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A REPORT ON PROJECT FINANCING OF RPL AND PRE AND POST MERGER VALUATION OF RIL - RPL By SWATI GOENKA (08BSHYD0871 )

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A REPORT O N PROJECT FINANCING OF RPL AND PRE AND POST MERGER VALUATION OF RIL - RPL

By SWATI GOENKA(08BSHYD087 1)

RELIANCE INDUSTRIES LIMITED1

A REPORT O N PROJECT FINANCING OF RPL AND PRE AND POST MERGER VALUATION OF RIL - RPL

By SWATI GOENKA(08BSHYD087 1)

ICFAI BUSINESS

SCHOOLMAY 15, 20092

AUTHORISATIONThis report has been authorized by PROF AJIT P ATIL as a part of the evaluation for SUMMER INTERNSHIP P ROGRAM. This report has been submitted as a part of partial fulfillment of the requirements of the MBA program of ICFAI Business School.

Authorizing Person (Prof. Ajit Patil)

Date: 15/5/2009

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ACKNOWLEDMENTI would like to take this opportunity to thank all those who have made working on this project feasible for me. I would first like to thank Reliance Industries Limited for providing me with the opportunity to work with them and giving me my first taste of the real corporate and professional world. It gave me an opportunity to understand the real life situations and implement all those things which I had earlier only come across in textbooks as part of my course. I would also like to extend my sincere gratitude to my guides, Mr. K.R. Raja and Mr. Hariharan Mahadevan for allowing me to work under their able guidance. Without their guidance, help and support this project would not have been possible. I extend a special thanks to Mr. Ritesh, for helping us thoroughly in the day to day working and the project. Also, I would like to thank my faculty guide Prof. Ajit Patil for his able guidance and support. Last but not the least; I would like to thank my colleague Tanya B hardwaj (Inte rn), without whose support, co-operation and suggestions, this project could not be completed.

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TABLE OF CONTENTS PARTICULARS Authorization NO.Acknowledgement Abstract 1. Introduction 1.1 Purpose and Scope 1.2 Limitations 1.3 Methodology 2. Industry Overview 3. Business Overview 4. Long Term Sources of Finance 4.1 Capital Market 4.2 Different Kinds of Equity Issue 5. Initial Public Offer 5.1 Intermediaries Involved in IPO 5.2 Considerations Before Deciding for An IPO 6. IPO by an Unlisted Company 7. Pre Issue Obligations 8. Terms of Issue 9. Pricing by Companies Issuing Securities 10. Promoters Contribution & Lock In Period 11. The Issue 12. Objects of the Issue 13. Basis for Issue Price 14. SEZ & Tax Benefits 15. Stock Movement in 2006 16. External Commercial Borrowings (ECB) 17. Eligible Borrowers 18. Recognized Lenders 19. Average Maturities for ECB 20. RPL Debt 21. Interpretations 22. Portfolio Tracker Version 0.0 23. Merger of RPL with RIL

PAGE3 4 9 12 13 15 16 17 22 25 26 27 29 31 33 34 36 37 38 41 44 46 48 51 52 58 59 60 61 62 63 83 885

24.

25. 26. 27. 28. 29.

23.1 Synergy of merger 23.2 Swap Ratio 23.3 Investors Position 23.4 Stock Position 23.5 Analysts take on the merger Valuation of RIL and RPL 24.1 Valuation of RIL 24.2 Valuation of RPL 24.3 Study of stock prices of RIL & RPL 24.4 Weighted Average Cost of Capital 24.5 Free Cash Flow to Equity 24.6 Free Cash Flow to Firm Findings Conclusion Recommendations Declaration References

91 92 95 97 99 104 116 121 124 127 130 132 133 135 136 137

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LIST OF ILLUSTRATIONS LIST OF TABLESPAR TICULARS Table 1: World Refining Capacity in MMBD Table 2: World demand growth in MMBD Table 3: GDP Billion US$ (ON PPP BAS IS) Table 4: Proposed F unding for RP L Table 5: Lead Managers to size of issue Table 6: Pre Issue S hareholdings Table 7: Capital Structure Table 8: Issue Details Table 9: Estimated Expenses Table 10: Estimated Expenses of Issue Table 11: Comparison with Domestic Peers Table 12: Debt Raised by RP L Table 13: Dilution of Promoters Table 14: Swap ratio PAGE NO. 19 19 20 23 36 41 42 44 46 47 49 62 93 96

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LIST OF FIGURESPAR TICULARS Figure 1: Refining Requirement Forecast Figure 2: Different K ind of Equity Issue Figure 3: Book Building Process Figure 4: MRP L Stock Movement Figure 5: BPCL S tock Movement Figure 6: HPCL S tock Movement Figure 7: RIL Stock Movement Figure 8: RP L Stock Movement Figure 9: RP L Details Figure 10: S tock Position of RIL Figure 11: S tock Position of RP L Figure 12: Operating Profit per S hare Figure 13: Percentage Growth Figure 14: Book Value per S hare Figure 15: Gross Profit Margin Figure 16: Gross and Net Profit Margin Figure 17: Return on Net Worth PAGE NO. 21 27 40 52 53 53 54 55 56 97 98 105 105 106 107 108 108

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ABSTRACTRefinery project requires huge investments for the setting up the refining plant. Hence, the long term sources of finance like raising funds through equity shares and raising long term secured debt are more viable. Reliance Petroleum Limited (RPL) to fund its operations opted for long term sources of funds namely equity and debt. The report aims at understanding various guidelines and processes involved for raising the long term funds through a case study of RPL. The capital cost of RP Ls project was estimated at Rs. 270 billion. The project was funded through debt (Rs. 157.5 billion) and equity (Rs 112.5 billion). As one of the means for raising Equity funds, RP L went for an Initial P ublic O ffer (IPO) through the book building process. The Company issuing Equity through IPO has to fulfill certain guidelines (rules and re gulation) issued by S EBI under Section 11 of the Securities and Exchange Board of India Act, 1992. The guidelines are called Disclosure and Investor Protection Guidelines (DIP). To raise funds through debt (External Commercial Borrowings in case of RP L) gu idelines of the Reserve Bank of India for External Commercial Borrowings need to be complied with. EC B can be accessed under two routes. They are Automatic Route and Approval Route. RPL raised debt through Approval Route for a new project having a term o f 9 years and 7 months. Reliance Debt Document is one of the finest example of Debt Agreement as it discusses the rights and obligation of all the parties involved (the borrower, Commercial Lender and the Commercial Facilities Agent) in all the possible situations. These Debt documents are comprehensive in nature and generally cover all the possible circumstances. Apart from long term sources of finance, the report explains the functionality of a software named Portfolio Tracker Version 0.0. Portfolio Tracker can help in calculating the gain or loss on the stocks of a portfolio. This software pulls the current prices of the shares from NS E and BSE sites at a definite interval. It compares the current price with the purchase price and hence calculates the profit or loss on the stock. This software is made using the functions of Microsoft Excel 2007.

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In the second part of the report, an attempt has been made to understand the facts of recent RIL RPL amalgamation, which was announced on 27 th February 2009 and took place on 1st April, 2009. The report discusses the swap ratio of 1:16 that has been decided by the Board of Directors of RIL for the merger. This ratio is marginally in favor of the shareholders of RPL, would mean a dilution of 4.4% of RILs equity. Moreover, the position of the shareholders of the two companies has also been looked at and the factors which can affect the shareholders investments decisions have also been analyzed. RIL will be benefitted from certain financial and operational synergies arising out of the merger of RPL with RIL. To understand the probable course of action for investors, the valuation of two companies has been done. This facilitates the investors in making the decision for investment in RIL after the amalgamation of RPL. The financial ratios of RIL state that the company is in good financial health. It shows Earnings per S hare of Rs. 133 with a Dividend per S hare of Rs 13 in 2007 -08. The companys liquidity ratio reveals that the company has considerable amount of cur rents assets and can very well pay off its current liabilities through it. The financial ratios of RP L, though do not canvas a very clear picture of financial health of the company. This is because the company has started its operation on 15 th March, 2009. Hence only 15 days operational data has been made public. C urrently the company has been highly leveraged as D/E Ratio for the company is 0.95:1. This is because RPL is a new project and requires heavy machinery. The free cash flows measures how much amount of cash can be paid to the equity shareholders of the company after the payment of all the expenses, reinvestment and debt repayment. Free cash flows can be classified as Free Cash F low to Equity (FCFE) and Free Cash F low to the F irm (FCFF). RIL has positive figures for FCFF and FCF E which indicates sound financial position of the company. The figures for RPL are negative because the company has only recently started production (only 15 days of production till March 2009). Further, the weighted average cost of capital has been calculated companies for both the

depending on the volatility of its shares at the stock market. Last one years data has been taken

to calculate the variance and standard deviation. The RIL stock prices are more volatile when10

compared to RPL. Thus the cost of equity for RIL is higher than Reliance Petroleum. S imilarly, the cost of debt is compared based on the financial charges based over the total value of debt. The cost of debt is little higher for RP L 5.96 than that of RILs 4.55. But as RP L is better leveraged than RIL and the cost of equity (Ke) is higher than cost of debt (Kd), the WACC for RIL is higher than RP L. As RIL has a higher WACC, the valuation of RP L is better when compared to RIL (in respect of WACC). Thus, RIL seems to be a little riskier investment than RPL. But from the past records of RIL, it has proved to be an ever growing company. Its financial records speak very well of the financial health of the company and shows that RIL has been a profit making company since its inception. The credit for the profits of the company goes to its various subsidiaries, which have been compensating for each others losses through their profits. Thus, numbers might term RIL to be a riskier firm when compared to RP L. But on papers, RIL is a much stronger company and shows a bright future. The past profits of the company second the statement of RIL being an intelligent investment.

