Power Finance Corporation Limited– Draft Shelf Prospectus

DRAFT SHELF PROSPECTUS

September 10, 2015

POWER FINANCE CORPORATION LIMITED (A Government of India undertaking)

Our Company was incorporated as Power Finance Corporation Limited on July 16, 1986 as a public limited company under the Companies Act, 1956, as amended and was granted a certificate of

incorporation by the Registrar of Companies, National Capital Territory of New Delhi & Haryana and was granted a certificate of commencement of business on December 31, 1987. For further details,

see the section titled History and Certain Corporate Matters on page 146. The Corporate Identification Number of our Company is L65910DL1986GOI024862.

Registered and Corporate Office: Urjanidhi, 1 Barakhamba Lane, Connaught Place, New Delhi 110001, India.

Telephone: +91 11 2345 6000; Facsimile: +91 11 2341 2545

Company Secretary and Compliance Officer: Mr. Manohar Balwani; Telephone: +91 11 2345 6000; Facsimile: +91 11 2341 2545

E-mail: [email protected]; Website: www.pfcindia.com and www.pfc.gov.in

PUBLIC ISSUE BY POWER FINANCE CORPORATION LIMITED (COMPANY OR THE ISSUER) OF TAX FREE BONDS OF FACE VALUE OF [] EACH IN THE NATURE OF SECURED, REDEEMABLE, NON-CONVERTIBLE DEBENTURES, HAVING BENEFITS UNDER SECTION 10(15)(iv)(h) OF THE INCOME TAX ACT, 1961, AS AMENDED

(BONDS) AGGREGATING UP TO ` 700 CRORES (ISSUE). THE BONDS WILL BE ISSUED AT PAR IN ONE OR MORE TRANCHES UP TO ` 700 CRORES (SHELF LIMIT)*, ON TERMS AND CONDITIONS AS SET OUT IN SEPARATE TRANCHE PROSPECTUS(ES) FOR EACH TRANCHE ISSUE, WHICH SHOULD BE READ TOGETHER

WITH THIS DRAFT SHELF PROSPECTUS AND THE SHELF PROSPECTUS.

The Issue is made under the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008, as amended (SEBI Debt Regulations) and pursuant to notification

No. 59/2015 dated July 6, 2015 issued by the Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India, by virtue of powers conferred upon it by item (h) of

sub-clause (iv) of clause (15) of section 10 of the Income Tax Act, 1961, as amended.

PROMOTERS

The President of India, acting through and represented by Ministry of Power, Government of India. For further details refer to the chapter Our Promoters on page 199.

GENERAL RISKS

Investors are advised to read the section titled Risk Factors on page 16 carefully before taking an investment decision in relation to this Issue. For taking an investment decision, investors must rely on their

own examination of the Issuer and the Issue, including the risks involved. This Draft Shelf Prospectus has not been and will not be approved by any regulatory authority in India, including the Securities and

Exchange Board of India (SEBI), the Reserve Bank of India (RBI), the Ministry of Power, any registrar of companies or any stock exchange in India.

COUPON RATE, COUPON PAYMENT FREQUENCY, REDEMPTION DATE, REDEMPTION AMOUNT & ELIGIBLE INVESTORS

For details relating to Coupon Rate, Coupon Payment Frequency, Redemption Date of the Bonds, see section titled Terms of the Issue on page 237 of this Draft Shelf Prospectus. For details relating to

eligible investors please see The Issue on page 48. ISSUERS ABSOLUTE RESPONSIBILITY

The Issuer, having made all reasonable inquiries, accepts responsibility for and confirms that this Draft Shelf Prospectus read together with the Shelf Prospectus and the relevant Tranche Prospectus

for a Tranche Issue does contain and will contain all information with regard to the Issuer and the relevant Tranche Issue, which is material in the context of the relevant Tranche Issue; that the

information contained in this Draft Shelf Prospectus and together with the relevant Tranche Prospectus for a Tranche Issue will be true and correct in all material respects and is not misleading in any

material respect; that the opinions and intentions expressed herein are honestly held and that there are no other material facts, the omission of which makes this Draft Shelf Prospectus read with the

relevant Tranche Prospectus as a whole or any such information or the expression of any such opinions or intentions misleading in any material respect at the time of the relevant Tranche Issue.

CREDIT RATING

CRISIL Limited (CRISIL) has assigned a rating of CRISIL AAA/ Stable to the long term borrowing programme of our Company for an amount upto ` 50,000 crores for Fiscal 2016, by its letter dated April 6, 2015 and revalidated the said rating vide its letter dated June 23, 2015 and dated August 27, 2015. ICRA Limited (ICRA) has assigned a rating of [ICRA]AAA to the long term

borrowing programme of our Company (including bonds and long term bank borrowing) for an amount upto ` 60,000 crores for Fiscal 2016, by its letter dated April 8, 2015 and revalidated the said rating vide its letter dated June 22, 2015 and August 31, 2015. Credit Analysis & Research Ltd. (CARE) has assigned its rating of 'CARE AAA' to overall borrowing programme of our Company

for an amount upto ` 60,000 crores (including short term borrowing aggregating to ` 10,000 crores as a sub-limit) for Fiscal 2016 by its letter dated April 7, 2015 and revalidated the said rating vide its letter dated June 22, 2015 and August 31, 2015. Instruments with these ratings are considered to have the highest degree of safety regarding timely servicing of financial obligations and such

instruments carry lowest credit risk. For details, see the section titled Terms and Conditions in Connection with the Bonds on page 232. For the rationale for these ratings, see Annexure B of this

Draft Shelf Prospectus. This rating is not a recommendation to buy, sell or hold securities and investors should take their own decision. This rating is subject to revision or withdrawal at any time by

the assigning rating agencies and should be evaluated independently of any other ratings.

