SIDCs with satisfactory performance have been in AndhraPradesh, Gujarat, Haryana, Karnataka, Maharashtra and Uttar Pradesh.

ANNEX I

- 48 - Page 3

Table 2: SIDCs' DEBT SERVICE COVERAGE RATIOS, 1982/83-1986/87

SI.No Name of SIDC 1982-83 1983-84 1984-85 1985-86 1986-87

1. Andhra Pradesh 1.27 1.03 1.01 0,74 1.082. Assam 0.89 0.60 1.08 - 0.193. Bihar 0.64 0.31 0.38 1.01 0.454. Goa 0.92 1.15 0.89 0.95 1.045. Gujarat 1.23 1.00 1.09 1.03 1.016. Haryana 0.22 1.69 1.47 0.88 1.997. Himachal Pradesh 1.01 0.88 1.03 1.02 1.008. Jammu & Kashmir 0.70 0.77 0.82 0.61 1.379. Karnataka 1.40 1.09 0.95 1.15 1.0910. Kerala 1.03 1.05 1.09 0.94 0.8611. Madhya Pradesh n .87 1.11 0.70 0.95 0.9812. Maharashtra .L.39 1.61 1.47 1.41 1.2713. Orissa 0.73 0.65 0.82 0.73 0.8314. Pondicherry 0.93 1.22 0.97 0.79 0.9515. Punjab 0.87 0.82 1.27 1.22 0.6116. Rajasthan 0.94 0.61 0.52 0.69 0.4917. Tamil Nadu 0.86 1.21 1.03 1.05 0.7918. Uttar Pradesh 1.35 1.29 1.29 0.97 1.1119. West Bengal 1.69 1.32 0.78 1.15 1.0220. Arunachal Pradesh - 0.92 0.70 0.36 0.5321. Manipur - - - - 1.0022. Meghalaya 1.42 1.42 1.37 0.64 0.6023. Mizoram - 0.60 0.35 0.37 1.6424. Nagaland 1.08 0.63 1.09 - 0.6225. Sikkim 2.89 0.75 0.70 0.74 0.6126. Tripura - 1.00 - Neg. Neg.

Average 1.15 1.14 1.06 1.08 0.97

Source: Operational Highlights of SIDCs, IDBI, March 1988.

l

ANNEX 2Page 1

- 49 -

INDIA

INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT

India's Cagital Market

1. India has 14 regional stock ex.'%hanges, which are markets for sharesand debenture of private firms and for long term government securities.Bombay is by far the most important exchange in terms of number and marketvalue of listed companies shares and turnover. Over 4,000 companies arelisted on the Indian Stock Exchanges, which is more than in any country otherthan the U.S.; the market capitalization of listed firms in 1985 was similarto Spain or Denmark among the developed countries, and more than doubleeither Korea and Mexico among the developing countries. In addition to thestock market, there is also a growing market in Treasury bills, and a moneymarket for interbank funds and commercial paper, which the RBI is now tryingto stimulate through regulatory changes.

2. The government securities market forms the largest segment of thecapital market. However, this marke¶.. segment is a captive one. Commercialbanks, the LIC and the GIC buy almost all of any issue and tend to holdissues to maturity because of the portfolio requirements. Hence, thesecondary market is very narrow. In recent years, rates on these instrumentshave been increased in line with the Chakravarty Committee's recommendations.Private investors own only a minimal amount of government debt.

3. The stock market has grown rapidly in recent years. At thebeginning of the 1980s, a number of changes occurred that stimulated thedemand for stocks and bonds of private companies. These included lifting ofrestrictions on dividend payouts, increases in the ceiling on debt:equityratios and improvements in the facilities for non-resident Indians.Moreover, restrictions on the purposes for which companies could issuesecurities were progressively relaxed to allow flotation of debentures tofund new companies, mergers/acquisitions and working capital. Thequantitative limit for issues exempt from capital issues controls was doubledto Rs 10 million and listing requirements were eased. Smaller firms weregiven improved access to the non-convertible debenture market by the raisingof the interest rate ceiling on their issues. Also, measures to diversifythe markets and improve the attractiveness of issues by start-up firmsincluded the introduction of new instruments such as Cumulative ConvertiblePreference Shares (CCPS - these securities count as equity, carry a fixeddividend and are convertible into straight equity after three to five years).Finally, the Government introduced legislation to protect investors and boostconfidence in the markets, and new institutions such as a stock holdingcorporation have been set up to simplify the purchase of securities.

ANNEX 2

- 50 - Page 2

4. The investment climate also improved with the initiation of tradeand industrial liberalization and the increased in industrial activity.Finally, growth of UTI and the LIC and GIC meant growing demand frominstitutional investors. Supply of issues also increased as corporateinvestment rose. At the same time, the growth of bank credit to industryslowed and became more expensive, as a result of the growth of prioritysector lending and the rise in the ceiling interest rate on non-prioritycredits. The result was a stock market boom in both prices and issues, asdisplayed by Table 1.

Table 1: CAPITAL ISSUES AND CAPITAL RAISED

(Amounts in R BLillian)

Private Sector Caaital IssUes la Public

Shares Debentures Sector

Average (of which Total Raised /bNo. Amount Price Index la E: Amount convertiblel Azunt Amount

1981182 2.82 188 1.96 n.a. 4.78

1982183 578 2.61 n.a. 66 4.45 n.a. 7.06

1983184 741 3.83 n.a. 53 4.54 n.a. 8.37

1984/85 407 3.63 253 64 6.93 n.a. 10.56

1985186 767 8.59 412 83 8.44 (0.85) 17.03 2.65

1986/87 430 10.00 583 99 15.60 (10.82) 25.60 19.78

1987/88 n.-. 10.99 486 n.a. 6.50 (5.12) 17.49 18.23

1988/89 604 ld

la Based on RBI Surveys. Excludes private placements.

Lb Non-fLnancial. Includes oversubseriptions.

Ie Bombay Stock Exchange Sensitive Index, anual average.

Id Indicative - Derived from Economic Times ordinary share priee Lndex.

Source: RBI, Renort on Currency and Finance and RBI, Annual Report 1987188.

5. In the mid-1980s, another boom occurred in response to a number offactors. There was a further increase in the ceiling interest rates (from13.5% to 15%); a provision was enacted that permitted companies to buy backnon-convertible debentures and thus provide a substitute for a secondarymarket; and the banks and all-India development finance institutions developeda secondary market. On the macroeconomic front, taxes were reduced and theindustrial climate improved. Also, in 1985/86, in a change in Governmentpolicy, public sector non-financial companies began to raise resources in thefinancial markets in significant amounts (the development banks have alwaysraised funds in the market and their issues are not included in Table 1). In1986/87, public sector firms began issuing large volumes of bonds. Thesecarried rates of 14% and a tax free 10%, which was quite attractive givenIndia's high corporate and private tax rate. A large fraction of these issues

Page 3- 51 -

were initially taken up by banks and financial institutions. However, theprivate equity market became oversold in 1987, owing to: (1) competition fromthe public sector bonds; (2) release of public sector bonds by financialinstitutions; and (3) the poor general economic situation resulting from asevere drought. In 1988, stock prices improved, with the enhanced economicoutlook that was more than fulfilled by the good monsoon, with the slowdown inpublic sector issues, and overall growth of the economy on the order of 10%.

6. The growing capital market clearly has represented an alternativesource of finance. Firms that have encountered constraints on bank lendinghave been able to go to the capital market. Nonetheless, the market remains alimited venue for long term funding. In 1986/87, private firms issued aboutRs 24 billion and actually raised about Rs 19 billion in the market. 1/ Thiscompares with IDBI loan sanctions of Rs 33 billion (net) and ICICI loansanctions of Rs 11 billion, and disbursements of Rs 22.5 billion andRs 7 billion, respectively.

/ Amounts raised differ from issues because of undersubscriptions andtiming.

ANNEX 3I ~~~~~~~~~~~~~~~~~~~~Page 1

- 52 -

INDIA

INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT

Venture Capital Guidelines I/

It has been decided to formulate a scheme under which venture capitalcompanies/funds will be enabled to invest in new companies and be eligible forthe concessional treatment of capital gains availabl' to non-corporateentities.

Venture Capital Companies/Funds which want to avail of concessionaltreatment ef capital gains for which necessary legislative measures will betaken, would be required to comply with the following guidelines:

1. Establishment.

(i) Funds, companies or schemes wishing to undertake venture capitalfinance activities may be established using the term "venture capital" if theycome within, and agree to abide by these guidelines.

(ii) Approvals would be given for the establishment of the venturecapital companies/funds by the Department of Economic Affairs, Ministry ofFinance, or such authority as may be nominated by the Government, andapplications for such approvals should be made with a suitable explanatorynote and details of the proposal and addressed to CCI/Jt. Secretary(Investments) in Department of Economic Affairs.

(iii) Applications for issue of capital by companies should be madeunder the Capital Issues (Control) Act to the CCI composite applications forapproval to establish the fund and for the issue of capital can also be made.

(iv) All India Public Sector Financial Institutions. SBI and otherscheduled banks, including foreign banks operating in India, and thesubsidiaries of the above would be eligible to start venture capital fundscompanies, subject to such approval as may be required from the Reserve Bankof India in respect of banking companies. Joint ventures between them, orbetween non-institutional promoters and them would be permitted, but theequity holding of such promoters shall not exceed a total of 20% and must notbe the largest single holding.

1/ Press Release No. S.l1(86)-CCI(11)/87, dated November 25, 1988, fromthe Ministry of Finance (Department of Economic Affairs), office of theController of Capital Issues.

Page 2

2. - Management.

(i) It is required that the venture capital funds/companies aremanaged, by professionals such as bankers, managers and administrators andpersons with adequate experience of industry, finance, accounts, etc. Ifestablished by subsidiaries of banks/institutions, or in-house schemes, theyshould maintain their independence and an arms length relationship. Theywould, however, be free to draw upon the professional expertise andinfrastructure of the parent organization in the interests of theirshareholders and clients, and minimizing costs.

(ii) No person would be permitted to be the full timeChairman/President, Chief Executive, M.D. or Executive Director or a wholetime director of a VCC/VCF if he holds any of the above positions in any othercompany, except that he may hold such a positiotn in an assisted company byvirtue of his position in the VCC/VCF.

3. Venture CaRital Assistance.

(i) It is intended that venture capital assistance should go mainlyto enterprises where the risk element is comparatively high due to thetechnology involved being relatively new, untried or very closely held, and/orthe entrepreneurs being relatively new and not affluent though otherwisequalified and the size being modest. For successful units, the possibility ofhigh returns would exist, but the projects would initially find it difficultto raise equity from the market, especially when public issues are no longerreadily available for small, greenfield companies. The assistance shouldmainly be for equity support, though loan support to supplement this may alsobe done.

Venture capital assistance, therefore, should cover those enterpriseswhich fulfill the following parameters:

(a) Size: Total investment not to exceed Rs 10 crores.

(b) Technology New or relatively untried or very closely held orbeing taken from pilot to commercial stage, or whichincorporates some significant improvement over the existingones in India.

(c) Promoters/Entrepreneurs: Relatively new, professionally ortechnically qualified, with inadequate resources or backing tofinance the project.

Investment in enterprises engaged in trading broking, investment orfinancial services, agency or liaison work, shall not be permitted. Furtherinvestment in assisted units for their expansion or strengthening; orinvestments for the revival of sick units, would be permitted as a part ofventure capital activity, and the above parameters will not apply. Therecipient venture should be established as a limited company and must employprofessionally qualified persons to maintain its accounts.

ANNEX 3- 54 - Page 3

(ii) The VCP/VCC should invest at least 75% of its funds into venturecapital activity as explained in para. 3 (i).

(iii) During the first 12 months, any permissible investments may bemade (including leasing up to 15% of the funds), but a level of 30% should bereached for venture capital activity by the end of the second year, and 60% bythe end of the third year, 75% by the end of the fifth year of operations.

The balance amounts may be invested in any new issue, by an existingor a new company, of equity, CCPs, debentures, bond or other securitiesapproved for this purpose by CCI. A part of this may also be employed forleasing but this should not, at any stage, exceed 15% of the total fundsdeployed, including in the first year. Activities such as money marketoperations, bill rediscounting, broking, portfolio investments and fundmanagement, financial services and consultancy, intercorporate lending wouldnot be permitted to VCC/VCF. Specific approval of CCI should be taken foractivities not prohibited, but also not included in the permitted list above.

4. Size. The minimum size of a VCC/VCF would be Rs 10 crores. If itdesires to raise funds from the public, the promoters share shall not be lessthan 40%.

5. Capital Issues.

(i) Funds may be raised through public issues and/or privateplacements to finance VCF/VCCs.

(ii) Foreign equity up to 25% multilateral/international financialorganizations, development finance institutes, reputed mutual Funds etc., wouldbe permitted, provided these are management-neutral and are for medium to longterm investments.

(iii) NRI investment would be permitted up to 74% on a non-repatriablebasis and up to 25%/40% on a repatriable basis.

(iv) An application should be addressed to Ministry of FinanceInvestment Division, North Block, New Delhi, with a copy to Chairman,Securities Exci;ange Board of India for foreign/NRI participation in CapitalIssues.

6. Debt:Equity Ratio. Debt:equity ratio may be maximum 1:1.5.

7. Underwriting/Listing.

(i) The VCC/VCF may be listed according to the prescribed norms. Itsissue may be underwritten at the discretion of the promoters.

(ii) For assisted units also, listing guidelines would applyInvestment by widely held VCF would be treated as public participation for thispurpose.

8. Exit. Pricing of the shares at the time of disinvestment by a publicissue of general offer of sale by the VCC/VCF, may be done by them, subject to

ANNEX 3Page 4

- 55 -

this being calculated on objective criteria like book value, profit earningcapacity, etc. and the basis is adequately disclosed to the public.