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INTRODUCTIONABOUT THE COMPAN Y The Reliance Group was founded by Late S h. Dhirubhai Ambani a nd today it is India's largest private sector enterprise. The flagship company, Reliance Industries Limited, is a Fortune Global 500 company and is the largest private sector company in India. For Reliance, backward vertical integration has been the cornerstone of the evolution and growth. It started with textiles and ever since Reliance has pursued a strategy of backward vertical integration in polyester, fiber intermediates, plastics, petrochemicals, petroleum refining and oil and gas exploration and prod uction. Exploration and production of oil and gas, petroleum refining and marketing,

petrochemicals (polyester, fiber intermediates, plastics and chemicals), textiles, retail and special economic zones has been the core activities of the Group. Reliance enjoys global leadership as the largest polyester yarn and fiber producer. Also, it is amongst the top ten producers of the petrochemical products in the world. Major Group Companies are Reliance Industries Limited (including main subsidiaries Reliance Petro leum Limited and Reliance Retail Limited) and Reliance Industrial Infrastructure Limited. PUR POS REPORT E OF THE

The F inal Report is the written component of the evaluation of the internship . This report contains the work done by me during my three months o f internship with RELIANCE INDUS TRIES LIMITED. This report is an attempt to document the analysis and leanings made by me during the period. This report will help the Faculty Guide Mr. AJIT P ATIL and the Company Guide Mr. K. R. RAJA and Mr. HARIHARAN to understand my work.

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SCOPE OF THE R EPORT As a part of the MBA program, I have undergone an industry internship with M/s Reliance Industries Limited to understand the practical applications of various financial instruments, transactions, processes and administration of the finance function. To achieve this objective, my company guide advised me to study the project financing for Refinery and Polypropylene plant being developed by Reliance Petroleum Limited (RP L), a subsidiary of RIL. Based on this study, I am expected to learn, in detail, the long term financing of the project and use this knowledge for related treasury and finance functions of the company like debt servicing, compliance of financial covenants, Accounting, MIS and filing of reports. The report discusses about Long Term Sources of F inance, factors which determine the requirement o f long term sources of funding and sources of raising them. It also includes the study of equity and debt in detail. It discusses the pros and cons of different types of long term fund raising methods. The report further includes the detailed study of Init ial P ublic O ffering (IPO) including its pre- issue obligations as mentioned by Securities and Exchange Board of India (S EBI). It states the Book building process for deciding the issue price. O nce there is a general understanding about the IPO, the report goes deep in the IPO process of Reliance Petroleum Limited and mentions specific SEBI guidelines for raising funds through IPO, which were compiled by RP L. The report also mentions the debt raising process and External Commercial Borrowing Guidelines. The report discusses the various covenants and clauses that are included in debt agreements. It broadly discusses the roles and responsibilities of various parties involved in debt agreement in light of RP Ls Commercial Term Agreement. The report also includes the details of PORTFOLIO TRACKER VERS ION 0.0 which helps investors to monitor various stocks in their portfolio at a specific period. The report contains the information about the various functionalities of the Microsoft Excel driven software. Further, to understand the current happenings in the Reliance Industries Limited, my company guide and the faculty guide suggested me to follow the recent merger of RP L with the company. This helped me in understanding the concept of merger and amalgamation. This also helped

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in analyzing the swap ratio decided by the board members of the Reliance Industries. The report also discusses the analysis of various analysts on the idea of merger and further the declared swap ratio. A calculation has been done to study the impact on the promoters holding in the RIL after the amalgamation of RPL as the stated ratio of 1:16. In order to understand the various options available to the investors of RPL and RIL, the valuation of both the companies has been done. As a part of valuation the previous 5 year data has been used for RIL to estimate its future financial statistics. Percentage of Sales method has been used for estimation of the future financials. After the estimations, various financial ratios like liquidity ratios, leverage ratios, payout ratios, coverage ratios etc. have been calculated and analyzed in order to study the financial health of the company. However, due to the lack of the historic data for Reliance Petroleum Limited, 15 days production data has been extrapolated to estimate the years data. This data has been used to estimate the future financials of the company. The growth of sales has been estimated by estimating the GDP growth rate of India and the utilization capacity of the refinery. The report also deals with the historic data of stock prices of RIL and RP L in consideration with Nifty Index for last year, starting from 1 April, 2008. This data has been used to find out the annual return, standard deviation and volatility of the stocks of these companies. This volatility helps in calculating the cost of equity. F urther, by using the cost of equity and cost of debt, weighted average cost of capital is calculated for both the companies. The valuation of the company is also discussed based on the result of WACC. The free cash flows for both the companies have also been calculated which measures how much amount of cash can be paid to the equity shareholders of the company after the payment of all the expenses, reinvestment and debt repayment. F ree cash flows ca n be classified as Free Cash F low to Equity (FCFE) and Free Cash F low to the F irm (FCFF). These cash flows are indicators of the financial company. position of the

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LIMITATIONS 1. While analyzing the prospectus of Reliance Petroleum Limited, I understand t hat the price band for the book building process was decided by management of the company in consultation with the merchant bankers to the issue. I am explained that the determination of the price band involves complex research, calculations and analysis o f various factors including market conditions, financing, project schedule, and project feasibility. This research and calculations are subjective in nature and no concrete data is available to us for study. 2. Some of the key documents and information provid ed by the company about the debt raising was technical and confidential in nature and hence, was not studied. 3. The software updates the prices at particular interval; hence the change in prices for less than a minute cannot be accommodated in it. This might become a shortcoming while deciding the arbitrage strategy as the stock prices changes at every fraction of seconds. 4. Non availability of the previous years financial data (P rofit &Loss account) was a major limitation in the process as the company hadnt started the production. Due to this, the exact percentage of the expenditure, incomes etc are not available. Thus, there are high chances that the projections made in the project might vary considerably from the actual results. 5. RPLs refinery has been des igned to have a Nelson Complexity Index of 14.0, which would make it amongst the most complex refineries in Asia. S imilarly GRM of the company is estimated to be on higher side as compared to industry average. Due to this, the competitors data cannot be o f much help in estimating RP Ls financials. Therefore, many assumptions have to be made while forecasting RPLs financial statements. 6. The comparison of Reliance Petroleum Limited with the competitors for the purpose of forecasting is not viable because RP L has been set up in a Special Economic Zone (S EZ), and therefore, the tax and other benefits are not available to other refineries. 7. The company cannot benchmark itself against the industry average and the industry leader.

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METHODOLOGY 1) Study of S ecurities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000, to understand the legal framework to be followed while doing an Initial Public O ffering (IPO). 2) Study and analysis of prospectus of RP L to understand the equity funding for the company. It helped in understanding the various methods through which equity can be raised for a company. It also provided an insight about the promoters contribution, lock- in period etc. 3) Study of Common Terms Agreement relating to the financing of a refinery and polypropylene plant in Jamnagar (Gujarat ) by RP L. This helped in understanding the agreement clause between the company and its lenders, thus explaining the debt financing of a company. 4) Financial forecasting of RIL is done by using the historic data of the company and by analyzing the financial performance in the past. Percentage of Sales method is used for estimating these statistics. For RPL, the latest quarter results, released on 23 2009 are used to do the financial forecasting. 5) Financial ratios, stock volatility, weighted average cost of capital (WACC), free cash flow to equity (FCFE) and free cash flow to firm (FCFF) are calculated as a part of valuation of the company. 6) SECONDARY DATA: Using the secondary data available on internet like analysis done about RP L and other competitor companies. 7) CASE ANALYSIS : Case analysis as we are studying the RP Ls funding process to understand the funding procedure of any company.rd

April

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INDUSTRY OVERVIEWGLOBAL OIL REFINING INDUSTR Y:The oil refining industry is global in nature because crude oils, other feedstock and refined petroleum products can be transported at a relatively low cost by sea and by pipeline and there is worldwide demand for such products. The principal factors affec ting refining margins are the demand for and prices of refined petroleum products relative to the supply and cost of crude oils and other feedstock and the configuration, capacity and utilization rates of refineries. The range and quality of refined petroleum products produced by any given refinery depends on the types of crude oil used as feedstock and the configuration of the refinery. REFINED PETROLEUM PRODUCTS :LPG Naphtha Gasoline Middle distills Fuel oils Pet coke Bitumen Niche, high value added refined petroleum products

