Sources For Financing Worli-Haji Ali Sea Link

Length of Bridge 3.20 kms

Project Base cost Rs. 1120 Cr (at 2007 prices)
Recovery of expenditure by way of Toll, Tariff and user fee
Project schedule Four Years
Contractor Reliance Infrastructure Limited.

Money to be paid by Reliance Infra-

Cost of construction of Worli - Haji Ali Sea Link-Rs.4301 Cr.
Reliance Infra to pay for Bandra – Worli Sea link Project Rs.1643 Cr.
Total cost Reliance Infra is Paying Rs. 5944 Cr.

Money Reliance Infra is getting-

Viability Gap Funding (assured to Reliance Infra )- Rs. 1392 Cr.
Loan Component- Rs. 2600 Cr.
Equity Component- Rs. 1100 Cr.
Total Money Reliance is able to manage- Rs. 5092 Cr.

Amount of Reliance still needs as per present condition

(Rs. 5944 Cr. – Rs. 5092 Cr.) = Rs. 852 Cr.

Reliance can go for-

The main sources of long term finance are as follows:

1. Shares:
These are issued to the general public. These may be of two types:
(i) Equity (ii) Preference. The holders of shares are the owners Of the business.

Merits of shares To the Management:

1. A company can raise fixed capital by issuing equity shares without creating any charge on
its fixed assets.
2. The capital raised by issuing equity shares is not required to be paid back during the life
time of the company. It will be paid back only if the company is wound up.
3. There is no liability on the company regarding payment of dividend on equity shares. The
company may declare dividend only if there are enough profits.
4. If a company raises more capital by issuing equity shares, it leads to greater confidence
among the investors and creditors.

2. Debentures:
These are also issued to the general public. The holders of debentures are the creditors of the
company.

Merits of debentures :

1) Raising funds without allowing control over the company:

Debenture holders have no right either to vote or take part in the
management of the company.
2) Reliable source of long term finance :
Since debentures are ordinarily issued for a fixed period, the company can make the best use
of the money. It helps long term planning.
3) Tax Benefits :
Interest paid on debentures is treated as an expense and is charged to the profits of the
company. The company thus saves income tax.
4) Investors’ Safety:
Debentures are mostly secured. On winding up of the company, they are repayable before any
payment is made to the shareholders.
Interest on debentures is payable irrespective of profit or loss.

Demerit:

1. As the interest on debentures has to be paid every year whether there are profits or not, it
becomes burdensome in case the company incurs losses.
2. Usually the debentures are secured. The company creates a charge on its assets in favour of
debenture holders. So a company which does not own enough fixed assets cannot borrow
money by issuing debentures. Moreover, the assets of the company once mortgaged
Cannot be used for further borrowing.

3. Public Deposits:
General public also like to deposit their savings with a popular And well established company
which can pay interest periodically And pay-back the deposit when due. It is a very old
source of finance in India. When modern banks were not There, people used to deposit their
savings with business concerns of Good repute. Even today it is a very popular and
convenient method of Raising medium term finance. The period for which business
undertakings accept public deposits ranges between six months to three years.

Procedure to raise funds through public deposits:

An undertaking which wants to raise funds through public deposits advertises in the
newspapers. The advertisement highlights the achievements and future prospects of the
undertaking and invites the investors to deposit their savings with it. It declares the rate of
interest which may vary depending upon the period for which money is deposited. It also
declares the time and mode of payment of interest and the repayment of deposits. A depositor
may get his money back before the date of repayment of deposits for which he will have to
give notice in advance.

Features:
1. These deposits are not secured.
2. They are available for a period ranging between 6 months and 3
years.
3. They carry fixed rate of interest.
4. They do not require complicated legal formalities as are required
in the case of shares or debentures.

Advantages :
Following are the advantages of public deposits:
1. Simple and easy:
The method of borrowing money through public deposit is very simple. It does not require
many legal formalities. It has to be advertised in the newspapers and a receipt is to be issued.
2. No charge on assets :
Public deposits are not secured. They do not have any charge on the fixed assets of the
company.
3. Economical :
Expenses incurred on borrowing through public deposits is much less than expenses of other
sources like shares and debentures.
4. Flexibility :
Public deposits bring flexibility in the structure of the capital of the company. These can be
raised when needed and refunded when not required.