9. Eligibilitv for Tax Concession. The preferential tax treatment wouldbe available to the approved venture capital company/fund only in respect offinancing of such assisted units as are eligible to be treated as venturecapital units as defined in para. 3. For this purpose, the unit seeking equitysupport from the VCC/VCF should obtain a letter of eligibility from IDBI/ICICI,or any such agency that may be nominated by the Government.

A A

Page 1

INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT

Selected Data Research and Development

Table 1: INDIA--PUBLIC AND PRIVATE R&D EXPENDITURES(Rs million)

1976177 1977/78 1978179 1979180 1980181 1981182 1982183 1983184 1984185 1985/86 198e!87

National

total 3.742 4.306 5.286 6.385 7,605 9.407 12.060 13.811 17.816 20.688 26.675

Private

sector 484 582 759 921 1,207 147 1.979 2,078 2,332 2,519 3,181

State govts. 252 295 402 46 593 718 971 1,199 1,261 1,628 1,929

Central

Govt. 3,006 3,439 4,125 5,004 5,805 7,219 9,120 10,533 14,223 16,541 21,576

Central

agencies 2,462 n.a. 3,195 3,848 4,384 5,472 7,372 8,321 11,495 13,346 17,597

cf vhic}.

CSIR 413 n.a. 239 26 406 461 877 900 967 900 1,104

DOE 42 n.a. 51 75 54 75 481 38 41 48 56

Publ. sect.

enterprises 318 375 552 734 864 1,078 1,224 1,617 1,712 1,986 2,371

Rsrah. Assus. 39 45 6 64 83 94 114 130 143 163 260

Indust. RS 823 990 1,374 1,724 2,129 2,416 3,015 3,600 3,964 4,432 5,542

Shares (1)

Pvt. sect/

Total RWD 13 14 14 14 16 16 16 15 13 12 12

Ind./Total

RD la 22 23 26 27 28 26 25 25 22 21 21

_a Includes private and public enterprises and research associations.

Sources: OST publications.

ANNEX 4Page 2

Table 2: INDIA--RESEARCH INTENSITIES OF MAJOR INDUSTRIAL SUBSECTORS /a

Korea Japan1980-82 1984-87 1985 1985

1. Drugs and pharma-ceuticals 1.72-2.05 1.8C-2.2 (1) Lb n.a. n.a.

2. Industrialmachinery 1.03-1.19 0.95-0.99 (4) 3.06 2.74

3. Transportation 0.87-1.17 0.52-0.64 (5) 2.2 2.904. Chemicals 0.87-1.00 0.78-1.45 (2) 0.96 3.795. Electricals and

electronics 0.72-0.84 0.92-1.11 (3) 4.12 5.10

6. Cement and gypsum 0.61-0.76 0.34-0.45 (6) n.a. n.a.7. Agricultural

machinery 0.48-0.71 0.22-0.41 (7) n.a. n.a.8. Rubber goods 0.44-0.66 0.31-0.32 (8) n.a. n.a.9. Metallurgical

industries 0.44-0.53 0.58-0.67 (5) 1.14 1.5911. Soaps and cosmetics 0.16-0.51 n.a.

/a Defined as the ratio of R&D expenditures to total sales./b Rating in 1984-87.

Source: DST, GOI.

Table 3: TOTAL R&D PERSONNEL IN SELECTED COUNTRIES

India (1986) 85,309Korea (1985) 41,473US (1985) 790,000France (1983) 92,682Germany (1981) 115,443Japan (1985) 381,282

ANNEX 4Page 3

- 58 -

Table 4: FULL-TIME EQUIVALENT OF MANPOWER EMPLOYED IN R&D ESTABLISHMENTS(as of January 4, 1986)

Personnelengaged

primarily inR&D activities

A. Institutional Sector1. Department of Atomic Energy 6,0622. Council of Scientific and Industrial Research 6,5463. Defense Research and Development Organization /a 7,9504. Indian Council of Agricultural Research 5,4035. Department of Space fb 6,8276. Indian Council of Medical Research 6057. Other central government ministries and agencies 6,9938. State governments 18,253

B. Industrial Sector1. Public sector including joint sector 9,5112. Private sector 17,159

Total 85.309

/-a A number of research laboratories have not provided data. These figureshave been reproduced from the report for the year 1982-83.

/b Figures indicated in 1984-85 report have been adopted on account of non-response.

Table 5: NUMBER OF APPLICATIONS FOR PATENTS FROM PERSONS IN INDIAAND ABROAD FROM 1975-76 TO 1985-86

1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86

India 1.129 1,342 1,097 1,124 1,05 1,159 1,093 1,135 1,055 1,001 999

Fozeign residents

in India 34 23 37 13 37 19 19 -- 25 2 --

Foreigners resi-

dent abroad 1,833 1,739 1,736 1,795 1,888 1,776 1,877 1,950 2,065 2,316 2,527

Total 2.996 3.104 2.870 2.932 2.980 2.954 2.989 3.085 3.145 3.319 3.526

Source: Annual Report o Controller Genera, of Patents, Designs and Trade Marks for 1984-85 and 1985-86.

ANNEX 5Page 1

59-

INDI_A

INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT

Foreign Collaborations and Technology Payments

Table 1: FOREIGN COLLABORATIONS AND FOREIGN INVESTMENTS APPROVED

Number FC vLth

of PC foreLSn Total Share of FDX bv malor countrles Average FDI

approved equity DFI UK US Germany Japan per case

(Rs mln) ----------------- (() ------------------- (Rs '000)

1970 183 32 24.52 1 20 5 30 766.3

1971 245 46 58.38 28 26 20 8 1,269.1

1972 257 37 62.27 18 66 2 0 1,683.0

1973 205 34 28.17 4 42 25 12 828.5

1974 359 55 67.13 8 29 9 7 1,220.5

1975 271 40 32.05 4 37 22 4 801.2

1976 277 39 72.69 8 62 13 0 1,863.8

1977 267 27 40.03 17 46 19 0 1,482.6

1978 307 44 94.06 5 50 9 1 2,137.7

1979 267 32 56.87 26 39 8 0 1,777.2

1980 526 73 89.24 11 24 5 19 1,222.5

1981 389 57 108.71 7 21 50 6 1,907.2

1982 590 113 628.06 3 8 6 40 5,558.1

1983 673 129 618.73 2 22 8 26 4,796.4

1984 752 151 1,130.02 2 8 3 5 7,483.6

1985 1,024 238 1,260.66 3 32 9 12 5,296.9

1986 957 240 1,069.52 7 27 19 5 4,456.3

1987 852 242 1,077.05 8 27 9 6 4,450.6

1988 930 134 k 2,395.00 6 la 47 La 17 la 3 /a 9,086.7 /a

Total 9.331 1.763 k 8.913.16 6 27 11 11 4.387.9 /a

Source: MLnistry of Industry (SIA) and Indian Investment Center.

Note: These figures include the period January-June

ANNEX 5Page 2

U - 60-

Table 2: TECHNOLOGY PAYMENTS(Rs million)

lotalProfits Dividends Royalties Know-how Interest payments

1970 131.20 434.30 52.30 206.30 128.00 ???1971 99.40 388.70 58.60 121.30 807.001972 155.40 390.80 73.30 113.30 156.00 888.801973 219.10 375.10 62.10 140.80 162.70 959.801974 71.90 184.60 84.60 125.60 367.00 838.701975 203.60 248.40 104.90 236.60 256.60 1,060.001976 193.90 454.70 158.80 378.00 251.10 1,466.501977 101.30 680.10 195.00 281.40 227.00 1,484.801978 102.40 543.50 126.50 555.20 314.40 1,642.001979 143.70 509.20 93.30 439.70 252.20 1,440.101980 121.00 559.20 88.80 1,049.30 232.20 2,041.511981 121.60 589.20 159.90 2,707.00 410.80 3,988.501982 191.20 703.10 397.20 2,505.80 802.30 4,679.601983 200.00 621.10 276.00 3,148.90 815.10 5,061.101984 166.80 745.80 284.90 3,006.00 1,239.10 5,442.601985 118.00 752.00 235.00 3,679.00 2,187.00 6,971.001986 106.00 855.00 401.00 3,584.00 3,189.00 8,135.00

Sources: FDI--Ministry of Industry (SIA); Technology Payments--Ministry ofFinance and Indian Investment Center.

Table 3: INDUSTRY-WISE FOREIGN COLLABORATIONS APPROVED

Total1974-76 1977-79 1980-82 1983-85 1986 1974-86

Metallurgical ind. 54 37 91 99 45 326Fuels & chemicals 119 91 174 250 124 758Electronics & elec-tricals 188 163 275 491 175 1,292Capital goods 368 414 736 1,140 322 2,979Leather & rubber 33 24 25 56 19 157Nonmetal minerals 41 30 56 125 40 292Traditional mfr. 31 23 47 52 34 187Other manufactures 73 59 98 241 196 667

Total 907 841 1.501 2.454 955 6.658

Source: Ministry of Industry (SIA).

ANNEX 6Page 1

- 61 -

IND-IA

INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT

Technical Development Fund Guidelines

1. The following two pvblications present the guidelines by which theTDF now operates.

Government of IndiaMinistry of Industry

Department of Industrial Development

PRESS NOTE

Subject: Import of Technology and Capital Goods under the TechnicalDevelopment Fund Scheme - liberalisation of the Scheme.

The Government of India introduced the Technical Development FundScheme (TDF) in 1976 in order to encourage modernisation and upgradation oftechnology by existing industrial units. The Department of IndustrialDevelopment has been operating this scheme. Over the years, the TDF Schemehas proved to be a valuable scheme for modernisation and upgradation oftechnology by existing industrial units. On the basis of a review of thescheme, it has been decided to further liberalise the scheme with a view tomaking it more flexible and result oriented.

2. This scheme will now be available for the import of the followingitems by existing industrial units for their modernisation and upgradation oftechnology:

a) Capital equipment (all types).b) Technical Know-how.c) Technical assistance.d) Technical drawings and designs.e) Technical consultancy services.

3. In order to avail of the facility under this scheme, it must beshown that the proposed modernisation and upgradation of technology wouldcontribute significantly to any of the following results:

1. Quality improvement.2. Cost reduction.3. Productivity gains.4. More efficient utilisation or conversion of raw-materials/inputs.5. Energy saving.6. Enhancement of export potential.7. Product diversification/Product-mix rationalisation.

ANNEX 6Page 2

- 62 -

4. The ceiling for imports under this scheme will henceforth be theforeign exchange equivalent of Rs. 2 Crores per unit per financial year. Indeserving cases, this limit can be relaxed to enable a total technologypackage to be implemented.

5. The facility will be available to an existing industrial unit thathas commenced commercial production prior to the date of application underthis scheme. It will also be availab'le for product diversification/product-mix rationalisation through the introduction of new and more sophisticatedrange of products, provided the industrial licence/registration of the unitcovers those items.

6. The application under the scheme should clearly state theanticipated increase in production, if any, as a result of the proposedmodernisation and upgradation of technology. In order to be eligible underthe scheme, such increase in production capacity should not exceed 49% of theexisting licensed/registered capacity of the unit.

7. There will be no restrictions on the number of applications that anexisting industrial unit can make in a financial year under the scheme so longas the financial ceiling mentioned in para 4 above is not exceeded.

8. Applications for availing of the facility under the Scheme should bemade at the Secretariat for Industrial Approvals (Technical Development Fund),Department of Industrial Development, Ministry of Industry, Udyog Bhavan, NewDelhi, in the form prescribed for the TDF Scheme together with the formprescribed for the capital goods import, foreign collaboration, designs anddrawings, etc. as the case may be. The application should be made in 12copies. In the case of an application for import of capital goods, it shouldalso be accompanied by a treasury challan for the prescribed application fee.

9. A simplified procedure will be followed under the scheme forexpeditious approval of the proposals:

a) Foreign Exchange allocation will be simultaneously made.

b) The technical authority concerned will give indigenous clearance,and in deserving cases, the indigenous clearance may be waived.

c) Decision on applications will be given as far as possible within 45days.

d) Import licenses will be granted by the Regional Licensing Offices.

10. The revised scheme is effective from 1st April, 1988.

11. This supersedes all the earlier Press notes/instructions applicableto this scheme. !

No. 2(1)/88-TDF New Delhi, the 22nd April, 1988

ANNEX 6Page 3

- 63 -

Forwarded to the Principal Information Officer, Press InformationBureau, Government of India for issuing the Press Note and giving it a widepublicity.

(signed)(K. J. BEDDY)

JOINT SECRETARY TO THE GOVT. OF INDIA.

Press Information BureauShastri Bhavan,New Delhi

Government of IndiaMinistry of Industry

Department of Industrial Development

PRESS NOTE (1989 series)

Subject: Import of Technology and Capital Goods under the TDF Scheme -Further liberalisation of the Scheme.

Government of India attach high priority to the modernisation andupgradation of technology by industrial units so that they can continuouslyimprove the quality of their products, reduce the cost of production, andachieve greater efficiency and competitiveness. The Technical DevelopmentFund Scheme (TDF) is one of the important schemes administered by theDepartment of Industrial Development to encourage this objective. This schemehas been found useful by existing industrial units to implement speedily theirschemes for modernisation and upgradation of technology. The scope andcoverage of the scheme was liberalized by the Government with effect from 1stApril, 1988 by this Department's press Note No. 2(1)/88-TDF dated 22nd April,1988. On the review of the scheme, it has been decided by the Government tofurther liberalise the scheme as follows to enable existing industrial unitsto implement modernisation and technology upgradation schemes:

1. The ceiling limit for import of technology and capital goods will bethe foreign exchange equivalent of Rs. 3 crores per unit perfinancial year instead of the present limit of Rs. 2 crores. Indeserving cases, this limit may be relaxed to some extent to enablea total technology package to be implemented without fragmentation.

2. The ceiling limit of Rs. 3 crores will be relaxed up to 50% in casean industrial unit exports more than 10% of the total turnover ofthe company or the industrial unit exports more than 25% of theproduction of a particular item for which the TDF approval is soughtby it. Appropriate guarantees will be sought for the fulfilment ofthis export commitment. This is intended to provide an extra

ANNEX 6Page 4

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incentive for units that are willing to show significant exportperformance.