REFINING INDUS TR Y CHARACTERIS TICS :1. Economics of oil refining- O il refining is primarily a margin-based business in which a refiners goal is to optimize the refining processes and yields of all products in relation to feedstock used. The Gross Refining Margins (GRMs) of complex refineries are higher than those of simple refineries because complex refineries are able to generate a higher yield of light and middle distillates from lower cost heavier and sourer crude oils. Crude oil typically accounts for 90% to 95% of the total cost of refining. Because other operating expenses are relatively fixed, the goal of refineries is to maximize utilization

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rates, maximize the yields of higher value-added products, minimize feedstock costs and minimize operating expenses. 2. Location of oil refine ries - The location of an oil refine ry can have an important impact on its refining margin since the location influences its ability to access feedstock and distribute its products efficiently. The location dictates what proportion of the feedstock and products can be transported by tanker vessels by sea or via pipelines, rail or tank trucks. Refining companies seek to maximize their profits by placing their products in the markets where they receive the highest returns after taking into account delivery transportation costs and other expense s such as import duties in those markets. Due to their flexibility and lower logistics costs, coastal refineries typically have a competitive advantage over the oil refineries located inland. 3. Crude oil supply- In 2004, the global oil supply was estimated by the International Energy Agency (IEA) to be 82.1 million barrels per day. The Middle Eastern OPEC countries accounted for 27.8% and total OPEC countries accounted for 39.5% of this supply. IEA estimates that by 2020, global oil supply may reach 104.9 million barrels per day with Middle Eastern OP EC countries accounting for 33.7% and total OPEC countries accounting for 45.2%. SUPPLY AND DEMAND FOR REFINED PRODUCTS: The worlds total refining capacity has remained at approximately the same level as it was in the beginning of the 1980s. This trend has been enabled, in part, by upgrades and debottlenecking of existing refineries and combinations of adjacent facilities. However, it is believed that tightening petroleum product specifications are likely to result in further closures of low complexity and low economic refineries. size

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Table 1: World Refining Capacity in MMBD 1994 World USA Europe including forme r Soviet Union Asia-Pacific India China Source: BP Statistical Review 2005 75.7 15.4 26.5 15.9 1.1 3.6 1999 81.9 16.5 24.8 21.4 2.2 5.4 2004 84.6 17.0 25.2 21.9 2.5 5.8 CAGR 19942004 1.1% 1.0% -0.5% 3.2% 8.9% 5.0%

Table 2: World demand growth in MMBD 1994 World USA Europe including forme r Soviet Union Asia-Pacific India China Source: BP Statistical Review 2005 68.2 17.7 19.8 17.1 1.4 3.1 1999 74.9 19.5 19.7 20.3 2.1 4.4 2004 80.8 20.5 20.0 23.5 2.6 6.7 CAGR 19942004 1.7% 1.5% 0.1% 3.2% 6.1% 7.8%

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KEY INDUSTR Y TREND:Economic growth and energy demand- Economic growth is a key driver of energy

demand given the close correlation between total energy demand and economic output. In the World Energy O utlook 2004, the IEA estimated that in recent decades energy demand has risen in a broadly linear fashion alo ng with gross domestic product. Table 3: GDP Billion US$ (ON PPP BASIS)201 5 World 47227 65449 78947 Asia17100 26158 33076 Pacific Middle 1431 2113 259 East 4 USA 10075 13084 15216 China 5494 9716 13003 Brazil 1370 1783 217 0 India 3160 5031 652 4 Russia 1657 2543 301 Source: EIA International Energy Outlook 2005 9 2002 2010 2020 94582 41253 3147 17634 16919 2638 8430 3579 2025 112752 51024 3789 20292 21699 3209 10807 4192 CAGR(%) 20022025 3.9% 4.9% 4.3% 3.1% 6.2% 3.8% 5.5% 4.1%

Economic regulations - Although industrialized countries continue to consume most of the worlds petroleum products, growth in demand for refined petroleum products over the last few years has primarily been driven by non-OECD countries, most notably C hina. The general growth in consumption and the stricter specifications have contributed to an increased demand for lighter refined petroleum products, such as gasoline and middle distillates, and lower demand for heavier products, such as fuel oils, contributing to the larger price differentials between higher value and lower value refined petroleum products. Therefore, it is believed that complex refineries which can produce environmentally friendly fuel are better positioned to meet growing market demand for these light products. Increase in light-heavy spread- Over the years, the demand for light and middle distillates has increased, including new demand for products that meet stricter environmental standards, driving up the sales prices for light and middle distillates. The combination of these market factors has resulted in an increasing light heavy differential. Given these trends, it is believed that complex refineries that are able to convert heavy crude oils into light products can achieve significantly higher GRMs than simple refineries.

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Shortage of complex refining capacity - As demand for fuel oil has been decreasing with the increase in demand for light products; existing simple refineries will either be phased out or will need to be upgraded. The chart below shows an incremental global refining requirement forecast to 2020, as reported by HARTs World Refining and Fuels Services. While the additional crude distillation capacity is estimated at 18.8 million barrels per day (a 22% increase) from 2005 to 2020 levels, the conversion capacity additions are estimated at 12.4 million barrels per day (a 51% increase) from 2005 to 2020 levels and desulphurization capacity additions are estimated at 21.8 million barrels per day (a 54% increase) from 2005 to 2020 levels. Figure 1: Forecast Refining Require ment

Source: HA RTS World Refining and Fuels Services, December 2005.

PROPELEYNE INDUSRTY: Polypropylene is a crystalline thermoplastic with a unique combination of physical, thermal and chemical resistant properties, produced by polymerization of propylene. According to CMAI, global consumption of polypropylene was estimated at 39.6 million tonnes and accounted for approximately 24% of all plastic demand in 2005. Polypropylene demand shows cycles that closely follow GDP cycles, growing as GDP increases. Global consumption of polypropylene is forecast to grow 5.4% per annum between 2005 and 2010 according to CMAI. Growth rates are expected to be higher in rapidly developing economies of the Asia region, including China and India, where current per capital consumption of polypropylene is low compared to more

developed countries.21

BUSINESS OVERVIEWIn 2006 Reliance Petroleum Limited was a startup company, formed to setup a Greenfield petroleum refinery and polypropylene plant. The plant is located in a Special Economic Zone in Jamnagar (Gujarat). The developed refinery has a complexity of 14.0, as mea sured using the Nelson Complexity Index. RPL has two major promoters, Reliance Industries Limited (RIL) and Chevron India Holding Pvt. Ltd. The RPL refinery and polypropylene plant is located adjacent to the existing refinery of RIL. RP L is 75% owned subsidiary of RIL. RPL has an agreement with Bechtel France S.A.S (Bechtel) to license the technology for the major process units of the refinery and polypropylene plant. Bechtel has also provided engineering, project management and other construction se rvices to the project. The refinery and polypropylene plant is locates in a Special Economic Zone (the S EZ) and hence receives certain tax benefits and concessions under SEZ regulations. PLANNED FIN ANCING FOR THE PROJECT AT THE TIME OF IPO The capital cost of the project was estimated at Rs. 270 billion. The project was funded through debt (Rs. 157.5 billion) and equity (Rs 112.5 billion). Before IPO, RP L entered into a preliminary term sheet with certain banks and financial institutions to provide for a syndicate term loan facility for approximately Rs. 67.5 billion. Additional financing through export credit agencies was proposed for approximately Rs. 45-67.5 billion. Another Rs. 22.533.75 billion were to be raised by further debt financing. As the total funds requirement for the projects is estimated at Rs. 270,000 million. The company has proposed to fund the Project through a mixture of debt and equity. The details of the proposed funding are as follows:

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Table 4: Proposed Funding for RPL Source Total equity including proceeds from the issue Debt - Syndicate Loan - Exports Credits - Rupee Debt/Bonds Total Debt Total Source: RPL Prospectus 2006 pg.32 KEY COMPETITIVE S TRENGTH Following are the major competitive strengths of RPL refinery and polypropylene plant: 1) RILs superior project execution skills in constructing a complex refinery: O ne of the promoters of RP L, Reliance Industries Limited has core competency in conceptualizing and implementing the multi-billion dollar projects on time and in a cost efficient manner. Thus, RPL got benefits from the expertise of RIL in construction of its refinery. 2) Large and complex refinery capable of using heavier and sourer, low cost crude to produce high products. 3) quality, premium petroleum Range Amount (in Rs. millions) 135000

45000-90000 45000-67500 22500-33750 157500 270000

Benefits of low capital costs: RILs has a prior experience in constructing and operating the Jamnagar refinery, especially in the areas of design and engineering, construction, labor and resource optimization, greater use of local material and resources and faster implementation. This resulted in a significant reduction in the capital cost for the project and enabled RPL to achieve lower cost per barrel, adjusted for complexity.

4) Strategic location with proximity to crude oil sources and target export market: The refinery is located on the west coast of India in close proximity to the Middle East, the largest crude oil producing region in the world. This will result in lower ship t urnaround time and crude freight costs. 5) Fiscal incentives by virtue of being located in a Special Economic Zone: An S EZ operates as a delineated area which is deemed to be a foreign territory for the purposes of trade operations, duties and tariffs. Being an export oriented refinery, RPL intend

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export the bulk of their production. Hence they will benefit from an income tax deduction on export turnover for a period of five consecutive years following the commencement of commercial operations (with a scaled reduction in income tax deduction for the next five year period and, subject to certain reinvestment conditions, for a third five year period thereafter). They will also be exempt from customs duty for goods and services imported into or exported from the SEZ and also from excise duty on domestic procurement, for the purposes of our authorized operations.