PUBLIC COMMENTS

The Draft Shelf Prospectus dated September 10, 2015 has been filed with BSE, the Designated Stock Exchange, pursuant to the provisions of the SEBI Debt Regulations and is open for public

comments for a period of seven Working Days (i.e., until 5 p.m.) from the date of filing of the Draft Shelf Prospectus with the Designated Stock Exchange. All comments on this Draft Shelf Prospectus

are to be forwarded to the attention of the Compliance Officer of our Company. Comments may be sent through post, facsimile or e-mail.

LISTING

The Bonds are proposed to be listed on the BSE, which is also the Designated Stock Exchange for the Issue. BSE has given its in-principle listing approval vide its letter dated [].

LEAD MANAGERS TO THE ISSUE

EDELWEISS FINANCIAL SERVICES

LIMITED

Edelweiss House

Off CST Road, Kalina, Mumbai 400 098

Maharashtra, India

Tel: +91 22 4086 3535

Facsimile: +91 22 4086 3610

Email: [email protected]

Investor Grievance Email:

[email protected]

Website: www.edelweissfin.com

Contact Person: Mr. Lokesh Singhi

Compliance Officer: Mr. B. Renganathan

SEBI Registration No.: INM0000010650

A.K. CAPITAL SERVICES LIMITED

30-39 Free Press House, 3rd Floor,

Free Press Journal Marg, 215, Nariman

Point,

Mumbai 400021

Tel: +91 22 6754 6500/ 6634 9300

Facsimile: +91 22 6610 0594



[email protected]

Website: www.akcapindia.com

Contact Person: Mr. Mandeep Singh

Compliance Officer: Ms. Kanchan Singh


RR INVESTORS CAPITAL

SERVICES PVT. LTD.

47, M.M. Road, Rani Jhansi Marg,

Jhandewalan, New Delhi 110055

Tel: +91 11 2363 6362

Facsimile: +91 11 2363 6746



[email protected]

Website: www.rrfcl.com/

www.rrfinance.com

Contact Person: Mr. Anurag Awasthi

Compliance Officer: Ravi Kant Goyal


KARVY INVESTOR SERVICES LIMITED

701, Hallmark Business Plaza

7th Floor, Sant Dyaneshwar Marg,

Off Bandra Kurla Complex,

Bandra (East), Mumbai- 400 051

Tel: +91 22 6149 1500

Facsimile: +91 22 6149 1515


Investor Grievance Email: [email protected],

[email protected]

Website: www.karvy.com

Contact Person: Mr. Bhavin Vakil/ Rohan Menon

Compliance Officer: Mr. V

Madhusudhan Rao


DEBENTURE TRUSTEE FOR THE BONDHOLDERS REGISTRAR TO THE ISSUE

MILESTONE TRUSTEESHIP SERVICES PRIVATE LIMITED*

602, Hallmark Business Plaza, Sant Dayaneshwar Marg,

Opp. Guru Nanak Hospital, Bandra (E), Mumbai 400 051, India

Tel: +91 2267167000; Facsimile +91 2267167077


Investor Grievance Email: [email protected]

Website: www.milestonetrustee.in

Contact Person : Ms. Vaishali Urkude

SEBI Registration Number:IND000000544

BIGSHARE SERVICES PRIVATE LIMITED

E2 Ansa Industrial Estate, Sakivihar Road, Sakinaka

Andheri East, Mumbai 400 072

Tel: 02240430200 ;Facsimile: 02228475207

Email: bonds@ bigshareonline.com

Investor Grievance Email: [email protected]

Website: www. bigshareonline.com

Contact Person: Mr. Vipin Gupta

SEBI Registration Number: INR000001385

ISSUE PROGRAMME** ISSUE OPENS ON: [] ISSUE CLOSES ON: []

*Milestone Trusteeship Services Private Limited has by its letter dated August 20, 2015 given its consent for its appointment as Debenture Trustee to the Issue and for its name to be included in the Draft Shelf Prospectus.

A copy of the Shelf Prospectus and relevant Tranche Prospectus shall be filed with the Registrar of Companies, National Capital Territory of Delhi & Haryana in terms of section 26 and 31 of Companies Act, 2013, along with the

endorsed/certified copies of all requisite documents. For further details please refer to the section titled Material Contracts and Documents for Inspection on page 296 of this Draft Shelf Prospectus.