3. In addition to the existing coverage, the scheme will also beapplicable for taking up the manufacture of any item included in thebroad-banded group in the licence/registration held by theindustrial unit, even though the unit may not be currentlymanufacturing that item.

4. In the case of non-NRTP/non-FERA companies, including section 20 (b)MRTP companies in respect of products in which they are notdominant, there will be no limit on expansion of capacity arisingout of the implementation of the technology upgradation ormodernisation scheme. The existing limit of 49% for such capacityexpansion will, however, continue in the case of MRTP/FERAcompanies, including section 20 (b) MRTP companies in respect ofproducts in which they are dominant.

5. In the case of industrial units who have reported to the BIFR interms of the Sick Industrial Companies Act, the scheme will besuitably relaxed to enable the units to achieve cost reduction orimproved profitability by forward or backward integration or byother suitable measures. This is intended to enable such units toimplement modernisation and cost reductio schemes quickly forrecovering their financial wealth.

2. The above mentioned changes in the TDF Scheme will take effect from1st April, 1989. In respect of all other matters, the provisions of thisDepartment's press note No. 2 (1)/88-TDF dated the 22nd April, 1988 willcontinue to apply.

3. Government hope that this liberalisation in the TDF Scheme will givea further boost to modernisation and technology upgradation by existingindustrial units.

No. 2(1)/89-TDF New Delhi, the 17th March, 1989

Forwarded to the Principal Information Officer, Press InformationBureau, Govt. of India for issuing the Press Note and giving it a wisepublicity.

(sligred)(A. V. Ganesan)

Addl. Secy. to the Govt. of India

Press Information BureauShastri Bhavan,New Delhi

ANNEX 7Page 1

- 65 -

INDIA

INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT

Technical Development Fund and Ministry of Industry--

Organizational Structure

Ministry of Industry (MOI) currently comprises the following fourdepartments:

1. Department of Industrial Development (DID);2. Department of Company Affairs;3. Department of Chemicals and Petro-Chemicals; and4. Department of Public Enterprises.

The DID is the primary government agency for promotion ofindustrialization, including formulating and implementating industrial policyin accordance with national priorities and objectives. The three remainingdepartments are more narrowly focused on the specific cases or subsectorsnoted in their names. The DID is responsible for supervising the system ofindustrial licensing (under the provisions of the Industries Development andRegulation Act of 1951) as well as the regulations related to the import ofcapital goods, technology and foreign investment.

Within the MOI, several committees have been formed which draw onofficials of MOI as well as those of other ministries and of the PlanningCommi3sion. Among the most important ones are thos econcerned with the importand adaptation of foreign technology, i.e. the Capital Goods Committee (CG),which decides on large capital goods imports and the Technical DevelopmentFund (TDF) Committee. In addition, there are several committees which areconcerned with new projects such as the Project Approval Board (PAB), theLicensing Committee (LC) and the Technical Evaluation Committee (TEC).

The TDF described in paras. 3.23-3.26 of the report has a committeewhich meets eve,y two weeks and is made up of the following members:

Additional Secretary of the Industry,Department of Ind. Dev. Chairman

Joint Secretary (Finance) MemberJoint Secretary (Industrial Approvals) MemberEconomic Advisor (Indu3try) MemberAccording to particular subsector under dis-cussion, committee will have additional mem-bers of the following organizations:

A. DGTDB. Administrative ministriesC. Planning Commission

Assistant Economic Advisor of DID Member Secretary

ANNEX 7Page 2

- 66 -

Applications below Rs 1 million (US$67,000) can be approved by the secretariatwithout submitting it to the TDF committee--in effect a free limit.

The value of TDF approvals through the end of March 1989 is presented inTable 1.

Table 1: TECHNOLOGY DEVELOPMENT FUND SCHEME (TDF), 1976-89

Drgs. & designs,know-how, or

Total Capital goods consultancyNumber Value Number Value Number Value

(Rs mln) (Rs mln) (Rs mln)

1976-77 791977-78 1011978-79 152 361.8 -- 144.4 20 17.41979-80 169 192.6 124 158.0 45 34.61980-81 278 345.5 183 249.4 95 96.11981-82 215 253.5 195 226.5 20 27.01982-83 201 313.8 158 250.1 43 62.91983-84 208 361.0 132 251.3 76 109.71984-85 267 496.2 166 327.8 101 168.41985-86 272 597.8 133 279.2 139 318.61986-87 272 691.5 125 352.2 147 339.31987-88 211 629.0 106 363.5 105 265.51988-89 256 1,040.0 140 583.0 116 457.0

ANNEX 8

- 67 - Page 1

INDIA

INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT

Proiect Technical Assistance for Technology SuDoort Services

A. CSIR

1. Support will be provided to CSIR for institutional developmentinitiatives in the following areas: (a) technical assistance and training toenhance CSIR's capability to market and manage its technology services toindustry, (b) a program to upgrade laboratory safety standards, and (c) aconsultant study to review and recommend improvement of NCL's managementsystem to serve as pilot effort for planning and management systems at otherCSIR institutes. The costs of these programs are estimated as follows:

UsS

Technology marketing and management 300,000Laboratory safety program 400,000NCL management system 300,000

Total 1.000.000

2. Technology Marketing and Management. The propn,ed technicalassistance program will finance:

(a) a study to develop a technology marketing and managementstrategy. Two consultants, with expertise in the marketing andmanagement of R&D output would be employed to work with a smallCSIR team to devise a strategy, protocols and practices for (i)a marketing survey/intelligence to provide a basis for CSIR R&Dpriorities, (ii) assessing technology generated in CSIR for itsupgrading/upscaling, patenting, licexising and sales, and(iii) designing the training program noted below; and

(b) training programs for CSIR headquarters and institute personnelwho are in or will join technology marketing and managementunits. Training would take place in both India and abroad. Thefocus of the training is to gain experience and expertise in (i)mechanisms of technology transfer negotiation, packaging andpricing; (ii) options for selecting clients, technologyarrangements, support services and long-term industry relations;and (iii) strategies and procedures for carrying out marketsurveys to help guide individual institutes in deciding onfuture programs and priorities.

ANNEX 8

-68- Page 2

3. This component will be organized and supervised by the TechnologyUtilization group (TUG) at CSIR. To monitor and measure the impact of thiscomponent, the following performance indicators for CSIR's entire laboratorynetwork have been agreed with the TUG for the period 1990-95:

(a) revenue from contract research to increase 15% p.a.,

(b) revenue from consultancy value to increase 20% p.a.,

(c) earning from sale of intellectual property to increase 25% p.a.,

(d) income from sale of services to reach US$1 million,

(e) technology marketing and management units (or their equivalent)to be set up at the majority of institutes by 1992, and

(f) operating guidelines and training to be completed by 1993 forthe units in all institutes supported under the project.

4. Laboratory Safety Program. Although CSIR laboratories have basicsafety equipment and facilities, the implementation of safety measures has notbeen adequate. This problem has been recognized by the leadership at CSIR andconfirmed by Bank missions. Major contributing factors to this probleminclude lack of proper protocols for safety management, insufficient well-trained personnel with responsibility for safety, and inadequate prioritygiven to safety at individual institutes.

5. In order to improve and upgrade safety levels, the program will:

(a) identify risks and hazards of each laboratory,

(b) study procedures and protocols adopted by well-knownlaboratories abroad,

(c) evolve and devise protocols for safety suited to Indianconditions, and

(d) implement the protocols through training of personnel andcreation of safety cells in laboratories.

6. As a first measure, a safety cell would be formed at CSIRheadquarters, which would draw upon personnel knowledgeable and experienced inthe area from different CSIR laboratories. A three-person team in each area.chemical, biological and engineering) along with consultants would visitwell-known laboratories and R&D organizations to study their practices andprotocols for safety management. They would then evolve a code of safetypractices and associated training suited to Indian working conditions andenvironment. The protocols would be submitted to outside experts for reviewand recommendations, and finally approved by CSIR.

7. Once the protocols are approved, it is proposed to train about 80scientists in 2 batches using foreign and domestic as well as in-house

ANNEX 8

- 69 - Page 3

experts. Local costs of arranging the training would be met by CSIR; thecosts of Indian and foreign consultants would be met from project funds.

8. The TUG will be responsible for organizing and supervising theprogram. The agreed actions and measurable indicators are summarized asfollows:

(a) the safety cell at CSIR headquarters will be established beforeany CSIR institute can receive funding under the project;

(b) after implementation of the program, the safety cell will trainat least 100 additional personnel (in addition to the 80 duringthe program) on all aspects of instituting a laboratory safetyprogram; and

(c) by 1992 safety manuals for the different disciplines would bedistributed to the corresponding CSIR laboratories.

CSI would be responsible for funding the necessary follow-up actions toinstitute the safety program.

9. NCL Management System Upgrading. Changing the orientation of CSIRlaboratories to provide more effective service to industry will requirechanges in management as well as planning systems. NCL has been chosen as apilot case to gain experience in designing an effective management system thatintegrates R&D activities with business strategy and marketing. The projectwould finance:

(a) an international consultant study carried out in closecollaboration with key NCL leaders to (i) assess the currentapproach to industrial liaison and develop a strategy andoptions for closer liaison with industry and financialinstitutions, (ii) design and establish a project-based costaccounting syscem, (iii) review and improve project selectionand budget allocation system and process, (iv) review andimprove marketing and technology management, and (v) review thetechnology management organization at NCL and propose, ifdesirable, options for modifying the organizational structure;

(b) subsequent training programs and preparation of an MIS forimplementation. The technical assistance program willcomplement the other project assistance to NCL. Agreedperformance indicators are presented in Annex 13; and

(c, a follow-up evaluation to determine the appropriateness andapplicability of the NCL management system to other RIs in theCSIR.

B. ICICI and ITD Studies

10. Support would be provided to IC'CI's TG for building its capacity tostrengthen industry-TI collaboration. ICICI would receive about US$100,000equivalent for foreign technical assistance, as required, to evaluate selected

Ah L.1Page 4

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TI proposals and for short-term training and exposure to programs in othercountries which attempt to achieve similar objectives as the technologyservices component of the proposed project.

11. An additional US$600,000 would be used to undertake a series ofstudies on the impact of key policies and factors on ITD in India. Studieswould include for example a comprehensive study of "in-house" R&D, includingwhat it has accomplished and if and how more should be stimulated.

12. The remaining US$250,000 would be contracted by ICICI for technicalassistance or studies for (a) the development of a technology informationsystem which can be used by firms to access technologies in India and abroad,(b) the development of training programs (partly financed by industry) intechnology management, and (c) evaluating programs which are aimed atpromoting ITD. All terms of reference, contracting procedures, etc., would besubject to Bank approval.

C. BIS

13. As India's exports increase, Indian industry will need increasedaccess to information and supporting service on standards, regulations andcertification and testing requirements of importing countries. To assist BISin exploring options for providing such information and service, a consultantstudy would determine (a) alternative approaches with costs and benefits ofestablishing a pertinent foreign standards and regulation data base and cross-indexing it with counterpart Indian standards regulations, and (b) alternativemethods of providing access to firms of information and ways of reaching outto BIS clients. The study would be carried out by consultants, probably frominternational standards organizations in collaboration with BIS. The cost isestimated at about US$50,000.

A LI2

- 71 - Page 1

INDIA

INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT

Technology Development and Information Company of India. Ltd. (TDICI)

1. ICICI established in early 1987 a Venture Capital Division whichappraised and approved in the 15-month period ending March 1988 some 9projects for a total financial assistance of Rs 5.5 crores. Based on thisexperience, ICICI felt the need to promote its venture capital activitiesinto a separate entity with its specific corporate culture adapted to theneeds of venture capital finance.

2. The Technology Development and Information Company of India, Ltd.(TDICI) was created by ICICI in August 1988 and based in Bangalore (India'shigh-tech center), with the mission of "accelerating the technologydevelopment process in India through the provision of capital, financial andother support services.' Its primary objective in its initial years ofoperation would be to provide finance, particularly venture capitalassistance, to promote commercial, market-oriented technology ventures; itwould alsn lay down the foundations for providing at a later stage techno-managerial services and technology information and consultancy services toits clients. To achieve its first objectives, TDICI would manage, for amanagement fee and a share in the profits, a series of VCFs to be subscribedby financial institutions and corporate and private investors.

3. TDICI initially took over the management of ICICI's first 9 venturecapital investments. During its first 8 months of operations, TDICIapproved and financed for a total of Rs 9 crores another 21 technologyinnovative ventures, most of them in the rapidly growing fields of chemicalsand materials, pharmaceuticals, food and bio-technologies. Its financialsupport, averaging Rs 0.5 crores (US$0.33 million) per project, has beenmainly through equity participations and conditional loans. This set of 30projects have been transferred to a first Venture Capital Fund of Rs 20crores, created in March 1989 under a new Venture Capital scheme of UTI andsubscribed equally by ICICI and UTI.

4. TDICI has presently a pipeline of about 20 projects in the finalstages of appraisal and processing, with total assistance requirements ofRs 13.5 crores. In addition, it has a portfolio of some 45 proposals forfinancial assistance likely to total an estimated Rs 39 crores. To financethose projects of the pipeline which will reach the final approval stage(about half of proposals), TDICI will float in May-June 1989 a second VCF ofRs 30 crores (of which Rs 5-Rs 7 crores are reserved for corporate sectorcontributions) and a third VCF of Rs 60 crores in 1990. The AsianDevelopment Bank (ADB), the Commonwealth Development Corporation (CDC) andother international agencies (including IFC) have been approached for, andexpressed interest in, subscribing to these funds. The level of demand forventure capital finance, as reflected by TDICI's pipeline built-up over oneyear, and TDICI's strong human resources (nine full-time experienced

ANNEX 9Page 2

- 72 -

professionals in Bangalore, and four part-time professionals in ICICI-Bombay) justify the total Rs 90 crores resources to be invested by TDICIduring the next 3 years and the proposed Bank assistance of US$20 million toICICI, representing one-third of this amount.