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LONG TERM SOURCES OF FINANCELong term sources of finance are those that are repayable over a longer period of time, generally for more than 12 months based on the feasibility of the Companys business/project. The sources of long term finance are equity shares, debentures, public deposits, term loans from banks etc. The need for the long term finance is determined by certain factors like the nature of the business, the goods produced and the type of technology that is required for the business to be carried out. Mainly, the long term sources of finance are used to finance fixed assets, to finance the permanent part of the working capital requirement and to fund the growth and expansion of the business as it is done for a longer period of time. The sources of long term finance can be broadly classified into: EQUITY- The amount of funds contributed by the owners or the stockholders including the retained earnings taken together is termed as the shareholders equity. There are different methods of raising equity finance i.e. promoters co ntribution, initial public offering, private placement and rights issue. The company can issue its shares either on par i.e. at Face value or at a premium which is known as the share premium. The companys earnings which have not been distributed to share holders and have been retained in the business are known as the reserves and surplus. DEBT- An amount of money borrowed by one party from another is known as debt. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest. Generally, the startup companies often turn to debt to finance their operations. In fact, almost all the corporate balance sheets will include some level of debt. The debt is also referred to as leverage. The most popular source for debt financing is the bank and other financial institutions. A company can also raise debt by selling the debentures of the company to the lenders.

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Refinery project requires huge investments for the setting up various processing units, pipelines, storages etc. This kind of project requires large amount of investment and short term means of finance like unsecured loans cannot meet such requirements. Hence, the long term sources of finance like raising funds thro ugh equity shares and raising long term secured debt is more viable. Moreover, the gestation period envisaged in such projects. to start the operations of typical refining plant is also very long. Accordingly huge amount of long term financing is

CAPITAL MARKETThe Capital Market is the market for securities (broadly classified into debt and equity), where companies and government can raise long term funds. The securities decouple individual acts of savings and investment over time, space and entities thus allow savings to occur without concomitant investment. The capital market aids economic growth by mobilizing the savings of the economic sectors and directing the same towards channel of productive uses. The capital market acts as a break on channeling savings to low-yielding enterprises and impels enterprises to focus on performance. It continuously monitors performance through movements of share prices in the market and the threats of takeover. Financial market works as a conduit for demand and supply of long-term debt and equity capital. Money provided by savers and depository institutions are channeled towards the borrowers and investees through various financial instruments like securities. A capital market is a highly decentralized system comprising of three major parts, namely stock market, bond market, and money market. It also works as an exchange for trading existing shares.

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DIFFERENT KINDS OF EQUITY ISSUE

Figure 2: Diffe rent Kind of Equity Issue

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Initial Public Offering is the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. In an IPO, the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market. A Further public offering (FPO) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations. Rights Issues is when a listed company proposes to issue fresh securities to its existing shareholders as on a record date. Here, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time. A rights issue is offered to all existing shareholders individually and may be rejected, accepted in full or (in a typical rights issue) accepted in part by each shareholder. Rights are often transferable, allowing the holder to sell them on the open market. A private placement is an issue of shares or of convertible securities by a company to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. It is a direct private offering of securities to a limited number of sophisticated investors. This is a faster way for a company to raise equity capital. A private placement of shares or of convertible securities by a listed company is generally known by name of preferential allotment. A listed company going for preferential allotment has to comply with the requirements contained in C hapter XIII of SEBI (DIP) Guidelines which include pricing, disclosures in notice etc, in addition to the requirements specified in the Companies Act. A Qualified Institutions Place ment is a private p lacement of equity shares or securities convertible in to equity shares by a listed company to Qualified Institutions Buyers only in terms of provisions of Chapter XIIIA of SEBI (DIP) guidelines. The Chapter contains provisions relating to pricing, disclos ures, currency of instruments etc.

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INITIAL PUBLIC OFFER (IPO)An Initial P ublic O ffer (IPO) may be termed as the maiden offer made by a non-public company to take up equity stake by the public. This offering is normally made by the company in order to raise public funds for its future projects. A corporate may raise capital in the primary market by way of an initial public offer, rights issue or a private placement by issuing either debt or equity instruments. An Initial P ublic O ffer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company. IPO is the first sales of stock by a company to the public through investment banking firms. A successful initial public offering increases the visibility and appeal of the company, thereby increasing the demand and value for shares of the company. Public companies have many shareholders and are subject to strict rules and regulations. They comprise of a BOD (Board of Directors) consisting of the requisite number of independent directors. This is for complying with the provisions of Corporate Governance. The management of the company is entrusted to update the BOD with all developments including the updated financial information on every quarter. In India, the regulatory body that guides these public companies is Securities and Exchange Board of India (S EBI). Reasons for Going Public: The main reasons for going public generally include: Raising funds to finance capital expenditure programs like expansion, diversification, modernization etc Arranging funds for increased working capital requirements Financing acquisitions like a manufacturing unit, brand acquisitions etc Debt refinancing It works as exit route for existing investors.

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Pros and Cons of IPO: When a company has strong foothold in the market, it is easier for the company to raise funds at a cheaper cost. But when a private firm starts off at an initial stage its cost of acquir ing funds is generally high. To support its activities company requires long term funds at a cost which is lower than the return on capital employed. The benefits of an IPO are: A publicly traded company may tap a broader universe of investors as well as a larger pool of investment capital. It provides liquidity to the existing shareholders. A publicly traded company seeks more attention and hence increases its visibility. It may raise more capital through additional stock offerings if sufficient investor interest exists. A publicly traded company may be able to attract and retain highly qualified personnel if it can offer employee stock option plans, bonus shares or other incentives, which might be instrumental in reducing the high attrition rate from which the corporate world is presently suffering. A listed company is in the position of winning the confidence of the mass because of its transparency exercised through stringent regulations imposed by the stock exchanges.

However, the use of IPOs is limited because of the following reasons: It involves substantial expenses. A publicly traded company needs to make continuous disclosers. It involves complexity in complying with federal and state laws governing the sale of business securities. Thus, it has increased regulatory monitoring. Offering business' s ownership for public sale does little good unless the company has sufficient investor awareness and appeal to make the IPO worthwhile Management must be ready to handle the administrative and legal demands of widespread public management time and efforts. ownership. Therefore, it requires substantial amount of

30

An IPO also means a dilution of the existing shareholders interests. IPOs can be a risky investment for the individual investor as it is difficult to predict what the stock will do on its initial day of trading.

INTERMEDIARIES INVOLVED IN IPOMerchant Banker: Merchant Banker has been defined under the Securities & Exchange Board of India (Merchant Bankers) Rules, 1992 as "any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management". Merchant Bankers assists the company from the initial phase of preparing prospectus to the listing of securities at the stock exchange. It is mandatory for them to carry due diligence for all the information provided in the prospectus and they must issue a certificate to SEBI. A Company may appoint more than one Merchant Banker provided inter-Se allocation of responsibilities between the Merchant Bankers is properly structured. Unde rwriters: Underwriters are a company or other entity that administers the public issuance and distribution of securities from a corporation or other issuing body. An underwriter works closely with the issuing body to determine the offering price of the securities, In case there is under subscription (i.e., the company does not receive good respo nse from public and amount received from is less than the issue size), underwriters subscribe to the unsubscribed amount so that the issue is successful. Bankers to an Issue: Bankers to an issue means a scheduled bank carrying on all or any of the following issue related activities namely:i. ii. iii. iv. Acceptance of application and application monies; Acceptance of allotment or call monies; Refund of application monies; Payment of dividend or interest warrants.

31

Registrar and S hare Transfer Agents: They are responsible share certificates / refund orders are also handled by them.

for processing all

applications received from the public and prepare the basis of allotment. The dispatches of

Stock Brokers & Sub-Broke rs: These are intermediaries who charge a fee or commission for executing buy and sell orders submitted by an investor. Depositories are the intermediaries who hold securities in dematerialized form on behalf of the shareholders. For RP L, the book running lead managers were: 1. JM Morgan Stanley Private Limited 2. DSP Merrill Lynch Limited 3. Citigroup Global Markets India P rivate Limited 4. Deutsche Equities India Private Limited 5. Enam F inancial Consultants Private Limited 6. HSBC Securities and Capital Markets (India) P rivate Limited 7. ICICI Securities Limited 8. SBI Capital Markets Limited 9. UBS Securities India Private Limited The Registrar to the issue for RP L is KARVY Computershare Private Limited.

