Page 61 - DMGT302_FUNDAMENTALS_OF_PROJECT_MANAGEMENT

Fundamentals of Project Management

Notes provided for meeting the foreign currency expenditures towards the import of equipment
and technical know how.
3. Debenture Capital: Akin to promissory notes, debentures are instruments for raising debt
capital. There are two broad types of debentures: non convertible debentures and
convertible debentures. Non-convertible debentures are straight debt instruments.
Typically they carry a fixed rate of interest and have a maturity period of 5 to 9 years.
Convertible debentures, as the name implies, are debentures which are convertible, wholly
or partly, into equity shares. The conversion period and price are announced in advance.
4. Deferred Credit: Many a time the suppliers of the plant and machinery offer a deferred
credit facility under which payment for the purchase of the plant and machinery can be
made over a period of time.
5. Incentive Sources: The government and its agencies may provide financial support as an
incentive to certain types of promoters or for setting up industrial units in certain locations.
These incentives may take the form of seed capital assistance (provided at a nominal rate
of interest to enable the promoter to meet his contribution to the project), or capital
subsidy (to attract industries to certain locations), or tax deferment or exemption
(particularly from sales tax) for a certain period.
6. Miscellaneous Sources: A small portion of the project finance may come from miscellaneous
sources like unsecured loans, public deposits, and leasing and hire purchase finance.
Unsecured loans are typically provided by the promoters to bridge the gap between the
promoters’ contribution (as required by the financial institutions) and the equity capital
the promoters can subscribe to. Public deposits represent unsecured borrowings from the
public at large. Leasing and hire purchase finance represent a form of borrowing different
from the conventional term loans and debenture capital.

Task Discuss about incentive sources.

Planning the Means of Finance

We have described the various means of finance that can be tapped for a project. How should
you go about determining the specific means of finance for a given project? The guidelines and
considerations that should be borne in mind for this purpose are as follows:

Norms of Regulatory Bodies and Financial Institutions

In some countries, the proposed means of finance for a project must either be approved by a
regulatory agency or conform to certain norms laid down by the government or financial
institutions in this regard. The primary purpose of such regulations is to impart prudence to
project financing decisions and provide a measure of protection to investors. In addition, the
norms of financial institutions, which often provide substantial assistance to projects significantly
shape and circumscribe project financing decisions.

Key Business Considerations

The key business considerations which are relevant for the project financing decision are: cost,
risk, control, and flexibility.
1. Cost: In general the cost of debt funds is lower than the cost of equity funds. Why? The
primary reason is that the interest payable on debt capital is a tax-deductible expense
whereas the dividend payable on equity capital is not.

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