5. Typical venture capital projects already, or about to be, financedby TDICI are given in the attached Table 1. They cover a wide range ofinnovative products and services, from alloys and fine chemicals toengineering industries, electronics, pharmaceuticals, software andbiotechnology. Project costs range between Rs 0.5 and Rs 1 crore(US$0.33-US$0.66 million), projected sales between Rs 1 and Rs 6 crores(US$0.66-4 million), and royalties between 1% and 7% of sales. TDICIfinancial assistance covers between 66% and 100% of the projects' costs, andis extended mainly in the form of conditional loans (average share of 70%),equity participation (20% on average) and standard loans.

6. Financial projections (disbursements, basic assumptions, incomestatement, cash-flow statements) for the 2nd and 3rd VCFs of TDICI are givenin Table 2. Disbursements would be spread over four years (1990-1993). TheVCFs would be closed 10 years after last disbursements, and their cash flowsdistributed regularly over time to the VCFs owners, including ICICI whichwould use part of the proceeds to repay the Bank subloan. The overall IRRunder quite conservative assumptions would be 16.7%, yielding a 21.7% IRR toICICI's equity investment after repayment of the Bank subloan.

Table 1: Representative Vonture Capital Proiects Financed by TOICI(Ks Crores)

Projected TDICI FinancingProject Cost Annual Sales Std Loan Condit Loan Equity Total

Product

Software 0.92 1.06 0.30 0.8s - 0.65Biotechnology 0.61 0.97 - 0.34 0.08 0.42Automated Carments 0.45 3.36 - 0.38 0.02 0.40Pharmaceuticals 0.77 3.66 - 0.58 0.10 0.88Automotive Parts 0.77 3.16 - 0.40 0.05 0.45office Technology 0.93 8.00 - 0.68 0.11 0.79cheOic s 1.00 5.08 - 1.00 - 1.00Biotechnology 1.90 9.00 - 1.10 0.3S 1.36

Chemicals n.a. n.a. 1.60Control Systems n.a. n.a. 0.60Telecoms Relays n.a. n.s. 0.32Software n.n. n.s. 0.46Medical Technology n.s. n.s. 1.60Metal Alloys n.e. n.n. 1.60Software n.s. n.a. 0.40Photovoltaics n.e. n.a. 0.70Tissue Cultures n.a. n.e. 0.8SCompressors n.e. n.a. 0.68Micro Electronic Circuits n.n. n.a. 1.30CAD Software n.a. n.a. 0.46Fine Chemicals/Drugs n.e. n.a. 1.00

I F3 2

I-'%

Table 2: Financial Prolections for TDICI Venture Capital Funds(Rs Crores)

Project Disbursement Assumptions

1990 1991 1992 1993Amount Amount Amiunt Amount Failure Rate Percentage Converted

Conventional Loan 1.8 5.3 7.8 6.1 Conventional Loans 3% S0%Conditional Loans 4.3 11.6 17.9 13.8 Conditional Loans 30% S0%Equity 2.4 8.2 10.9 8.8 Equity 30X

Total 8.3 23.1 38.6 28.3 Conditional Loan Royalty 8.0% of Sales

Equity Disinvestment 100% in the 5th and 7th yearDividend 0.0% 8Price Fact 67.0X 2 original value

43.0% 8 original value

IRR_

Conventional Loan 23.7%Conditional Loan 14.9%Equity 19.9%Total Portfolio 18.7%Equity Investors 21.7%

09 crX

0..tI

ANNE 9Table 2

-75 Page 2 of 3

IINCDMIIL EIPE110ITUIE STNEMIIEI

-9, I_2 IS9 14 1995 19I6 1997 1999 199 2000 2001 2002 2003 2004

Interest Coav.Loaa

Lour Risk 0.22 o. 2.00 2.69 2.44 1.71 1.02 0.61 0.33 0.12 0.02

0.22 0.94 2.00 2.6t 2.44 1.71 1.02 0.61 0.33 0.12 0.02 0.00 0.00 0.00

Conditional Loan 1.09 3.79 7.67 10.12 10.15 9.99 9.99 9.99 9.14 6.94 3.29 0.60

Cnvrt.Lns.-Div. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Realization 0.71 2.36 9.89 18.77 24.96 19.56 4.35

Orking.Cap,Fund 1.93 2.98 3.93 2.94 2.94 2.94 2.94 2.94 2.94 2.94 2.94 2.94 2.94 2.94at 12.5l

EquityDividends 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Realization 1.92 4.92 14.49 20.08 27.24 15.78 2.91

0.00 0.00 0.00 0.00 1.92 4.92 14.49 20.09 27.24 15.78 2.91 0.00 0.00 0.00

TOTAL INWHE 2.15 3.92 7.01 9.41 15.67 22.06 37.47 52.39 65.35 47.39 I.36 9.77 6.23 3.54

EXPENSES

lriteoffs

Conventional Loans

Lowr Risk 0.05 0.16 0.23 0.18 0.05

Conditional Loans 1.29 3.49 - 5.38 4.08 0.91

Equity 0.72 1.93 3.27 1.97 0.36

Total Writeoffs 0.00 0.00 2.05 5.50 9.89 6.23 1.32 0.00 0.00 0.00 0.00 0.00 0.0u 0.00

Ad,inistrative Esp. 0.47 0.47 0.99 1.30 1.25 1.16 1.14 1.14 1.14 1.14 1.14 0.53 0.53 0.53

Nhnagent Fe 0.31 0.31 0.69 0.94 0.84 0.77 0.76 0.76 0.76 0.76 0.76 0.35 0.35 0.35

TOTAL EXPEISES 0.79 0.79 3.72 7.75 10.97 8.16 3.22 1.90 1.90 1.90 1.90 0.59 0.90 0.83

6ROSS PROFIT 1.36 3.04 3.29 1.66 4.70 13.90 34.25 50.49 63.45 45.49 17.46 9.89 5.34 2.o5

Profit Tax 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

NET PROFIT '.36 3.04 3.29 1.66 4.70 13.90 34.25 50.41 63.45 45.49 17.46 9.89 5.34 2.65

ANNEX 9Table 2

- 76- Page 3 of 3

SOLCES & USE OF FUNDS

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 1002 2003 2004

EouitytiDlE 10.7? 19.10 28.14 8.44vWold Bank 5.28 9.70 13.86 4.16

16.00 29.40 42.00 12.60

Wot Incoas 0.00 2.36 3.04 3.29 1.66 4.70 13.40 34.25 30.49 63.45 45.49 17.46 8.89 5.34 2.oSAdd

Oritooffs 0.00 0.00 0.00 2.05 5.50 6.89 6.23 1.32 0.00 0.V0 0.00 0.00 0.00 0.00 0.00

RspayuntsConv*ntooaal Loans

Lomar Risk 0.31 1.19 2.18 2.b0 2.31 2.01 1.49 0.73 0.15 0.00 0.00 0.00

Total ktpayats 0.00 0.00 0.00 0.31 1.19 2.18 2.60k 2.31 2.01 1.49 0.73 0. 15 0.00 0.00 0.o0

TOTAL SOURCE 16.00 30.76 45.04 19.25 8.36 15.7 22.73 37.88 52.50 64.94 44.22 17.60 .8.9 1.'j4 2.65

USES

Conventional Loans

Lowa Risk 1.60 5.34 7.77 6.05 1.51 0.00 0.00 0.00

Coadittonal Loans 4.29 11.64 17.93 13.60 3.03

Equity 2.40 6.17, 10.91 6.55 1.21

TOTAL DIRECT USES 8.29 23.15 36.61 26.21 5.75 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00NET SOURCES OF FUNIDS 7.71 7.61 8.42 -7.96 2.61 15.76 22.73 37.88 52.50 64.94 46.22 17.60 8.89 5.44 2.b5Dividuods/VEF Holders 2.61 15:76 22.73 37.88 52.50 64.94 46.22 17.60 8.89 5.34 26.16Alloc.to Orking.Cap. 7.71 7.61 8.42 -7.96 0.00 0.00 0.00 0.00 v.00 0.00 0.00 0.00 0.30 0.00 -23.51

Orkmng.Cap.Fnd.

opening Balance 7.71 15.43 23.04 31.46 23.51 23.51 23.51 23.51 23.51 23.51 23.51 23.51 23.51 23.51 23.11Accrul 7.71 7.61 8.42 -7.96 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -23.51Closing balance 15.43 23.04 31.46 23.51 23.51 23.51 23.51 23.51 23.51 23.51 23.51 23.51 23.51 23.51 0.vO

Dividunds Distibutio. -

WorM Sank Repaymnts 0.00 0.00 0.00 0.00 0.00 0.00 0.93 2.64 5.08 5.82 5.92 5.82 5.82 5.92 S.OZDividmnds-Loan Rapyt 0.00 0.00 0.00 0.00 2.61 15.76 21.79 35.24 47.41 59.12 40.41 11.79 3.08 -0.47 20.23Loan Rapyt reserve 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -11.72

ANNEX 10-77 -

INDIA

INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT

CANBANK FINANCIAL SERVICES, LTD. (CANFINA)

1. The parent institution, Canara Bank (CanBank), created in 1906 andnationalized in 1969 with 13 other commercial banks, is currently the thirdlargest bank in India. By end 1988, it had a staff of 49,400, some 1,950branches throughout India (and one in London), and total assets of Rs 13,060crores (US$8.3 billion). Its outstanding features are its dynamism inoffering new services to its clients, a rapid growth, and high profit-ability. Deposits increased 'rom Rs 4,325 crores in 1984 to Rs 9,340 croresin March 1989 (+21% p.a.), ar.; its investment portfolio from Rs 1,235 croresto Rs 3,068 crores (+25? p.a.) over the same reriod. Its 1987 net profit ofRs 45 crores, representing an 18X return on equity, was the largest of allcommercial banks. Its audited accounts are summarized in Table 1. CanBankhas participated ia two Ban projects for Export development; the results ofits involvement has been saLisfactory. 1/

2. Canara Bank established in July 1987 a wholly-owned subsidiary,CinBank Financial Services, Ltd. (CanFina), specialized in financialservices, merchant banking and leasing. In its first year of operations, ithas become India's top manager of capital issues on the Stock Exchange (54public issues). Its net prefit of Rs 12.7 crores in 1988/89 represented a55X return on equity, and permitted to serve a 18? dividend (see Table 1).It set up in September 1988 an Industrial Consultancy Division of 12professionals providing comprehensive services in project promotion,management, research and training to industry. This Division, staffed withexperienced engineers and investment bankers, would be responsible formanaging CanFina's VCF of Rs 25 crores, to be funded initially for an amountof Rs 10 crores. CanFina has also approached CDC for an equity partic-ipation of the latter in its VCF. The Bank's assistance of US$5.25 millionto CanBank would represent one-third of the VCF. CanFina's initial pipelineof eight projects for venture capital financing would represent a totalinvestment of Rs 17.25 crores, of which Rs 3.2 crores for equity.

3. Financial projections for CanBank's VCF are provided in theattached Table 2. Disbursements would be made over 3 yars (1989-1991).The VCF cash-flow would be distributed regularly over time to VCF owners,including CanBank which would use part of the proceeds to repay the Bankloan. The overall IRR under very conservative assumptions would be 14.8%,yielding a 16? IRR on CanBank's equity investment after repayment of theBank loan-

1/ For more details on Can Bank's performance, See Annex IV of SARNo. 7603-IN.

Tabl- 1: Synopsis of Csnara Bank Activities and Results(in Re Crores)

1984 198S 1988 1987 1988e89

Summary Balance Sheet (before distribution):

Assets: Investment Portfolio 1,235.1 1,498.5 2,163.6 2,722.2 3,068.8Loans/Advances Portfolio 2,813.8 3,580.2 4,188.4 4,659.3 6,802.0Cash and Deposits 840.4 949.1 1,037.5 1,573.2 1,572.5Other Assets 1,197.4 1,609.9 1,968.7 1,943.8 2,622.7

Liabilities: Capital and Reserves 656. 101.0 186.1 248.0 352.7Deposits 4,324.6 5,628.2 8,818.4 7,878.4 9,340.7Borrowings 716.6 939.8 1,192.5 1,496.3 1,656.9Other Liabilities 991.1 948.7 1.141.1 1,276.8 1,816.9

Total Assets/Liabilities 6,088.7 7,817.7 9,318.1 10,898.3 13,088.2

Summary Income Statement:

Income: Interest Payments 417.7 550.2 677.1 848.4 1,287.9Other Income 26.7 33.8 48.4 69.5 85.7Total 443.4 84. 0 723.6 907.9 1,363.6

Less: Interest Paid 292.1 391.0 493.3 615.7 925.9 1Salaries/Others 145.8 182.0 212.0 247.2 872.8Total Expenses 437.9 573.0 705.3 882.9 1,298.7

Net Profit 5.6 11.0 18.2 46.0 64.9As % of Equity 10.0 11.0 11.0 18.1 16.8

CanBank Financial Services Ltd (CANFIN)

1987/88 1988/89 1987/88 1988/89Balance Sheet: Summary Income Statement:

Not Fixed Assets 12.1 66.6 Income: Merchant Bkg 6.1 16.3Othor Assqts 4.7 43.7 Other Income 1.8 13.5

Less: Expenditures 3.6 17.1Capital/Reserves 12.0 22.9Unsecured Loan 4.8 77.3 Net Profit 3.2 12.7

Total Assets/Liabilittoe 16.8 100.2 Dividend (X) 14.0 18.0

It0

Table 2: Financial Proiections for CanBank Venture Capital Fund(Rs Millions)

Pro;ect Disbursement Assumptions

1989 1990 1991Amount Amount Amount Failure Rate Percentage Convertod

Conventicnal Loan Conventional LoansHigh Risk (8.671) 3.47 7.37 9.64 High Risk 20XLow Risk (4.331) 1.73 3.68 4.76 Low Risk 101 s0X