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CONSIDERATION BEFORE DECIDING FOR AN IPOBefore deciding to launch an IPO, the management of the issuing company should pay considerable attention to its future business model. Deciding to come out with the IPO considering the brighter side of mobilizing resources is not enough, unless it is supported by an increase in the shareholders value of the invested funds. When an inve stor invests in the stock of a company, he expects its stock value to grow constantly, subject to market conditions. Therefore, to have a successful IPO, the company must have a robust business model and a considerable future growth prospects. For a successful IPO, a company should take care of following point: It should have an effective risk management system. It should also have an internal audit department reviewing the procedures implemented and continuously improve the same. The company should abide by the corporate governance procedures to safeguard the interests of its stakeholders as well as its own interest. The management should be capable enough to make effective and efficient utilization of the resources. In case, the company is unable to fulfill the above the valuation of stock deteriorates and the company will lose market confidence. Decreased valuation of the company may affect the lines of credits, pricing of any follow-on public issue, ability to maintain morale o f the employees, confidence and value of the shareholders wealth. Thus a company should comply with the above mentioned points in order to have a successful IPO.

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IPO BY AN UNLISTED COMPANYSecurities and Exchange Board of India (S EBI) came into existence in 1992, since Controller of Capital Issues was dissolved. To come up with an IPO the company needs to fulfill all guidelines (rules and regulation) issued by SEBI under Section 11 of the Securities and Exchange Board of India Act, 1992. The guideline s are called Disclosure and Investor Protection Guidelines (DIP). As per the S EBI guidelines, an unlisted company can make a public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date, only if it meets all the following conditions: a. The company has net tangible assets of at least Rs.3 crores in each of the preceding 3 full years of which not more than 50% is held in monetary assets. b. The company has a track record of distributable profits for at least 3 years out of immediately preceding 5 years. c. The company has a net worth of at least Rs. 1 crore in each of the preceding 3 full years. d. In case the company has changed its name within the last 1 year, at least 50% of the revenue for the preceding 1 full year is earned by the company from the activity suggested by the new name; and e. The aggregate of the proposed issue and all the previous issues made in the same financial year in terms of size does not exceed 5 times its pre- issue net worth as per the audited balance sheet of the last financial year. As RPL was a newly incorporated company hence the above conditions were not applicable. SEBI guidelines take care of the condition where a newly incorporated company might like to go for an IPO hence as per SEBI guideline, if the unlisted company does not comply with the above given conditions it may make an IPO of equity shares or any other security if it meets both the conditions: a. The issue is made through book building process with at least 50% of the net offer being allotted to qualified institutional buyers (QIB), failing which the full subscription monies

34

shall be refunded, OR, the project has at least 15% participation by F inancial Institutions/ Scheduled Commercial Banks, of which at least 10% comes from the appraisers. In addition to this at least 10% of the issue size shall be allotted to QIBs failing which the full subscription monies shall be refunded. b. The minimum post issue face value capital of the company shall be Rs. 10 crores, OR, there shall be compulsory market making for at least 2 years from the date of the listing of the shares. RPL very well qualify in the above stated condition. The details of the same are elaborated while discussing the details of RPLs IPO. Note: Net tangible assets mean the sum of all net assets of the company, excluding the intangible assets defined under the AS-26 issued by ICAI. Project means the object for which the monies proposed to be raised to cover the objects of the issue.

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PRE ISSUE OBLIGATIONSAs per the S EBI Guidelines, there are certain pre- issue obligations that the Company should take into account before the issue. These obligations can be summarized as follows: 1. The Lead Merchant banker has exercised due diligence about all the aspects of offering, veracity and adequacy of disclosure in the offer documents as the liability process. 2. The documents that had to be submitted along with the Offer Document by the Lead Manager like the Memorandum of Understanding, a statement of the allocation of the responsibilities among all the merchant bankers to the issue and the list of promoters group and other de tails. 3. The condition given by SEBI regarding the minimum number of lead manager to be appointed based on the size of the issue (given in the table below) had been complied with. Table 5: Lead Managers to size of issue Size of the Issue Less than Rs. 50 crores Rs.50 crores to Rs.100 crores Rs.100 crores to Rs.200 crores Rs.200 crores to Rs.400 crores Above Rs.400 crores No. of Lead Managers 2 3 4 5 5 or more of the merchant banker continues even after the completion of the issue

4. An agreement with the depositories should have been entered into by the issuercompany for the dematerialization of securities.

From the study of the prospectus of RP L, I understand that all the above obligations were fulfilled by the Company.

36

TERMS OF THE ISSUE

The Equity Shares being offered are subject to the provisions of the: o Companies Act o Memorandum of Association of the company o Articles of Association of the company o The terms of the Red Herring Prospectus, the Prospectus, the Bid cum Application Form and other documents/certificates. The Equity Shares are also subjected to: o Laws as app licable o Guidelines o Notifications o Regulations relating to the issue of capital and, o Listing and trading of securities issued by S EBI, Government of India, and the Stock Exchanges.

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PRICING BY COMPANIES ISSUING SECURITIESAn unlisted company eligible to make a public issue and desirous of getting its securities listed on a recognized stock exchange pursuant to a public issue, may freely price its equity shares. Price Band: As per the S EBI guidelines, following are the points to be taken care off while deciding the price band of the issue: a. Issuer company can mention a price band of 20% (cap in the price band should not be more than 20% of the floor price) in the offer document filed with the Board and the actual price can be determined at a later date befo re filing of the offer document with the ROCs. b. The final offer document shall contain only one price and one set of financial projections, if applicable. Freedom to determine the denomination of shares for public/right issues and to change the standard denomination: a. In case of IPO by an unlisted company a. If the Issue Price is Rs 500 or more, the issuer company shall have discretion to fix the face value below Rs 10 per share, subject to the condition that the face value shall in no case be less than Re 1 pe r share. b. If Issue Price is less than Rs 500 per share, the face value shall be Rs 10 per share. As the Issue Price of RPL is Rs 60, the face value of the RPL shares is Rs 10 per share. b. The disclosure about the face value of the shares (including the statement about the issue price being X times of the face value) shall be made in the advertisement, offer document and in application forms. RPL has complied with the above guideline as it has clearly mentioned the face value of the shares in all the above stated documents.38

Book Building ProcessCorporate can raise capital in the primary market either by way of an initial public offer, rights issue or private placement. An Initial P ublic O ffer (IPO) is the selling of securities to the public in the primary market. Initial P ublic Offering can be made either through the fixed price method or the book building method or a combination of both. In case the issuer company wants to issue the securities through the book building process then as per SEBI guidelines, the securities can be issued in the following manner: a. 100% of the net offer to public through the book building procedure. b. 75% of the net offer to public through the book building process and the remaining 25% through the fixed price method. c. Under the 90% scheme, this percentage would be 90 and 10 for the book building process and fixed price method respectively.

THE PROCESS The issuer who is planning an IPO nominates a lead merchant banker as a book runner. The issuer specifies the number of securities to be issued and the price band for orders. The issuer also appoints syndicate members with whom orders can be placed by the investors. Investors place their order with the syndicate member who incorporates the orders into the electronic book. This process is called bidding and is similar to open auction. The Book should remain open for a minimum of five days. Bids cannot be entered for a price which is less than the floor price. The bidder can revise bids before the issue closes. On the close of the book building period the book runner evaluate the bids on the basis of the evaluation criteria which may include:

39

-

Price Aggression Investor quality Earliness of bids

The book runner and the company conclude the final price at which it is willing to issue the stock and allocation of securities. Generally, the number of shares is fixed; the issue size gets frozen based on the price per share discovered through the book building process. Allocation of securities is made to the successful bidders.

Price Band

Draft Red Herring Prospectus

SEBI + Stock Exchange

Stock Exchange Initial Listing Approval

Issue Opens

SEBI Filing

Red Herring Prospectus

SEBI Comment

ROC filing (3 days before the issue opens)

Issue Closes

Fixation of Price

Prospectus

ROC Filing

Figure 3: Book Building Process

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PROMOTERS CONTRIBUTION & LOCK-IN PERIODIn accordance with the S EBI Guidelines, 2000; the promoters contribution in any issue shall be in accordance with the following provisions as on: a. The date of filing the red herring prospectus (in case of a book built issue) or prospectus (in case of a fixed price issue) with ROC or letter of offer with designated stock exchange as the case may be in case of fast track issue and b. The date of filing draft offer document with the board, in any other case. In case of the public issue by unlisted companies, the promoter shall contribute not less than 20% of the post issue capital. The promoters have to bring in the full amount of the promoters contributio n including premium at least one day prior to the issue opening date, which shall be kept in escrow account with a Scheduled commercial Bank and the said contribution /amount shall be released to the company along with the public issue proceeds. In case the promoters contribution has already been deployed by the company, the company has to give the cash flow statement in the offer document disclosing the use of such funds received as promoters contribution. Details of pre- issue shareholding and promoters contribution in RPL are as under; Table 6: Shareholdings Name of Shareholders Pre Issue Post-Issue

Pre-Issue (As on date of filing of the Red Herring Prospectus with ROC) Number of Equity S hares Equity shares capital (%)

Number of Equity S hares

Source: RPL Prospectus 2006 pg. 24 Promoter RIL 2,700,000,000 Promoter Nil Chevron Pre-IPO Investors 450,000,000