Disadvantages :

1. Uncertainty :
A concern should be of high repute and have a high credit rating to attract public to deposit
their savings. There may be sudden withdrawals of deposits which may create financial
problems.
2. Insecurity :
Public deposits do not have any charge on the assets of the concern. It may not always be safe
to deposit savings with companies particularly those which are not very sound.
3. Lack of attraction for professional investors :
As the rate of return is low and there is no capital appreciation, the professional investors do
not appreciate this mode of investment.
4. Retained earnings:
The company may not distribute the whole of its profits among its shareholders. It may retain
a part of the profits and utilize it as capital. Like an individual, companies also set aside a part
of their profits to meet future requirements of capital. Companies keep these savings in
various accounts such as General Reserve, Debenture Redemption Reserve and Dividend
Equalisation Reserve etc. These reserves can be used to meet long term financial
requirements. The portion of the profits which is not distributed among the shareholders but
is retained and is used in business is called retained earnings or ploughing back of profits. As
per Indian Companies Act., companies are required to transfer a part of their profits in
reserves. The amount so kept in reserve may be used to buy fixed assets. This is called
internal financing.

Merits :

1. Cheap Source of Capital :

No expenses are incurred when capital is available from this source. There is no obligation on
the part of the company either to pay interest or pay back the money. It can safely be used for
expansion and modernization of business.
2. Financial stability:
A company which has enough reserves can face ups and downs in
business. Such companies can continue with their business even in
depression, thus building up its goodwill.

Limitation :

1. Huge Profit :
This method of financing is possible only when there are huge profits and that too for many
years.
2. Dissatisfaction among shareholders :
When funds accumulate in reserves, bonus shares are issued to the shareholders to capitalise
such funds. Hence the company has to pay more dividends. By retained earnings the real
capital does not increase while the liability increases. In case bonus shares are not issued, it
may create a situation of under–capitalisation because the rate of dividend will be much
higher as compared to other companies.
5. Term loans from banks:
Many industrial development banks, cooperative banks and commercial banks grant medium
term loans for a period of three to five years. Traditionally, commercial banks in India do not
grant long term loans. They grant loans only for short period not extending one year. But
recently they have started giving loans for a long period. Commercial banks give term loans
i.e. for more than one year. The period of repayment of short term loan is extended at
intervals and in some cases loan is given directly for a long period. Commercial banks
provide long term finance to small scale units in the priority sector.

Merits-

1. It is a flexible source of finance as loans can be repaid when the need is met.
2. Finance is available for a definite period, hence it is not a permanent burden.
3. Banks keep the financial operations of their clients secret.
4. Less time and cost is involved as compared to issue of shares, debentures etc.

Demerits-

1. Banks require personal guarantee or pledge of assets and business cannot raise further
loans on these assets.
2. In case the short term loans are extended again and again, there is always uncertainty about
this continuity.
3. Too many formalities are to be fulfilled for getting term loans from banks. These
formalities make the borrowings from banks time consuming and inconvenient.

6. Loan from financial institutions:

There are many specialised financial institutions established by the Central and State
governments which give long term loans at reasonable rate of interest. Some of these
institutions are:
i)Industrial Finance Corporation of India ( IFCI)
ii) Industrial Development Bank of India (IDBI)
iii) Industrial Credit and Investment
iv) Corporation of India (ICICI)
v) Unit Trust of India ( UTI )
vi) State Finance Corporation

Calculation no. Of shares to be issued-

Debt as obtained by Reliance Infra Rs. 2600 Cr.
Interest assumed to be payable @ 10%
Equity so far obtained Rs. 1100 Cr.
Evaluated Share Value assumed Rs.250 per Share
Expected No. of share holders 4.4 Cr. In Numbers.

For the company like reliance debt financing would be the best possible solution because to get the
term loan from banks and financial institutions, reliance may not necessary to give that much of
security against loan as it is diversified and reputed conglomerate. Or reliance can also come with
issue of debentures. Between equity and debt would be the advisable for such amount where no. Of
options are available. Like commercial banks, debentures, or deferred credits.