Income Note (12.00S) 4.80 10.20 13.20 Income Notes 30X s0XConditional Loan (16.00%) 6.00 12.76 18.60 Conditional Loan 40X s0XEquity (680OOX) 24.00 51.00 68.00 Equity 40X

Total 40.00 86.00 110.00 Income Note Royalty 2.60X of SalesConditional Loan Royalty 6.001 of SalesIncomo Note Interest Floor 6.00e

Equity Disinvestment 100% in the 7th yoarDividend 12.0X from Year 6Price Fact 40X 7 original value

8OX 3 original value

IRRs

(Pro-Tax and Pre-Exp. for Each Instrument)

High Risk Conventional Loan 20.01Lower Risk Conventional Loan 21 .6Income Note 18.3XConditional Loan 14.3XEquity 17.11Total Portfolio 15.3XEquity Investors 21.81

00 a,

o o

ANNEX 10Table 2

-o0- Page 2 of3

IKCW I EIPENSITIDE STATEENT

1990 0991 1992 199 19 W99 1996 199 1991 1999 200 2001 2002 2003 2')04 2005

laterest Caav.LweRioh Risk 0.22 0.69 1.30 2.93 2.39 1.57 1.40 1.06 0.75 0.42 0. 15Lowu Risk 0. 09 0.29 0.55 1.49 0.13 0.62 0.50 0.39 0.27 0.05 0. 06

0.32 0.9" 1.35 4.47 3.52 2.20 1.91 1.46 1.02 0.53 0.21 0.00 0.00o 0.00 0.0o0 .00Jacome NoteIntterst 0.20 0.63 1.13s 1.LZ 0.95 0. be 0.52 0.36 0.20 0.07 0.00Royalty 0.31 2.52 4.74 4.74 4.74 4.74 4.74 4.74 4.74 3.93 2.22

0.20 0.63 0.03 1.02 O.95 1.49 3.04 5.00 4.94 4.61 4.74 4.74 4.74 4.14 3.93 2.22Canditional Loan 1.30 4.05 7.61 71.61 7.60 7.60 7.61 7.61 7.60 7.oI o.32 3.56

CovrU.ns.-Div. 0.00 0.00 0.43 1.33 2.51 2.08 1.07 0.00 0.00 0.00 0.00 0.00 0. U( 0.00C&P.Iains 19.71 40.33 54.20

liking.Cap.Fund 0.00 0.19 0.89 0.30 0.81 0.91 0.30 0.61 0.61 0.91 0.01 0.91 0.31l 0.81 0.91 0.31at el

EquityOivsdscds 1.73 5.40 10.05 3.42 4.75 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Capotul gains 0.00 0.00 66.24 140.76 192.16 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.0 0.00 0.00 I. 73 0.0 763 49.1O 96.i 00 .o 00 .0 00 .0 0

TOTAL 19000 0.52 0.30 3.92 6.40 8.73 15.29 111.9 208.14 256.69 13.31 o:.37 13.16 13.16 13.16 11.06 6.59

EXPENSES

Wr1t..ffs

Conventional LoansHIhgk Risk 0.69 0.47 1.91Louar Risk 0.17 0.37 0.48

Income Not"e 1.44 3.06 3.96

ConditionAl Loas 2.4 5.0 6.6

Equitv 9.60 20.40 26.40

Total Writeoffs 0.00 0.00 14.31 30.40 39.34 0.00 0.00 0.00 0.00 0.00 0.00j 0.00 0.00 0.00 4J.00 V.6,

Administrative Fee 1.39 1.83 3.31 2.95 2.26 2.26 2.26 2.26 2.26 0.53 0.53 0.53 0.53 0.53 0.13 0.53

Wnanqemat Fee 1.25 1.25 2.21 1.90 1.50 1.51 1.51 0.51 1.50 0.35 0.35 0.35 0.35 0.35 0.35 .5

TOTAL EVPENSE 3.13 3.13 19.32 35.16 43.12 3.77 3.77 3.77 3.77 0.33 0.38 0.93 0.33 0.38 0.33 SO.

GROS PROFIT -2.61 -1.32 -15.90 -29.76 -34.39 11.50 109.20 204.37 252.91 ii.93 12.49 02.23 02.29 02.23 10.18 5.71

Profit Tax 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.0O 0.00 0.00 MOv v. vo

MET PROFIT -2.61 -1.32 -I5.9 -29.76 -34.39 10.51 009.21 204.37 252.91 12.93 12.49 12.28 12.28 12.23 10.18 !.-,I

ANNEX 10Table2

- 81- Page 3 of 3

S1C I USES SOF FMS

1919 I9 1991 9m 1993 1 191995 996 1997 39;3 1999 2000 20v3 2002 2003 2004 2005

EquatyCull 30 *0 80

IblE bnt 10 30 40

4 0 120

t l taco. 0.00 -2.61 -3.32 -15.90 -22.76 -34.39 11.51 108.21 204.37 252.91 12.93 12.49 12.23 12.21 12.28 11.18 5.71Mi

riteffs 0.00 0.00 0.0 14.S3 30.40 39.34

R"0naytsCmne.tiosal Lons

Hip Risk 0.00 0.00 0.28 0.87 1.63 1.u3 1.63 1.35 0.76 0.00 0.00 0.00 0.00 O.iOLogr Rji 0.11 0.35 0.65 0.65 0.65 0.65 0.65 0.54 0.31 0.00 0.00 0.00 0.00 0.00

Incon lNotu 0.56 1.64 2.94 2.63 2.63 2.63 2.18 1.23 0.00 0.00 0.00 0.00 0.00 0.00

Total Rtikuyts 0.00 0.00 0.00 0.67 I.99 3.87 4.15 4.92 4.92 4.47 3.13 1.07 0.00 0.00 0.00 0.00 0.00

TOTAL SWURES 40.00 87.39 118.68 -0.92 3.63 8.83 15.66 313.13 209.2R 257.37 16.06 13.56 12.23 12.2E 12.28 10.18 5.71

Coventiollul WssHio Risk 3.47 7.37 9.54Lower Risk 1.73 3.60 4.76

Incom ot" 4.8 10.2 13.2

Condittonal Loann 6 12.75 I6.5

E4uty 24.00 51.00 66.00

TOTAL IREt USES 40.00 85.00 110.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0-00 0-00 0-00 0.00 0.-0 0-00 0-00T7 S8UltES OF FUIDS 0.00 2.39 O.8 -0.92 3.63 8.83 15.66 113.13 209.28 257.37 16.06 13.56 12.28 12.28 12.28 10.18 5.71videadsadlF Molders 3.63 8.83 135.66 33.13 209.28 257.37 16.06 13.56 12.28 12.23 12.2d 10.18 15.87

Alloc.to Nrkiq.Cap. 0.00 2.39 8.6 -0.92 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.0 0.00 0.0

rtirkng.Ca.Pd.

iOetnit Balance 0.00 0.00 2.39 33.07 10.15 10.15 10.15 10.35 10.35 10.15 10.15 10.35 00.15 10.35 30.35 Is.15 10.35kcrual 0.00 2.39 8.68 -0.92 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.o0 0.00 -30.15Closing Blance 0.00 2.39 11.07 10.15 10.15 10.15 10.15 10.15 10.15 10.15 10.15 30.35 10.35 10.15 10.15 IQ15.

Davndeds Distribution

Iorld Bank Re,nts 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0 .00 0.00 ).00 0.00 0,0 0 '.00Dividdanids-Lon Rtpyt 0.00 0.00 0.00 0.00 3.63 8.83 15.66 II3.13 209.20 257.37 16.06 13.56 12.28 12.21 12.28 10.18 15.87Loan R__yt rsur 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0. 00 0.00 v. W 0J .00

ANNEX 11Page 1

- 82 -

IIDIA

INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT

Andhra Pradesh Industrial Development Corgoratin (APIDC)

1. APIDC, established in 1960, is one of the 26 State IndustrialDevelopment Corporations (SIDCs) owned by the State Governments and createdas autonomous corporations to promote large and medium-scale industries andprovide financial assistance and other :_acilities in their respectivestates.

2. To achieve these objectives, APIDC has fulfilled a number offunctions and services, with the focus on:

- project promotion (project ideas, project evaluation, admin-istration of State incentive schemes) and "escort" services toenterprises (licenses, clearances and infrastructure facilitiesfrom Government authorities); and

- financial assistance, either loans under the IDBI refinanceschemes for term loans and seed capital, 1/ or equityparticipation in joint and private sector projects.

3. Before 1980 when the IDBI loan refinance scheme was introduced,equity investments were the dominant activity of APIDC (60% of its assets).APIDC has invested in 526 medium/large scale induF_..es; of the 380 units inproduction by March 1988, 320 were in the private sector and 57 in the jointsector. About 45% of the assisted units are operating in technology-oriented subsectors (engineering, electronics, chemicals, pharmaceuticals).The equity investment portfolio by March 1988 totalled about Rs 64 crores atbook value (about Rs 80 crores at market value) APIDC's primary objectivein its past equity investments was promotion of industrial investments,rather than profit maximization. Nevertheless, its investment portfolio hasbeen profitable and generating substantial profits.

4. APIDC's financial situation, as summarized in Table 1, is satis-factory. A substantial part of its income (one-third on average) has comefrom its equity investments, in the form of dividends and primarily capitalgains made on disinvestments, an activity where APIDC has gained asubstantial experience. Some of its past investmer earned large capitalgains and dividends, totalling over the years 7 to £4 times its originalinvestment. The yield on the investment portfolio averaged about 7% inrecent years, except in 1986/87 when a slow-down in disinvestments resultedin a small loss in the Corporation's profit and loss statement.

/ Term loans up to Rs 0.9 crores per project repayable with an interestof 14% p.a. (12 1/2% p.a. in backward areas). Seed capital assistanceto encourage 1st generation entrepreneurs, professionals and

Continued on next page

ANNEX 11Page 2

- 83 -

5. The past experience of APIDC in promoting and investing in a largenumber of medium-scale technology-oriented projects 2/ (see Table 2) and thelarge and diversified technological base of Research Institutes in AndhraPradesh, provide a sound basis for the Corporation's plan to establish aVenture Capital Fund oriented towards technology-innovative projects. APIDChas already a pipeline of eight such projects being considered for venturecapital financing, with total investment needs of Rs 10 crore. To this end,APIDC established in April 1989 in consultation with the Bank a subsidiary,APIDC Venture Capital, Ltd., which will specialize in managing VCFs. Itsinitial responsibility will be to manage APIDC's first VCF of Rs 13.5 crores(US$9 million), to be launched under the project with Bank financing toAPIDC for US$3 million and possible equity participations from Indiancorporations, ADB and COC.

6. The attached Table 3 provides the financial projections of APIDC'sVCF. Disbursements would be made over 3 years (1989-1991). The generatedcash-flow would also be distributed regularly over time. The overall IRRunder quite conservative assumptions would be 15.4%, yielding a 17% IRR onAPIDC's equity investment after repayment of the Bank's subloan.

Continued from previous pagescientists, in the form of equity or loans at 1% interest up to Rs 0.15crores for small projects with a total cost below Rs 3 crores.

2.1 About 20% of these projects were successful and yielded good capitalgains and dividends, another 40% have yielded average results anddividends, and the last 40% have been failures.

-84 - ANNEX 11

Table 1

Table 1: Synopsis Table of APIDC Activities and Results(Rs Crores)

1980-81 1984-85 1985-86 1986-87 1987-881. Financial Activities

Approvals: Equity Invests 12.2 8.5 2.3 1.4 14.9Term Loans 16.2 41.5 21.3 25.3 30.1Seed Capital 0.2 2.9 2.8 2.2 1.5

Disbursements: Equity Invests 5.2 6.6 6.2 3.5 5.2Term Loans 5.0 15.6 31.6 19.7 21.0Seed Capital 0.2 1.9 1.7 2.1 1.3

1984-85 1985-86 1986-87 1987-882. Summary Balance Sheet

Assets: Net Fixed Assets 1.0 1.0 0.9 0.9Investment Portfolio 49.0 56.7 59.5 63.9Loan Portfolio 70.2 95.5 111.1 126.9Net Current Assets 0.1 0.4 0.3 0.3

Liabilities: Share Capital 51.4 56.4 61.5 65.0Reserves/Surplus 7.6 7.9 7.0 8.8Outstanding Debt 61.3 89.4 103.3 118.2

Total Assets/Liabilities 120.3 153.6 171.8 192.0

1984-85 1985-86 1986-87 1987-883. Summary Income Statement

Income: Dividends 1.0 0.9 1.7 1.2Capital Gains 2.6 2.8 0.2 3.1Interest Received 2.2 4.8 6.5 8.1Others Income 0.3 0.4 0.4 0.3

Less: Interest Plaid 4.5 6.7 7.9 9.4Others/Adjustments 0.3 1.3 1.7 1.4

Gross Profit 1.3 0.9 (0.8) 1.9Net Profit (After Tax) 0.8 0.3 (0.9) N.A.