Equity share capital (%) 75% 5% 10%41

85.71% 0.00% 14.29%

3,375,000,000 225,000,000 450,000,000

Public Total

Nil 3,150,000,000

Nil 100%

450,000,000 4,500,000,000

10% 100%

Table 7: Capital Structure Price/ Equity Shares (Rs) Dec 06,05 100,000 10 Jan 30,06 4,300,000 10 Feb 25,06 2,695,600,000 10 Apr 03,06 450,000,000 60 Apr12, 06 900,000,000 60 Source: RPL Prospectus 2006 pg.23 Date of Allotment No. of Equity Shares Consideration (Cash, bonus, other than cash) Cash Cash Cash Cash Cash Cumulative Share Premium (Rs) Nil Nil Nil 22,500,000,000 67,500,000,000 Cumulative Share Capital (Rs) 100,000 4,400,000 2,700,000,000 3,150,000,000 4,050,000,000

The entire pre-Issue capital (including

the P re-IPO

placement,

but excluding

the

minimum Promoters Contribution) would be locked- in for a period of one year from the date of allotment in the Issue. Hence the capital brought-in on 6-Dec-2005, 30-Jan-2006 and 25Apr-2006 by Reliance Industries Limited would be locked for 1 year. 900,000,000 Equity S hares which form the 20% of the post Issue paid- up capital. These Equity Shares represent the minimum Promoters Contribution pursuant to clause 4.1.1 of the SEBI Guidelines. In terms of clause 4.11.1 of S EBI Guidelines, these Equity Shares will be locked -in for a period of 3 years from the date of allotment in the Issue or the date of commercial production, whichever is later or as per the SEBI Guidelines. As per C lause 4.15.1 of the S EBI Guidelines, the locked- in Equity S hares held by the Promoter can be pledged only with banks or financial institutions as collateral security for loans granted by such banks or financial institutions, provided the pledge of shares is one of the terms of sanction of loan. Under C lause 4.16.1(a) of the SEBI Guidelines, the Equity S hares held by persons other than the Promoter prior to the Issue may be transferred to any other person holding the Equity S hares which are locked- in as per C lause 4.14 of the S EBI Guidelines, subject to continuation of the lock-in in the hands of the transferees for the remaining period and compliance with SEBI Takeovers Regulations.

42

Further, under C lause 4.16.1(b) of the S EBI Guidelines, the Equity S hares held by the Promoter may be transferred to and amongst the P romoter group or to a new Promoter or persons in control of the Company subject to continuation of the lock- in in the hands of the transferees for the remaining period and compliance with SEBI Takeover Regulations. Thus, RIL has transferred 225,000,000 Equity Shares constituting 5% of the post-Issue Equity S hare Capital to Chevron India Holdings P vt. Ltd. on April 27, 2006. These Equity S hares are held by C hevron India as part contribution. of the minimum promoters

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THE ISSUETable 8: Issue Details Issue of Equity S hares Of which, Promoters Contribution Net Issue to P ublic Of which the QIB Portion Of which Available for Allocation to Mutual F unds Balance for all QIB including Mutual F unds Non-Institutional Portion Retail Portion Equity S hares outstanding prior to the Issue hares Equity S hares outstanding after the Issue S hares Source: RPL Prospectus 2006 pg.5 1350,000,000 Equity S hares 900,000,000 Equity S hares 450,000,000 Equity S hares At least 270,000,000 Equity S hares (allocation on proportionate basis) 13,500,000 Equity S hares (allocation on proportionate basis) 256,500,000 Equity S hares (allocation on proportionate basis) Minimum of 45,000,000 Equity Shares (allocation on proportionate basis) Minimum of 135,000,000 Equity Shares (allocation on proportionate basis) 3,150,000,000 Equity S 4,500,000,000 Equity

The total Issue of equity shares by RP L is of 1,350 million equity shares, out of which the promoters contribution is nearly 2/3rd of the issue, i.e. 900 million equity shares and 1/3 rd of the total issue (450 million equity shares) are the net issue to public. As equity shares are being offered to the public through 100% Book Building Process in O ut of 450 million shares (net issue to the public), in accordance with the SEBI Guidelines read with Rule 19(2)(b) of the SCRR (The Securities Contracts (Regulation) Rules, 1957, as amended from time to time), wherein: 1) At least 60% of the Net Issue shall be allocated on a proportionate basis to QIBs (270 million shares out of 450 million shares offered to the public), including up to 5% of the QIB Portion that shall be available for allocation on a proportionate basis to Mutual Funds only (13.5 million shares out of 270 million shares offered to QIBs) and the remainder of the QIB Portion shall be available for Allocation on a proportionate basis to

44

all QIB Bidders, including Mutual F unds (256.5 million shares out of 270 million shares offered to QIBs); 2) Minimum of 10% of the Net issue shall be available for allocation on a proportionate basis to the Non-Institutional Bidders (45 million shares out of 450 million shares offered to QIBs) and 3) Minimum of 30% of the Net Issue shall be available for allocation on a proportionate basis to Retail Individual Bidders (135 million shares out of 450 million shares offered to QIBs), subject to valid Bids being received at or above the Issue Price. The outstanding equity shares prior to the IPO were 3150 million shares, out of which 2700 million shares belonged to the Reliance Industries Limited (RIL) and 450 million shares were allotted to pre-IPO investors. FACE VALUE AND ISSUE PRICE The face value of the Equity S hares is Rs. 10 each and the F loor Price is Rs. 57 and the Cap Price is Rs. 62 per Equity S hare. Issue Price is Rs 60 per equity share, which is 6 Times the face value. The above stated information has been clearly mentioned on the cover page of the RPL prospectus. Hence, it is in compliance with the SEBI guidelines, where the issuing company is asked to make a clear statement about the face value and the issue price of the shares. MARKET LOT AND TRADING LOT The equity shares of the company were only allotted in dematerialized form complying with existing S EBI Guidelines which states that the trading in the Equity Shares of the Company should only be in dematerialized form for all the investors.

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OBJECTS OF THE ISSUEThe objects of the Issue by the company were to achieve the benefits of listing and raising capital for financing the proposed project. The company intended to utilize the proceeds of the Issue, after deducting underwriting and management fees, selling commissions and other expenses associated with the Issue (Net Proceeds), to partially finance the equity portion of the Project. As the S EBI guidelines, ask for clear information about the projected funds requirement of the company in the prospectus, RP L has included the project estimates in the following manner: Fund requirements: The company had proposed to set up the P roject for an estimated cost of Rs. 270,000 millions (approx US$ 6 billion) as estimated by the company and intend to finance the Project through a combination of debt and equity. The P roject was expected to begin commercial operations in, or around, December 2008. The estimated expenses expected to be incurred in connection with the Project are set forth below on a half yearly basis: Table 9: Estimated Expenses 1st half of 2ndhalf 1st half 2ndhalf 1st half 2ndhalf CY 2006 of CY of CY of CY of CY of CY 2006 2007 2007 2008 2008 beyond & Deposits for 5990 infrastructur including utilities e etc. Equipment/Const 25474 22176 r uction costs etc. Technical fees 21678 7712 Interest during 7916 2715 construction, pre operating costs Contingency Margin money for working capital Total 61058 32639 Source: RPL Prospectus 2006 pg. 31 Total

5990

40037 52770 515 3874 2 5586 4875 -

22295 650 7197 9750 -

1088 9361 3892 4871 9540

163840 39918 31216 19496 9540

44426 63233

39892 28752 270000

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ISSUE R EXPENSES

ELATED

The S EBI guidelines along with the projected cost of the Project also ask for the details of the other expenses that the company has to make in order to make an issue. Hence complying with that RPL prospectus includes the following information: The expenses of the Issue include, among others, underwriting and management fees, selling commission, printing and distribution expenses, legal fees, statutory advertisement expenses and listing fees. The estimated expenses of the Issue are as follows: Rs. in millions Table 10: Estimated Expenses of Issue Lead management, underwriting and selling commission Advertising and marketing expenses Printing, stationary including transportation of the same Others (Registrars fees, legal fees, listing fees, etc.) Total estimated Issue expensesSource: RPL Prospectus 2006 pg.34

202.5 80.0 92.0 93.1

467.6

This gives the investor a clear picture about the plan of the company, as to how they are planning to invest the funds which are raised by them. Thus, by following the S EBI guidelines, the issuing company becomes transparent and gives investors a chance to make an informed decision.