Return/Investment 8.1 6.9 3.2 6.9Portfolio (Z)

Table 2: Selected Industries Promoted by APIDC Using Indigenous Technology

A P I D C'sYear of Participation

Sl. No. Investment Product Project Cost Equity Term Loan Present Status(Rs. in Lakhs)

1. 1967-68 Sodium Metal 73.70 8.38 21.47 Highly Successful2. 1975-76 Hydraezine Hydrate 83.43 4.00 6.00 Highly Successful3. 1976-77 Monochloro Acetic Acid 39.55 10.77 44.72 Problematic4. 1977-78 Alkyl Amines 204.07 19.74 79.96 Problematic5, 1978-79 Antibiotics 298.18 9.00 60.00 Problematic6. 1978-79 Drugs and Formulations 194.85 10.05 68.00 HJ9hly Successful i7. 1981-82 Indl. Laminates 95.74 6.22 41.00 Problematic C8. 1982 Active Carbons 68.00 4.50 15.80 Not Satisfactory9. 1982 Theophylline. Aminophylline... 251.62 15.00 89.13 Satisfactory10. 1982 Sulphamethoxazole 105.78 3.20 40.52 Not Satisfactory11. 1982-83 Alcohol from Tapioca 140.C0 4.82 56.68 Satisfactory12. 1982-83 Sodium/Potassium Chlorate 140.00 11.00 60.00 Successful13. 1982-83 Formic Acid 178.00 13.90 80.30 Problematic14. 1982-83 Yeast 184.30 5.75 53.00 Problematic15. 1982-84 CNC Machines 130.00 7.80 89.76 Satisfactory16. 1983 Lactic Acid 205.01 8.97 90.00 Problematic17. 1983 Chloroquine-di-Phosphate 105.78 3.20 40.52 Satisfactory18. 1984 Methyldopa 153.76 10.63 72.51 Satisfactory19. 1984 Iso Syrup 95.00 4.10 37.20 Not Satisfactory20. 1984 Salburamol/Beta, Methazone 251.62 15.00 89.13 Satisfactory21. 1984 Tinidazole 130.25 4.00 56.80 Satisfactory22. 1984 Basic Drugs 127.75 3.66 55.16 Satisfactory23. 1985 Liquid Glucose 198.00 - 90.00 Satisfactory

rii

Table 3: Financial Proiections for APIDC's Venture Cap;tal Funds(Re Millions)

Project Disbursement Assumptions

1989 1990 1991Amu-nt Aut Amount Failure Rate Percentage Converted

Conventional Loan (25.00%) 6.76 10.76 13.26 Conventional Loans 265 60XEquity (76.00%) 26.26 32.26 39.76 Equity 40X

Total 36.00 43.00 63.00Interest Rate 1st a Yaosr Thereon

Conventional Loans 19X 19X

Eoult Disinvestment 10OX in the 7th yearDividend 17.5X from Year CPrice Fact 60X 6 original volue O

50X 3 original volue

IRRs

(Pro-Tax and Pre-Exp. for Each Instrument)

Conventional Loan 21.1XEquity 17.4XTotal Portfolio 16.4%Equity Investors 17.0X

soll

ANNEX 11-87- Table 3

Page 2 of 3

IKOIE I EUITII9 E RIATEHET

19W 1991 199 199 1994 1995 1996 1997 1991 199 2000 '2009 2002 13 2v o4 2..O 005

I4trsrft conv.Lan

1.25 2.11 4.67 3.95 2.99 1.71 1.36 1.05 .19 0.38 0.13

9.25 2.78 4.67 3.95 2.99 9.79 9.33 1.05 0,11 0.38 0.93 0.0 0 .00 0.00 0.00 ;).wj

Cnvtt.Lns.-Div. v.00 0.00 0.57 1.218 2.95 1.58 0.87 v.00 0.00 V.0(, 0.00 V.w O.wg Vv.oC&P.Gaaais 14.17 10.14 22.36

Irking.Cip.Fufid 0.00 0.99 0.41 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65at 122

equityDividgndr. 2.76 6.14 10.32 7.5* 4.97 0.00 0.00 0.00 0.00 0.00 0.00 0.00Capital Bains 0.00 0.00 10.98 87.03 107.33 0.00 MO0 0.00 0.00 ~.0.0 0.00 0.oO

0.00 0.00 0.00 0.00 2.76 6.94 81.19 94.e4 111.50 0.00 '00 0.00 0.00 0.00 0.00 0.00

TOTAL I8001 1.25 2.89 5.08 4.61 6.98 9.79 100.14 116.-5 136.09 1.03 .79 0.65 0.65 0.65 0.65 0.65

EXPENISES

Vritsof4s

Cc*vuntaonal Loans

2.19 2.69 3.31

Equity 10.50 12.90 15.90

Total nriteefOs 0.00o 0.00 12.69 15.59 19.21 0.00 0.00 0.00 0.00 0.00 0.00 vi .00 0. 00 U. 00 0.00 0.i)o

Adainzstrative Feet 9.56 1.56 2.37 2.05 1.67 1.67 1.67 1.67 1.67 0.00 0.00 0.00 0. 00 0.00 0.00 .;.

Hoegaqmnt Fees 0.73 0.78 9.13 1.03 0.84 0.84 0.84 0.84 l.a. 0.6! v.34 L'.00 0. &0 0.jO 00)00

TOTAL EIPEKSES 2.34 2.34 16.24 18.67 21.72 2.59 2.51 2.59 2.59 0.o1 0.34 v.00 0.00 0.60 0. C00 .'

GODlSS PROFIT -9.09 0.55 l11.1A -14.06 '14.74 7.26 97.63 913.55 933.59 0.42 0.45 0.65 0.65 0. o5 -. 65* 0.*5

Profit Tax 0.00 0.00 0.00 0.00 0.00 0.00 35.74 *o,.94 78.47 -bb.38 -39.59 -100.59 0.36 0.36 O.:* ).30

NET PROFIT -1.09 0.55 -11.16 -14.06 -14.714 7.28 69.90 49.60 5!.92 66.9 82.04 101.16 0.2,9 0.29 0.:9 2

ANNEX 1.

-88-

Page 3 of 3

MMc I t0s w FMl

1919 19w 5990 1992 199 1994 099 1994 1997 1911 1919 :oo 2(I) 2002 1'Yv3 2004 :oos

Equity001K 23.45 30.15 34.35Merleha 11453 14.35 11.15

35 45 55

Not lucia 0.00 -1.09 0.55 -11.14 -14.04 -14.74 7.23 61.90 4S.40 53.12 64.60 32.04 101.14 0.29 0.29 0,29 0.219

Irateeffs 0.00 0.00 0.00 12.49 15.59 9.21I

Cuvuetima Loss

0.47 1.04 1.75 1. 75 1.75 t. 75 1.75 1.29 0.11 0.00 0.00 0.00 0.00 0..%0

Total Rsyaymts 0.00 0.00 0.00 0.47 1.04 1.75 1.15 1.75s 1.75 1.75 1.29 0.71 0.00 t.00 0.00 0.00 0.00

toTAL. SAumE 35.00 43.91 55. 55 2.00 2.57 6.22 9.04 63.65 50. 34 56.397 69.00 32.75 101.14 0.29 0.29 0.49 0.279

Conventional Lou'

3.75 10.1! 3.

EquIty 26.25 32.25 39.75

TOTAL DIECT USES 35.00 43.00 53.00 0.00 0.00O 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.,00WT SOIICES OF FM13 0.00 0.91 2.35 2.00 2.57 4.22 9.04 43.65 50.36 56.87 68.03 92.15 101.16 0.29 0.219 0.29 0.29OivjftWs/IK) Holders 2.57 4.22 9.04 61. 65 50.36 56.67 68.03 92.75 101.16 0. 29 0.29 0.29 5.717Aloc.to orking.Car. 0.00 0.91 2.55 2.00 0.00 0.00 0.00 0.00 0.40 0.00 0.00 0.00 0.60 0.00 0..0 0.00

0puInin edifce 0.00 0.00 0.91 3.45 5.46 5.44 5.46 5.46 5.46 5.46 5. 46 5.44 5.46 5.46 5.46 5.46 5.4.kccroal 0.00 0.91 2.55 2.00 0.00 0.00 0.00 0,00 0.00 0.00 0.00 0.00 0.00 0.0.) 0.00 0.Ou -5.4,)Closting llasc. 0.00 0.91 3.45 5.44 5.44 5.46 5.46 5.46 5.46 5.44 5.46 5.40 5.46 5.46 5.4a 5.46 0. j;

Dlvia44u4 Diutrlhatlu

vwld lank R.9)Aitu 0.00 0.00 0.00 0.00 0.00 0.00 4.43 9.99 16.47 15.53 14.59 13.64 12.70 11.76 113.42 9.09a 6.40liviaiuds-,.oa kw, 0.00 0.00 0.00 0.00 2.57 6.22 0.56 53.0 33.39 41,34 53.50 69.10 08.46 -11.46 -lv,.32 9.39. -1. 1Loan lupyt r.suv 0.00 0.00 0.00 0.00 0.00 9.00 0.00 0.0 0 .00 0.00 0.00 0.00 -28.21 0. 09 0. -J -J. 0 0.-.O

ANNEX 12-89 -

GUJARAT INDUSTRIAL INVESTMENT CORPORATION (GIIC)

1. GIIC, created in 1968, is another successful and profitable SIDC.The objectives, functions and services which it fulfills are quite similarto APIDC's (see Annex 11). It acts as a financier by extending loans toprivate sector projects, and promotes joint/associate sector projectsthrough equity support to those projects where private entrepreneurs areshy to come forward because of high risks or long gestation period. ItsBoard of nine members includes four prominent industrialists.

2. GIIC's financial situation is satisfactory, as shown in GIIC'sfinancial summary (see Table 1). The bulk of its activities has been inlending. Cumulative loan approvals, to about 2,800 units, totalled Rs 430crores by March 1988, and disbursements Rs 275 crores. The outstandingloan portfolio (Rs 180 crores by March 1988) represents 90Z of theCorporation's total assets.

3. GIIC has also invested in some 66 medium/large scale industries,of which 27 are in production, for equity participation totalling Rs 17.6crores by March 1988. Large investments in recent years increased theequity portfolio to Rs 50.2 crores by March 1989. A majority of theCorporation's investments are in heavy and technology-intensive industries(e.g., petrochemicals, bulk chemicals, drugs, oil exploration equipment,power generation equipment, cement), along with some investments inelectronic industries and automotive components. The return on theinvestment portfolio has averaged about 92 in recent years, comingessentially from dividends. In 1986/87, large capital gains made ondisinvestment of shares in 3 companies boosted the return on the portfolioto 33Z.

4. With its business-oriented culture and the dynamism of Gujaratentrepreneurs, GIIC is keen to establish and develop in-house VentureCapital activities. It is about to create a VCF of Rs 24 crores (US$16million) to finance technology-innovative projects in its traditional areasof investment (chemicals, drugs, electronics, engineering industries). Thelimited but performing experience of GIIC and its efficient and business-like management justifies a Bank subloan of US$5.25 million, to be investedby r 8 in its VCF. Other VCF investors being approached by GIIC wouldinclut, a number of Gujarat corporations, and possibly CDC.

5. Dis1ursements of the VCF funds would spread over the period1989-1991 (see attached Table 2). Again, the generated cash-flow would bedistributed upon its generation, in order to benefit from tax exemption.The overall IRR under very conservative assumptions would be 15.72,yielding a 22.8X IRR on GIIC's equity investment after repayment of theBank's subloan.

- 90 - ANNEX 12Table 1

Table 1: Synopsis Table of GIIC Activities and Results(Rs Crores)

1984-85 1985-86 1986-87 1987-881. Financial Activities

Approvals: Equity Invests 1.5 6.1 1.6 29.9Term Loans 41.1 54.2 57.1 65.8Seed Capital 0.25 0.50 0.38 0.10

Disbursements: Equity Invests 9.4 10.4 14.3 14.8Term Loans 25.5 33.9 46.4 46.5Seed Capital 0.37 0.27 0.13 0.33

2. Summary Balance Sheet

Assets: Net Fixed Assets 0.4 0.4 0.5 0.6Equity Investments 10.7 17.1 17.6 50.2Loan Portfolio 115.0 140.5 181.6 192.5Net Current Assets 10.6 11.8 9.2 2.1

Liabilities, Share Capital 16.0 18.0 30.0 40.0Reserves/Surplus 2.2 2.6 3.6 4.2Outstanding Debt 118.5 147.3 173.6 201.1

Total Assets/Liabilities 136.7 169.8 208.9 245.3J:s====~~~~~~~~~~ === =3 == ===

3. Summary Income Statement

Income: Dividends 0.9 1.0 1.1 1.0Capital Gains ... 0.6 4.8 0.9Interest Received 10.7 13.2 15.9 19.6Other Income 0.6 0.6 - 1.3

Less: Interest Paid 8.4 11.1 13.6 17.1Write-Offs 1.2 1.0 4.6 1.7Others 2.3 2.4 2.8 3.0

Gross Profit 0.3 0.9 0.8 1.0Net Profit (Afte-r Tax) 0.3 0.8 0.8 0.9

Return/Investment 8.' 9.4 33.4 3.8Portfolio (Z)

Table 2: Financial Projections for CIIC's Venture Capital Funds(Rs Millions)

Project Disbursement Assumptions

1989 1990 1991Amount Amount Amount Failuro Rate Percentage Converted

Conventional Loan (20.00X) 14.00 16.00 17.00 Conventional Loans 265 WSOIncome Note (20.00X) 14.00 16.00 17.00 Income Notes 265 50XConditional Loan (10.00X) 7.00 7.50 8.60 Conditional Loan 501 60XEquity (60.00) 35.00 3760 42.50 Equity 60X

Total 70.00 76.00 86.00Interost Rato 1st 3 Years Thereon

Conventional Loans 8X 201

Incor4oe Moto Royalty 2.60X of Sales 0

Conditional Loan Royalty 5.001 of SalesIncomo Noto Intorest Floor 8.00X

Equ&it Disinvestment 1001 in the 7th yoaeDividend 12.0X from Year SPrice Fact 40X 9 original value

60e 3 original value

IRRs

(Pre-Tax and Pre-Exp. for Each Instrumont)

Conventional Loan 20.11Income Noto 21.91Conditional Loans 12.81Equity 16.65Total Portfolio 16.7XEquity Invostors 22.8X

WI

ANNE 12

-92 Page 2 of 3

INCO & EIDEMITURE STATE4ENT

1990 1991 199 1I9 1994 199 3994 1991 199 I999 2000 2001 2002 2003 2004 2005

Interest coev.Loam

Lowa Risk 0.64 1.74 2.74 5.70 4.24 2.30 2.00 1.51 1.02 0.53 0.28

0.34 1.74 2.74 5.70 4.26 2.50 2.00) 1.51 1.02 0.53 0.18 0.00 '). (1.00 0.00 0.00

ltetrest 0.84 1.74 2.74 2.48 2.07 3.30 3.12 0. ?b 0.39 (0.14 0.00loyalty 2.52 5.22, 8.28 9.8 0.29 9.8 e.28 8.289 8.28 8.22 5.76 3 .016

0.84 1.74 2.74 2.49 2.07 4.',2 4.35 9.04 8.67 9.42 8.20 9.28 8.28 8.28 5.76 .obCouditaioal Loan 0.s4 1.74 2.74 2.76 2.76 2.76 2.74 2.14 2.76 2.76 1.92 2.02

Cayrt.Lne.-Div. 0.00 0.00 0.97 2.00 3.21 2.21 2.27 0.00 0.00 0.00 0.00 (. 00 0.00 0.00CaP.Salls 53.55 57.38 65.03

at In1EquityOaviduds 2.10 4.33 6.90 4.90 2.55 0.00 0.00 0.00 0.00 0.00 0.00 0.00Capital lan 0.00 0.00 94.50 101.25 114.75 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 2.10 4.35 101.40 106.03 117.30 0.00 M.O 0.00 0.00 0.00 0.00 0.00

TCTAL. IKCOI 1.48 3.74 4.33 9.32 11.38 35.74 170.28 180.08 197.09 12.84 12.34 12.18 32.18 12.18 9.92 5.22

Nrit"of,s

Cosauotioal Loan

Lowa Risk 3.50 3.75 4.25

Income Not"n 3.5 3.75 4.25

Conditional Loans 3.5 3.75 4.25

Equity 17.50 19.75 21.25

Total brit.ofhs 0.00 0.00 28.00 30.00 34.00 0.00 0.00 MO0 0.00 0.00 0.00 0.00 0.00 0.00 O). u.

Adirnistrative Fm 2.9 2.90 4.04 3.44 2.76 2.76 2.74 2.76 2.76 0.46 0.44 0.44 0.46 0.46 0.04 0.4k

Rhaagu.nt Fm 1.45 1.45 2.02 1.72 2.8 .39 1. 28 .3 2.38 1.38 0.23 0.23 0.23 0.23 0.23 0.23 0.23

TOTAL EUPENSE 4.35 4.35 34.04 35.16 38.14 4.14 4.14 4.14 4.14 0.69 0. n9 0.69 0.49 0.n9 0.69 v.49

GM09 PROFIT -2.47 -0.39 -27.73 -25.84 -26.76 11.40 164.24 15.94 192.95 12.13 11.47 11.49 11.49 11.49 8.23 4.53

Profit Tun 0.00 0.00 0.00 0.00 0.00 p.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.I30 0.0N0 1. 0

NET PROFIT -2.47 -0.59 -27.73 -25.04 -26.74 11.60 16*.24 175.94 192.95 12.25 12.47 31.49 11.49 11.49 8.13 4.534

ANNEX 12Table 2

93 Page 3 of 3

1009 9mo 99 1192 53 m994 1m tn 199 it" It9 2(00 200 2002 2003 2004 2*

Eqiutylilt 44 12 42

Ov i1nk 24 26 26

70 it 94

m lacmt 0.00 -2.47 0.19 -27.13 -;.14 -26 7t Il.40 144.24 111.94 192." 12.11 15.67 11.49 11.4 15.49 e.u3 4.nam

WritOfas 0.00 0.00 0.00 2n.00 30.00 34.00

RCoa tipe t Laws

Lowar ist 0.7n 1.5. 2.44 2.44 2.44 2.4 .44 1.71 0.91 0.00 0.00 0.00 o.0o 0.0facce" met" 5.? 3.29 5.03 4.40 4.s0 4.40 9.20 1.70 0.00 0.00 0.00 0.00 0.00 0.00

Total tWAYus 0.00 0.00 0.00 2.M0 4.63 7.49 1.04 7.04 T.0M 1.s 3.41 0.91 0.00 0.00 0.00 0.00 0.00

TOTAL 109 70.00 77.33 S.41 2.77 O.99 14.73 56.67 173.30 503.01 19I.41 13.57 12.1 I U.4 51.4 1.9 3.13 4.53

Cuauto I Lan

LOe tki 14.00 15.00 17.00

Incz Mtn 14 15 IT

Coeitziaal Lb2 7 7.1 3.5

Equt 31.00 37.50 42L50

1TOTA DIRECt U3 70.00 71.00 59.00 0.00 0.00 o.: .- o00 0.00 0.00 0.0.) 0.00 0.00 0.00 0.00 0.00 0.00 0.00NET SOIEI OF FUNS 0.00 2.33 4.41 2.77 0.99 14.73 10.47 I57.3 103.01 196.41 11.57 12.51 I.4 II.4 11.49 8.13 4.51D0vileue4v F mldws 0.9" 14.73 16.47 173.30 163.01 193.41 1.17 12.9 11.49 11.4 11.49 0.1i 14.04Allac.te lrkin.Cq. 0.00 2.33 4.41 2.fl 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

irki.Cap.Fo.d

Owaing almae 0.00 0.00 2.33 .74 9.51 9.11 9.51 9.51 9.11 9.51 9.11 9.51 9.51 9.51 9.*1 9.51 5 Ltkcruul 0.00 2.33 4.41 2.77 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0. 0 0.00 -;.00 0.00 -b.1Closin SalaMi 0.00 2.33 4.74 9.51 9.11 9.51 9.51 9.51 9.11 9.51 9.51 9.11 9.51 9.51 9.51 9.51 O.0

Oieudus Distributio

Huld bak bpwit 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.°06iv1daaguLtc Reyt 0.00 0.00 0.00 0.00 B.9 14.73 16.41 573.30 163.01 193.41 11.17 12.9I 11.41 15.49 15.4 8.13 14. YLoan R"t ruwus 0.00 0.0 0.0 0.00 0.00 0.00 0.0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

ANNEX 13Page 1

INDIA

INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT

5

Technology Institutes and Subnroiects

1. This annex is intended to supplement the information provided in thetext concerning the four CSIR institutes (para. 5.16) and their subprojects,since they were described only briefly in the text. What is presented here isintended to be illustrative of the TI subcomponent. Further information andanalysis of the four institutes and subprojects is available in the projectfile as well as supplemental information on BIS and SIIR.

National Chemical Laboratory (NCL)

2. NCL, set up in Puna in 1950, has a staff of 1,100, including 360scientists and engineers, and an annual expenditure of Rs 70 million. NCL hasmajor R&D programs in catalysis, polymers, drugs, analytical chemistry andprocess development. NCL is reputed for its excellence in basic research andmany of its scientists are internationally recognized. It has also succeeded,in some well known cases in catalysis and polymers, to commercialize itsresearch results. More recently, NCL has increased its sponsored researchprogram with industry. NCL has a 15-year-old technology management groupresponsible for marketing, licensing, patents, transfer of NCL technology aswell as managing sponsored programs with industry. A key constraint toindustry's use of NCL is the lack of confidence in being able to apply NCLtechnology on a commercial scale. With that limitation in mn'nd, NCL proposesto establish a multipurpose pilot plant for developing and testing catalystsbeyond the laboratory scale and a multipurpose pilot plant for developing newpolymer materials, such as engineering plastics, and new processes for polymerproduction. It has also proposed to do the same for organic chemistry, whichwill be subject to subsequent ICICI appraisal. bh;ilding on the reputation ofNCL's excellent research staff and initial commercial success in the catalysisand polymer areas, the pilot plants will strengthen the institute's ability toattract more sponsored R&D from large chemical and petrochemical companiesincluding multinational corporations. NCL also proposed to improve itsmanagement system and to strengthen its technology management group. NCL hasalready made significant progress in increasing its cost coverage from below20% to 27% in i987/88. With the efforts noted above, NCL expects to continueincreasing its revenue generation and its cost recovery ratio to about 50% in1994/95.

3. Performance Indicators. NCL would be expected to achieve thefollowing milestones.

t ~~~~~~~~~~~~~~~~~~~ANNEX 13Page 2

Table 1: INDIA--NCL PERFORMANCE INDICATORS

87/88 89/90 90/91 92/93 94/95

Sponsored R&D and consultine

No. of contracts 110 121 124 126 129Value (Rs million) 15 20 22 31 42

TecInology licensing

No. of tech. licensed 2 7 15 18 18Income (Rs million) 1 4 6 11 19

Income as % of recurrentexpenses 27 33 36 43 50

Specific indicators and implementation milestones for catalysis, polymers andorganic chemistry groups are summarized in the Project File.

4. Sub2roiect Cost and Finaneing. To implement the institutionalstrategy plan, NCL anticipates a capital investment requirement of Rs 168million during the three year period starting 1990. The World Bank loan ofUS$5.5 million (Rs 89 million 53% of total cost) will finance the equipmentpurchases of the pilot plant facilities for catalysis, polymer and organicchemistry groups. The balance will be financed bv UNDP (15%) and CSIR (32%).The detailed equipment list for Bank financing is summarized in the projectfile. The base costs of the equipment are estimated by NCL with availableinformation. A five percent physical contingency is added. According to theproject implementation schedule provided by NCL, price contingencies arecalculated based on the Bank's projection of domestic and internationalinflation rates. The tentative allocation of Bank funds is summarized in thefollowing table:

Table 2: NCL SUBPROJECT COST

Foreign Domestic Total

Equipment 0.8 0.5 1.3Catalysts 1.2 0.8 2.0Polymers 0.9 0.6 1.5Organic Chemistry 2.9 1.9 4.8

Base Cost

Physical Contingencies 0.1 0.1 0.2Price Contingencies 0.3 0.3 0.6

Project Cost 3.3 2.3 5.6

F ~~~~~~~~~~~~~~~~~~~ANNEX 13Page 3

t ~~~~~~- 96 -

Of the above financing $5.6 million, $1.5 million allocated to organicchemistry is subject to a technical review by ICICI to onsure viability.

5. Benefits. The project support for catalysis could assist NCL inproducing state-of-art innovation and transferring the technology developed ata high value-added form. This is an area where NCL has earned aninternational reputation, and the project could help NCL to enter potentialtechnology export. Polymers is an area that NCL has strengthened considerablyin the past few years, support from the project could enable NCL to make itscontribution in engineering plastics, polymer alloys and other polymer forindustrial applications. Project support to NCL's organic chemistry groupwould benefit a wide range of smaller scale chemical industries where domesticsource of technology will play an important role.

Central Mining Research Station (CMRS)

6. CMRS was set up in Dhanbad, Bihar in 1955 under the CSIR system andhas a staff of 5cO, including 200 scientists and engineers, and annualexpenditures in the past 3 years of Rs 35 million. Its R&D activities covermining methods, mining environment and health, mining engineering andexplosion safety. Testing services of CMRS are important parts of itsactivities. However, in most cases, the facilities require upgrading andimprovement. For flameproof and safety testing, CMRI is the sole testingcenter in India. The project would finance modernization of the flameproofand safety testing facility to make its testing acceptable internationally andalso to gain useful experience of using CSIR laboratories for industrialtesting. CMRS which presently generates about Rs 15 million revenue (45% oftotal expenditure) is anticipating increasing its cost recovery ratio to 50%after completion of the project.

7. Subnroject. The proposed project focuses on modernization of testingfacilities, strengthening of consulting service to industry and maintainingcurrent level of research activities, and to finance its modernization programof the Flame and Explosion Labnratory. The modernization program includes: (a)upgrading the in-house facilities for safety and performance testing; (b)establishment mobile laboratory on vans for on-site safety inspection andeducation; and (c) establishment of consulting and training cells forindustrial safety.

8. Performance Indicators. For institutional objectives, CHRI isexpected to achiev the following performance indicators:

ANNEX 13Page 4

- 97 -

Table 3: INDIA--CMRS'S PERFORMANCE INDICATORS

89/90 90/91 91/92 92/93 93/9'.

SRonsored ProiectNo. of projects 80 80 80 80 80Rs millions 8 8 8 8 8

Consulting AssignmentsNo. of Assignments 105 117 129 141 150Rs million 3.5 3.9 4.3 4.7 5.2

TestingRs million 3.5 3.8 4.2 5.4 7.6

Total RevenueRs million 16 18 19 20 23as % of curr. exp. 43 45 45 46 50

9. SubDroject Costs. To implement the institutional development plan,CHRS anticipates a capital investment requirement of Rs 30 million duringthree years period frem 1990/91 to 1992/93. The World Bank will provide aboutUS$0.7 million (equivalent of Rs 11.2 million and 37% of total capitalrequirement) and the balance will be financed by CSIR. The Bank financingwill concentrate on the modernization program of the Flame and ExplosionLaboratory, financing equipment purchase, training and imported testingmaterials. The detailed equipment list and project components financed by theBank is included in the Project File.

10. Benefits. The Flame and Explosion Laboratory at CMRS is the onlyrecognized testing authority for testing and certification of electricalequipment used in flammable atmosphere. Modernization of the laboratory is inresponse to the increased demand of work volume and sophistication. Besidesin-house testing, the project will equip CMRS with mobile safety inspectionand consulting facilities to provide the needed service on site.

Central Leather Research Institute (CLRI)

11. CLRI was set up near Madras in 1953 under the CSIR system and it nowhas a staff of 630, including 140 scientists and engineers with an annualexpenditure of about Rs 40 mill.oa. Its client base is the tanning, leathergoods and related chem^ "als industry whose export revenue amounted to aboutRs 4 billion (US$300 million) in 1984/85, accounting for close to 4% of totalIndian exports. Despite the potentially large client base, CLRI has tended tofocus too heavily on basic research and has underpriced the services it hasprovicted its clientele, resulting in an inadequate recovery ratio. Many ofits scientists, however, are of outstanding repute and CLRI is well organizedfor its past goals. CLRI has prepared an institutional strategy wh,chproposes to refocus some of its excellent human resources on applied work,

ANNEX 13

- 98 - Page 5

thereby strengthen CLRI's ability to serve its clients and to increase itscharges and revenues. To help achieve these goals, under the project, CLRIwould (i) establish pilot plant facilities by which indistrial R&D beyondlaboratory scple can be conducted; (ii) attract direct involvement of theindustry through establishing an R&D facility commonly operated by CLRI andthe industrial firms; and (iii) develop quality control mechanisms and expandits environmental program in the tanning sector. Through implementation ofthe new strategy, CLRI aims to increase its revenue generation from Rs 4.2mi'llion in 1987 to about Rs 40 million in 1995 and its cost recovery ratiofrom 11% to 45% in the same period.