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BASIS FOR ISSUE PRICEThe Issue Price has been determined by the company in consultation with the Book Running Lead Managers (BRLMs) on the basis of assessment of market demand for the offered Equity Shares by the Book Building Process. The face value of the Equity Shares is Rs. 10 and the Issue Price is 6.0 times the face value. The factors which influence the deciding of the issue price by the company can be broadly classified as qualitative and quantitative factors. These factors are discussed as under: QUALITATIVE FACTORS Factors Internal to the Company The company is promoted by Reliance Industries Limited (RIL), which is amongst the largest private sector companies, in terms of market capitalization, in India. Reliance Petroleum will benefit from economies of scale arising out of the size. The proposed refinery, having a capacity of 580 KBPSD, will be the sixth largest refinery globally based on current capacities. (Source: Oil and Gas Journal, December 2005). The company would derive significant advantages owing to higher complexity of the refinery. The higher complexity levels will enable the company to process lower cost, heavier and sourer crude oils and yet achieve superior yields of higher value products such as gasoline, aviation fuel a nd diesel. Nelson Complexity Index is a measure of secondary conversion capacity in comparison to the primary distillation capacity of any refinery. It is an indicator of not only the investment intensity or cost index of the refinery but also the value addition potential of a refinery. RP L has the NCI of 14.0 which is highest in India. Close proximity to the Middle Eastern crude oil sources would help the company in reducing turn-around time and crude freight costs. RPL will enjoy several fiscal incentives by virtue of being set-up in a Special Economic

Zone.48

RILs expertise will be available for crude and other feedstock procurement, marketing of products, operation and maintenance of the refinery as well as risk management. Factors External to the Compa ny As shown in the Industry analysis, the world economy is expected to grow at a CAGR of 3.9% per annum in terms of GDP on a purchasing power parity basis between 2002 and 2025. RP L is likely to benefit from this expected growth in world economy as there is a close co-relation between demand for petroleum products and economic activity. The company is also likely to benefit from the significant imbalances between demand and supply of different refined petroleum products that have developed capacity in Western Europe. QUANTITATIVE FACTORS Table 11: Comparison with Domestic Peers EPS (Rs.) P/E RON W (%) BOO K VALUE (Rs.) 9.99 222.50 248.80 212.90 12.30 270.40 184.80 38.00 134.40 PRIC E PER SHAR E 562.48 46.33 734.28 177.10 67.62 232.96 RATIO OF PRICE PER SHARE VALUE 2.53 3.77 2.72 0.96 1.78 1.73 in certain regions like the shortage of gasoline production capacity in the United States and the shortage of diesel fuel production

RPL IOCL HPCL BPCL MRPL RIL KRL BRPL CPCL

15.80 4.10 63.30 32.20 9.80 44.80

35.60 11.30 11.60 5.50 6.90 5.20

20.00 15.80 15.80 48.50 21.80 38.60 73.00 33.00

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From the above table it can be seen that the ratio of the price per share to the book value per share for all the 8 companies ranges between 0.96 to 3.77 or we can say 1 to 4 (approx). Therefore, based on the findings above, the qualitative factors for the company and forecasted revenue based on internal calculations, the issue price was determined at Rs. 60 i.e., the issue price is 6 times the face value. The price band for the book building process was Rs. 57 to Rs. 62.

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SEZ AND TAX BENEFITSSEZs are those geographical regions of a country where the economic laws are more liberal as compared to the laws generally followed in the country. As per the requirements of the guidelines given by S EBI, the auditors of the issuing company should certify through the report about the tax benefits that would be available to the company and its shareholders are covered under the direct tax laws, Special Economic Zones Act, 2005 and Gujarat Special Economic Zones Act, 2004. The benefits available to RP L can be summarized as under: 1. The Company is entitled to deduction of 100% of the profits and gains from its unit set up in Special Economic Zone (S EZ) for a period of 5 consecutive assessment years and 50% of such profits and gains for further 5 consecutive assessment years. 2. The shares of the Company are not liable to Wealth Tax. 3. The Company is exempted from payment of Stamp Duty and registration fees payable on transfer of land within SEZ. 4. The Company is exempted from levy of stamp duty and registration fees o n loan agreements, credit deeds and mortgages executed by the S EZ or unit set up in the processing area of S EZ. 5. The Company is exempted from Sales Tax, P urchase Tax, Motor Spirit Tax, Luxury Tax, Entertainment Tax and other taxes and cess payable on sales and transactions within the S EZ. 6. The inputs (goods and services) purchased by the Company from Domestic Tariff Area shall also be exempted from sales tax and other taxes under the state laws of Gujarat.

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STOCK MOVEMENT IN 2006In an attempt to find out any movement in the stock prices of the competitors and the promoter of RP L due to the IPO of the company, a study of the competitors stock prices has been done. Following are the stock movements of various related companies for year 2006 (the year in which the IPO of RP L has been made): Mangalore (MRPL) Refinery & Petrochemicals Limited

The movement of stocks of MRP L over a period of one year starting from January 2, 2006 to December 2, 2006 has been constant except for a sudden increase followed by a steep fall around the month of May-June. Apart from this secondary fluctuation, the primary trend has been almost constant.

MRPL STOCK MOVEMENT70 60 50 40 30 20 10 0

Figure 4: MRPL Stock Movement

Bharat Petroleum Corporation Limited (B PCL) The movement of stocks of BPCL over a period of one year starting from January 2, 2006 to December 2, 2006 has been constant except for a slight increase followed by a fall around the month of May-June. Apart from this secondary fluctuation, the primary trend has been almost constant.

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BPCL STOCK MOVEMENT600 500 400 300 200 100 0

Figure 5: BPCL S tock Movement

Hindustan (HPCL)

Petroleum

Corporation

Limited

The movement of stocks of HPCL over a period of one year starting from January 2, 2006 to December 2, 2006 has been constant except for a slight fall in the month of June followed by the recovery period till the month of September. Apart from this secondary fluctuation, the primary trend has constant. been almost

HPCL STOCK MOVEMENT400 300 200 100 0

Figure 6: HPCL Stock Movement

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Reliance Industries Limited (RIL) The movement of stocks of RIL over a period of one year starting from January 2, 2006 to December 2, 2006 has been constant except for a sudden increase followed by a fall around the month of May-June. Apart from this secondary fluctuation, the primary trend has been almost constant. The movement in the stock prices of RIL has been almost similar with the overall movement in the market.

RIL STOCK MOVEMENT1400.0 0 1200.0 0 1000.0 0 800.0 0 600.0 0 400.0 0 200.0 0 0.0 0

Figure 7: RIL Stock Movement

Reliance Petroleum Limited (R PL) The movement of stocks of RP L over a period of one year starting from January 2, 2006 to December 2, 2006 has been constant.

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RPL STOCK MOVEMENT120 100 80 60 40 20 0

Figure 8: RPL Stock Movement

OVERALL MARKET TREND The primary trend of the market in the year 2006 was bullish in nature along with minor fluctuations in the opposite direction. During the months of May & June, there was a secondary trend which projected a bearish movement in the market. The stock market is generally influenced by many political and economical factors. During the period of secondary trend, the main incidents that took place were: The Left party took over in the state elections in Kerala & West Bengal. Pull out by foreign investors from the emerging markets like India, Taiwan and South Korea. Blowing up of the issue of higher education reservation. Hike in the fuel prices.

Hiking the rates by 25 bps by RBI. During May-June, 2006, Sensitivity Index of BS E lost 28.14%. Experts said that the

volatility during these two months was mainly due to the nervousness among the investors. Moreover, the apprehension related to the hike in the US Fed rates was pulling the fore ign investors away from the emerging markets like India.

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This is the major cause of the secondary trend in the movement of the stock market during the two months and a related movement could be seen in the prices of the shares of the companies like HPCL, MRP L, BPC L and RIL. Conclusion: For the study of various related companies and the overall market trend, it is been concluded that the stock movements of the companies mainly depend on the overall market movement. In turn, the overall market movement depends on various economic and political factors. The IPO by Reliance Petroleum Limited does not show a major impact on the stock prices of the related companies because of the above stated factor. There is one more factor which explains the unrelated behavior of the stock prices of competitors and the IPO, that is: Oil and gas market in India is a supplier driven market and hence the entrance of a new competitor in the market does not pose a threat for other players in the market.

STOCK DATA AS ON APRIL 2, 2009Market Capitalization is a measurement of corporate size of a public company. Thus capitalization can represent the public opinion of companys net worth. The stock price of Reliance Petroleum Limited along with the total number of outstanding shares helps in calculating the market capitalization of the company.

Figure 9: RPL Details

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Current market price (April 2, 2009): Rs. 103.60 Reliance Petroleum Limited Key Data: Currency Fiscal Yr Ends Share Type Indian Rupees March Ordinary Market Capitalization Shares Outstanding Closely Held Shares 466,198,640,250 4,499,986,875 3,391,958,030

Where,

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EXTERNAL COMMERCIAL BORROWINGS (ECB)External Commercial Borrowings are being permitted by the Government for providing an additional source of funds to Indian corporate and PSUs (P ublic Sector Undertak ings) for financing expansion of existing capacity and as well as for fresh investment, to augment the resources available domestically. External Commercial Borrowings are approved within an overall annual ceiling, consistent with prudent debt management, keeping in view the balance of payments position and level of foreign exchange reserves. External Commercial Borrowings (EC Bs) are defined to include commercial bank loans, buyers credit, suppliers credit, securitized instruments such as F loating Rate Notes and F ixed Rate Bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of Multilateral F inancial Institutions such as International F inance Corporation (Washington), ADB, AFIC, CDC, etc ECBs can be raised only through the internationally recognized source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity-holders, international capital markets etc. Any o ffers from non-recognized sources are not entertained. ECB can be accessed under two routes. They are Automatic Route and Approval Route. Automatic Route External Commercial Borrowing for investment in real sector, especially infrastructure sector comes under automatic route. They dont require any RBI or government approvals. The maximum amount of ECB which can be raised under this route by an eligible bo rrower can be USC 500 million during a single financial year. However, NGOs engaged in micro finance activity are allowed USD 5 million in a financial year. Approval Route Borrowings raised through this route require an approval from an Empowered committee set up by RBI. Any case which falls outside the purview of automatic route comes under approval route.