Table 4: CLRI PERFORMANCE INDICATORS

89/90 90/91 91/92 92/93 93/94

Large Contracts bv Mission ProjectsNo. of Contracts 2 4 5 6 6Value (Rs million) 0.5 1.1 2.6 3.2 4.0

Consulting by Mission ProiectsNo. of Assignments 15 20 25 25 27Value (Rs million) 1.2 2.5 4.1 6.0 8.2

Eguipment Rental By Mission ProjectsNo. of Rental 2,000 2,500 2,800 3,200 3,500Income (Rs million) 0.6 1.0 1.5 3.2 5.3

Total CLRI Revenue GenerationRs million 10 14 23 31 41as % of current expenses 20 22 26 39 45

12. Subgroject Cost. CLRI anticipates a capital investment requirementof Rs 136 million in three years to implement the institutional plan. TheBank will provide US$4.05 million (Rs 64 million, 47% of the total cost) tofinance procurement of equipment, management system improvement andinternational training. The balance will be financed by CLRI and possibleindustrial crntributions. The detailed procurement list for Bank financing isin the Pro -ct File and the financing required is summarized in Table 4. Thebase cost is estimated by CLRI with available information. A physicalcontingency of 5% and a price contingency estimated on the basis of projectedimplementation schedule and the Bank's projection on domestic andinternational inflation rates are added to ensure adequate allocation offunds.

ANNEX 13Page 6

Table 5: CLRI PROJECT COMPONENTS FINANCED BY THE BANK(US$ million)

Foreign Local Total

Equipment 2.93 0.35 3.28Training 0.05 0.0 0.05Management System 0.18 0.0 0.18

Base cost 3.16 0.35 3.51

Physical Contingency 0.16 0.02 0.18Price Contingency, 0.32 0.04 0.36

Total /a 3.64 0 41 4,05

la Of which $0.37 million allocated for Kanpur commonfacility is subject to industry's commitment.

13. Benefits. The proposed project will attract more sponsored researchat the pilot tanner facilities and increase potential use of the facility byindustrial firms. It will also strengthen CLRI's capability in finishedproduct quality control, leather and footwear design and leather chemicalareas. The technology pull from industry should amplify the economic benefitsof CLRI project as collaboration between the institute and industry improves.

National Metallurgv Laboratory (NML)

14. NML in Jamshedpur (established in 1950) has a staff of 1,000including 230 scientists and other professionals. Its R&D and testingactivities are in the areas of material science and engineering, metal andmining processing. NML is an excellent example of a turn around which cantake place in an RI, which previously was not a productive institution servingindustry's needs. Major steps to re-orient the institution have already beentaken and support is needed to further strengthen it. Three years ago, undernew senior management with previously extensive industrial experience, NMLcompleted a self-analysis and a long-term development plan dealing with allaspects of the institutes, its role, methods of operation, staffing, etc. Itinter alia redefined its objectives and priorities to pursue applicationoriented research with 75% of its total available resources. Decision makingprocedures were established to facilitate initiation and implementation offocused industrial R&D. It also stepped up its efforts to collaborate withindustry in R&D projects and succeeded in 3 years to raise outside revenuegeneration from about 10% to over 40%. One such future effort, a new R&Dprogram for component integrity evaluation is proposed with joint financingfrom industry and the project. This R&D program aims to develop methodologyand to provide testing facilities to detect rotential failures in large scaleindustrial systems such as power plants, chemical plants, petroleum

ANNE){ 12Page 7

- 100 -

refineries, railways and steel plants. The potential economic and socialbenefits for detecting potential failure and ensuring system reliability toavoid major system breakdown are enormous. Institutionally, NML expects tomore than double its revenue generation between 1988/89 and 1993/94 and toreach a cost recovery ratio of above 50% by that time.

15. SubRroiect. The proposed project would finance equipment, technologycollaboration fees and related expenses in establishing a component integrityevaluation R&D program. The program would characterize the selectedindustrial materials, develop methods to analyze component reliability ofirdustrial systems and prevent major system failures. The program will bevery useful to detect potential failure and to identify the weak links inlarge industrial structures, such as those of steel industry, pipelines, powerplarnts and chemical complex.

16. Performance Indicators. NML is expected to achieve the performanceindicators in the following table.

Table 6: INDIA--NML PERFORMANCE INDICATORS

89/90 90/91 91/92 92/93 93/94

Revenue Generation

PRs million 24 30 35 40 45as % of current exports 46 45 45 45 52

Technology Licensed

No. Licensed 5 7 8 9 10Patents Filed 17 20 22 25 28

Industrial Relation

No. of Clients 220 270 330 390 410No. of MOU 4 5 7 9 11

Staff Restructuring/training

High level (No/Age) 205/47 215/45 225/43 235/41 245/40Low level (No/Age) 785/52 770/52 755/53 740/53 725/54Training of Staff 35 40 45 50 55

17. SubRroiect Cost. The estimated cost of establishing the componentintegrity evaluation program is about Rs 74 million (US$4.6 million) of whichthe Bank will provide financing of US$2.3 million (50% of the total cost).The detailed procurement list and project components are included in theProject File. The summarized cost is presented in Table 4. The base costs

ANNEX 13Page 8

- 101 -

are estimated by NML with available information. A physical contingency of 5%and a price contingency estimated on the basis of projected projectimplementation schedule and the Bank's projection of domestic andinternational inflation rates are added to ensure adequate allocation offunds.

Table 7: INDIA--NML COMPONENT EVALUATION PROGRAM COST ESTIMATES(US$ million)

Foreign Domestic Total

Equipment 2.5 0.3 2.8Technology and training 1.0 0.1 1.1Other 0.0 0.1 0.1

Base Cost 3.5 4.0

Physical contingencies 0.2 0.0 0.2Price contingencies 0.3 0.1 0.4

Proiect Cost 41 .0 0. 4.6

18. Benefits. The economic benefit of the component integrity evaluationprogram is the prevention of potential catastrophic failure of largeindustrial structure in operation and provision of gaidelines and materialselection in design stages. Many large industrial firms, such as Tata Steel,Steel Auathority of India, India Oil and many power plants, have long demandedsuch service. Because of capital and special staffing requirements, firmshave failed to establish in-house programs of their own. NML is ideallypositioned to undertake this project has the technical capability beyond thatof individual firms to carry this endeavor out well and to realize a moreefficient use of human and financial resources than if each company went itsown way.

ANNEX 14

- 102- Page 1

INDIA

INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT

Operating Guidelines of the Sponsored R&D Promotion Fund

1. Objectives. The Sponsored R&D Promotion Fund (Fund) established bythe Government of India with the proceeds of the IDA credit has been placedwith ICICI for management. The Fund is intended to stimulate industry'sdemand for services of the TIs and strengthen industry-TI collaboration byproviding financing for R&D projects sponsored by industry and carried out byor with technology institutions (TIs).

2. Project Criteria. Eligible projects will cover industrial researchand development technology activities carried out by or jointly with TIs.

(a) They should normally be aimed at contributing to at least one of thefollowing:

(i) development of a new product or process;

(ii) significant improvement of an existing product or process interms of raw material consumption, cost reduction, quality,productivity or environmental control;

(iii) developing, testing and upscaling of a technology developed by aTI.

(b) Projects can be at any point in the spectrum of R&D activitiesstarting from laboratory trials and prefeasibility studies toprototype. In exceptional cases, particularly for technologiesdeveloped in TIs, full-scale pilot plant operations can also befunded.

(c) Projects should have feasible and measurable outputs and shouldnormally not be planned to take longer than 18 months to 2 years tocomplete. Where an R&D program is long-term, it should be phased,with each project to be a phase of the program. Projects which arefollow-ups to successful projects would be encouraged. Financingwould be available for all stages.

(d) The work can be carried out in a TI or on the firm's premisesprovided that the contribution by the TI to the joint project issubstantial as judged by ICICI.

3. Eligible TIs. Eligible TIs include public sector researchinstitutes, universities and other educational institutions, laboratories setup by industrial associations and foundations, other similar noncaptive and

- 103- Page 2

autonomous R&D institutions and other institutions (such as BIS) with thecapacity to carry out the proposed R&D project.

4. Eligible Companies. Companies, both existing and start-up, in theprivate, joint or public sector will be eligible

5. Eligible Exjenses. Items eligible for financing by the Fund includethe following:

(a) equipment and facilities (excluding buildings and land) at TIs or, ifat the firm, at a percentage representing the use of the equipmentfor the project;

(b) labor cost and fees of TI personnel identifiable for the projectactivities;

(c) technology fees payable to TIs;

(d) expenses and fees payable to outside consultants and experts;

(e) materials and consumables required for the project;

(f) project related travel and overhead expenses.

All expenses must be documented and audited annually.

6. Terms and Conditions.

(a) Subloans will be made at an initial interest rate of 6% p.a. duringthe project implementation period and will be increased to 14%interest and/or royalty from tl-e date of targeted completion. Themethod of repayment will be determined by ICICI in negotiations withthe client company.

(b) ICICI will receive annual management fees equal to 29. of the subloanbalance and 15% of royalty payments accruing to the Fund.

(c) The maximum term of subloan is twelve years but the term wouldgenerally be shorter. Grace periods will reflect the stage ofdevelopment of the activity and the likely period for 1commercialization of results, but will not normally exceed fouryears.

(d) In exceptional circumstances, the subloar. can be written off ifdemonstrated by the sponsoring industrial firm to the satisfaction ofICICI that the project was unsuccessful. A set of simple andmeasurable definitions of success, therefore, will be included ineach subloan agreement.

7. Disbursements would normally be made to the TI on the basis ofrequests by the sponsoring firms.

8. Maximum Assistance per Company. The maximum assistance from the Fundto one sponsoring company should not exceed US$500,000 or the net annual

&- , 14

- 104- Page 3

increase over and above the average R&D outlay of the company for the previoustwo years, whichever is lower. In exceptional circumstances, if the WorldBank agrees, the limit can be waived.

9. Sponsor's Contribution. The sponsor's contribution should be atleast 50% of the sponsored R&D project.

10. TI Particiation. The TIs would be expected to provide performanceguarantees that they will carry out the activities and would be heldaccountable in the event that they do not carry out the work agreed to.

11. Proiect Approval Procedures. The TG would complete an appraisalreport of each project and submit it to an approval committee consisting ofthe Deputy Managing Director of ICICI, the head of the TG and the relevantoutsiders invited from the steering committee. The first five projects wouldfirst be reviewed and approved by the Bank.

12. Project Implementation Monitoring. If the progress of the project isfound to be unsatisfactory, the TG would review the project with the sponsorai.d determine a suitable action with respect to further disbursement.

13. In general, and where necessary, TG will identify and assign aresource person for individual sponsored project. Such a person will visitthe project periodically, the frequency being determined by the need forreview and complexity of the project. In addition, the TG would form atripartite review committee made up of a representative each of the TI, firmand ICICI to review progress. The sponsor of each project will submitquarterly progress reports to the TG for review, which would form the basisfor the tripartite review.

13. Where progress is unsatisfactory, with the approval of the DeputyManaging Director, ICICI reserves the right to cake suitable action includingsuspending disbursements.

[i

IBRD 21651

H@= ~ /V lt /z 1\I N D I A

c andig ah INDUSTRIAL TECHNOLOGYDEVELOPMENT PROJECT

,uZi4,,,v | iv J /- _ Location of ParticipatingInstitutions

PAKISTAN SIIR

I Delhi ._

{ t / 1 ! . _ 4 n~~~~~~~BHUTAN> aS 8 I >/ z i | X alpur J 7- Lucknow 2_

L \ ° -- ,~~~~~~~~~~~~~~~~ Guwahati

t // f ' { _ /

- ¢< 0 -> 8 BAN~~~~~~~~~~~~~G-> < , ZliX B X 2 ' } ~~~~~~Dhanbad 00

Ahmedabad Bhopal0t1 0 Jamshepur

.v1/1lis s1/.#. s VBhubaneshwaroa

, t r-i ., <;V ~~~BA' orBombay( NCL R NGA

Stl I Pune -.

oX Hyderabad_>

I'>.i;t.J , s ii ,v s .. . j '- Technolorv Services Management Entlty

1. Industrial Credit and InvestmentCorporatlon of India (ICICI)

A Venture Calitat Management Entitles:

1. Technology Development andBangalore Information Company of India (TICU)

2. CanBank Financial Service Ltd. (CanFin)'[RZ VMadras 3. Andhra Pradesh industrial Development

Corporation (APIDC),2 - . \< - 44. Cujarat Industrial Investment

Corporation (GIIC)

Ar/ 161 A Colmbatore * The First Six TechnoloEv institutes:

1. Bureau of Indian Standards (BIS)Its % :_jo 2. National Chemical Laboratory (NCL)\t I. t_ { -_ 3. National Metallurgical Laboratory (NML)

MILES \ / Central Mining Research Station (CMRS0 1oo 200 S0! j J t 5. Central Leather Research Institute (CLRII_________ |Trivandrum 6. Shriram Institute for Industrial

X | | X | - . ~~~~~~~~~~Research (STIR)0 100 200 300 400

KILOMETERS 0RI o TownsLANKA i National Capital

Due to scale considerations, some areas couldnothe State and Union Territoryincluded in the map; for any information Boundariesthatmay apply toasuchsareas.er' International Boundaries

JUNL I1989