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ELIGIBLE BORROWERSAUTOMATIC ROUTE 1) Corporate registered are eligible. 2) NGOs involved in micro-financing are also eligible, if they have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorized to deal in foreign exchange. 3) Any individual, trust or non-profit making organization (except the NGO involved in micro- financing) is not eligible for raising ECB. under the Companies Act, 1956 (except financial

intermediaries, such as banks, financial institutions (FIs) & housing finance companies),

APPROVAL ROUTE 1) Financial institutions dealing exclusively with infrastructure or export finance are considered on a case by case basis. 2) Banks and financial institutions which had participated in the textile or steel sector restructuring package as approved by the Government are also permitted. However, they are only considered only to the extent of their investment in the package. Any ECB which has already been availed by the above stated entities are deducted from their entitlement. 3) NBFCs (Non Banking F inancial Companies) are permitted to raise EC B under this route towards import of infrastructure equipment for leasing to infrastructure projects with a minimum average maturity of 5 years. 4) Foreign Currency Convertible Bonds (FCCBs) by Housing F inance Companies with strong financials satisfying criteria notified by RBI are permitted under the Approval Route. 5) Any other cases falling outside the purview of the automatic route limits.

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RECOGNIZED LENDERSFollowing are the recognized sources from where borrowers can take loans: 1) International banks, international capital markets, multilateral financial institutions (such as IFC, ADB, CDC etc.,), 2) Export credit agencies and 3) Suppliers of equipment, foreign collaborators and foreign equity holders. 4) NGOs engaged in micro- financing can also take loans from overseas organizations and individuals. But individual lenders from countries wherein banks are not required to adhere to K now Your C ustomer (KYC) guidelines are not permitted to extend ECB. Foreign Equity Holder is a foreign lender for EC B. They require minimum equity participation, in the capacity of equity holder, in the borrowers company. It is as follows: 1) If the ECB is up to USD 5 million, the overseas lender should directly hold minimum of 25% of the equity. 2) If the ECB is more than USD 5 million, the overseas lender should directly hold minimum of 25% of the equity and the debt-equity ratio should not exceed 4:1 (i.e. the proposed should not exceed 4 times the direct foreign equity holding). 3) If the debt-equity ratio exceeds 4:1 ratio, such case will be considered by RBI under Approval route.

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AVERAGE MATURITIES FOR ECBECBs have the following minimum average maturities: 1) Minimum average maturity of five years for external commercial borrowings greater than USD 20 million equivalent in respect of all sectors except 100% Export Oriented Units (EOUs); 2) For external commercial borrowings of less than or equal to US D 20 million equivalent (for all sectors except 100% EOUs) has a minimum average maturity of three years. 3) 100% Export Oriented Units (EOUs) are permitted ECB at a minimum average maturity of three years for any amount.

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RPL DEBTReliance Petroleum Limited, promoted by Reliance Industries Limited and C hevron India Holding P vt. Ltd., rose at total of Rs157.5 billion. For this it has signed a Commercial Facilities Agreement with various F inancial Institutions and Commercial Lenders. Following are the details of debt raised by Reliance Petroleum limited in the month of October in year 2006: Table 12: Debt Raised by RPL ECB / FCCB ECB ECB Borrowe r Reliance Petroleum Ltd. Reliance Petroleum Ltd. Equivalent Amount in USD 1,500,000,000 500,000,000 Purpose New Project New Project Maturity Period (Aprox) 9 years 7 months 9 years 7 mo nt hs

RPL has raised debt through Approval Route. Reliance Debt Document is one of the finest example of Debt Agreement as it discusses the rights and obligation of all the parties involved (the borrower, Commercial Lender and the Commercial Facilities Agent) in all the possible situations. These Debt documents are comprehensive circumstances. in nature and generally cover all the possible

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INTERPRETATIONSCommercial Agreements Lender

The common terms agreements dates on or about the date of an agreement and entered into between the Commercial Facilities Agent and the Borrower. Availability Period It means the period from the S igning date to the earlier of the date falling 365 days after the Signing date and the date on which the Total Amount has been reduced to nil. Drawdown Date It is the date on which an Advance is made. Facility Office In relation to Commercial Facilities Agent or Commercial Lender, Facility O ffice is the O ffice identified with its signature in the debt agreement. LIBOR London Interbank O ffered Rate (LIBOR) is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market . It is the interest rates that major international banks charge one another for loans. Majority Comme rcial Lende rs 1) Before any Advance has been made, a Commercial Lender or a group of commercial lender whose commitments amount in aggregate to more than sixty-six and two-third (66 2/3) per cent of the Total Available Amount. 2) After the Advances have been made, a Commercial Lender or a group of commercial lender to whom in aggregate more than sixty-six and two-third (66 2/3) per cent of the Total Loan is owed.

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Transfer Certificate It is a certificate signed by the Commercial Lender and the Transferee whereby Commercial Lender seeks to procure the novation in favor of Transferee of rights and obligation unde r the Financial Documents. Weighted Ave rage Drawdown Date It is the date determined by the Commercial Facilities Agent on the earlier of i) ii) The date on which the Available Commitment is reduced to zero The last day of the Availability Period in accordance wit h below formula

Where N is rounded up to the nearest whole number. WAL is the weighted aggregate Advances being the aggregate of the number of days from the signing date to the date on which that advance was made, multiplied by the initial principal amount of the Advance. Purpose a) The Facility is intended to finance Project Costs. The borrower shall apply all amounts raised by it in compliance with the circulars on External Commercial Borrowings issued by the Reserve Bank of India and all other applicable laws and regulations of India. b) Without prejudice to the obligations of the borrower under the above clause, neither t he Commercial Facilities Agent, the Lead Arranger and the Commercial Lender nor any of them shall be obliged to investigate the application of amount raised by the Borrower. Nature of Comme rcial Lende rs Right and Obligations 1) The failure of a Commercial Le nder to perform its obligation shall not affect the obligation of the Borrower towards any other party. 2) Other party is not liable for the failure by a commercial lender to perform its obligation.

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3) The amount outstanding at any time from the Borrower to each of the parties shall be a separate and independent debt. 4) If not expressly provided in the F inance Documents, each party is entitled to protect and enforce its individual rights.

Availability of the Facilities The Borrower may utilize facilities if: 1) The Commercial Facilities Agent receives a Notice of Drawdown from Borrower before a certain period from the proposed date for making the proposed Advances. The receipt of such notice obliges the Borrower to borrow the amount on a particular date subjected to certain terms and conditions. 2) The amount of Advance requested from each Facility is same when expressed in the percentage term of Available Amount from that Facility. 3) The proposed date of making the proposed Advances is a business day during the Availability period. 4) The aggregate principal amount of the proposed Advances is at least of a certain amount (Amount confidential to the company) or equal to Total Available Amount (if it is less than a certain amount (Amount confidential to the company)). If a Commercial Lenders Facility Commitment is reduced in accordance with the term mentioned in the agreement, after the Commercial Facilities Agent has received a Notice of Drawdown, then the amount of the proposed Advances shall be reduced accordingly. Security And ubordination S

The term loans from banks are secured by a first ranking pari passu mortgage over leasehold interests under the Land Lease Agreement and the fixed assets (including plant and machinery) of the Project of RP L; A first ranking pari passu charge over movable assets (other than current assets and investments) of the Project;

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A floating second ranking charge over such of the companys current assets relating to the Project that are charged on a first ranking basis to the working capital lenders and an assignment of Companys right, title and interest under the key Project Agreements including agreements in respect of utilities. Inte Period rest

The period for which an Advance is outstanding shall be divided into successive period each of which shall start on the last day of the preceding period. The duration of the interest period relating to an Advance can be one, three or six months (or such other period as the Borrower and the Majority Commercial Lenders may agree) as the Borrower may select in the Notice of Drawdown. If the borrower fails to give such notice of its selection of an Interest Period, the duration of that interest period shall be six months. These interest periods are required as it facilitate the Borrower to pay interest t o those Commercial Lenders who are listed by the end of the interest period. Inte rest 1) On the last day of each interest period the borrower shall pay accrued interest on the Advance. 2) After the start of each Interest Period, the Commercial Facilities Agent shall notify the Borrower of the amount of interest to be paid and the due date of payment. However, the failure of Commercial Facilities Agent to provide such notification, does not in any way affect on the Borrowers obligation to pay the same. 3) The date upon which the Borrower shall be obliged to make payments is determined in accordance with Common Term Agreement. 4) The rate of interest applicable to an Advance is the sum of LIBOR on the Quotation Date for the interest period and the Applicable Margin.

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Repayment The Borrower shall repay the Loan by repaying (on each repayment date) an amount (confidential to the company) outstanding at the end of the Availability Period. Cancellation and Prepayment: 1) The Borrower may cancel th