**The Issue shall remain open for subscription on Working Days from 10 a.m. to 5 p.m. during the period indicated above, except that the Issue may close on such earlier date or extended date as may be decided by the Board or a duly constituted committee thereof. In the event of an early closure or extension of the Issue, our Company shall ensure that notice of the same is provided to the prospective investors through an advertisement in a reputed daily national

newspaper on or before such earlier or extended date of Issue closure. On the Issue Closing Date Application Forms will be accepted only between 10 a.m. and 3p.m. (Indian Standard Time) and uploaded until 5p.m. or such extended

time as may be permitted by the BSE.
http://www.pfcindia.com/http://www.pfc.gov.in/mailto:[email protected]:[email protected]://www.akcapindia.com/mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]://www.akcapindia.com/

TABLE OF CONTENTS

SECTION I-GENERAL .......................................................................................................... 3 DEFINITIONS AND ABBREVIATIONS ........................................................................... 3 CERTAIN CONVENTIONS, USE OF FINANCIAL, INDUSTRY AND MARKET DATA

AND CURRENCY OF PRESENTATION ........................................................................ 13 FORWARD-LOOKING STATEMENTS .......................................................................... 15

SECTION II-RISK FACTORS ............................................................................................ 16 SECTION III-INTRODUCTION......................................................................................... 48

THE ISSUE ......................................................................................................................... 48 SUMMARY OF FINANCIAL INFORMATION .............................................................. 53 STATEMENT OF STANDALONE UN-AUDITED FINANCIAL RESULTS FOR THE

QUARTER ENDED JUNE 30, 2015 .................................................................................. 67 SUMMARY OF BUSINESS .............................................................................................. 71 GENERAL INFORMATION ............................................................................................. 79 CAPITAL STRUCTURE .................................................................................................... 86 OBJECTS OF THE ISSUE ................................................................................................. 93 STATEMENT OF TAX BENEFITS .................................................................................. 96

SECTION IV-ABOUT OUR COMPANY ......................................................................... 100

INDUSTRY OVERVIEW ................................................................................................ 100

OUR BUSINESS .............................................................................................................. 112 REGULATIONS AND POLICIES ................................................................................... 137 HISTORY AND CERTAIN CORPORATE MATTERS ................................................. 146 OUR MANAGEMENT .................................................................................................... 156 FINANCIAL INDEBTEDNESS ...................................................................................... 170 OUR PROMOTER ............................................................................................................ 199

SECTION V-LEGAL AND OTHER INFORMATION .................................................. 200 OUTSTANDING LITIGATION AND MATERIAL DEVELOPMENTS ...................... 200 OTHER REGULATORY AND STATUTORY DISCLOSURES ................................... 207

SECTION VI- ISSUE RELATED INFORMATION ....................................................... 229 ISSUE STRUCTURE ....................................................................................................... 229 TERMS AND CONDITIONS IN CONNECTION WITH THE BONDS ....................... 232 TERMS OF THE ISSUE .................................................................................................. 237 ISSUE PROCEDURE ....................................................................................................... 252

SECTION VII- MAIN PROVISIONS OF ARTICLES OF ASSOCIATION OF OUR

COMPANY ........................................................................................................................... 284 SECTION VIII- MATERIAL CONTRACTS AND DOCUMENTS FOR INSPECTION

................................................................................................................................................ 296 DECLARATION.................................................................................................................. 298 ANNEXURE A FINANCIAL STATEMENTS ................................................................. 300 ANNEXURE B CREDIT RATING ................................................................................... 646 ANNEXURE C DEBENTURE TRUSTEE CONSENT .................................................... 679

SECTION I-GENERAL

DEFINITIONS AND ABBREVIATIONS

Unless the context otherwise indicates, all references in this Draft Shelf Prospectus to the Issuer, our

Company, the Company or PFC are to Power Finance Corporation Limited, a public limited company

incorporated under the Companies Act, 1956 having its registered office at Urjanidhi, 1 Barakhamba Lane,

Connaught Place, New Delhi 110001, India. Unless the context otherwise indicates, all references in this Draft

Shelf Prospectus to we or us or our are to our Company and its Subsidiaries, Joint Ventures and Associates,

on a consolidated basis.

Unless the context otherwise indicates or implies, the following terms have the following meanings in this Draft

Shelf Prospectus, and references to any statute or regulations or policies includes any amendments or re-

enactments thereto, from time to time.

Company related terms

Term Description

Articles/ Articles of

Association/AoA

Articles of Association of our Company.

Associate The joint ventures of our Company, being National Power Exchange

Limited and Energy Efficiency Services Limited.

Board/ Board of Directors Board of Directors of our Company or a duly constituted committee

thereof.

Director Director of our Company, unless otherwise specified

Equity Shares Equity shares of our Company of face value of ` 10 each. Joint Ventures The joint ventures of our Company, being National Power Exchange

Limited and Energy Efficiency Services Limited.

Memorandum/ Memorandum of

Association/ MoA

Memorandum of Association of our Company.

Registered Office or

Corporate Office or

Registered Office and Corporate

Office

The registered office and corporate office of our Company, situated at

Urjanidhi, 1 Barakhamba Lane, Connaught Place, New Delhi 110001,

India.

RoC Registrar of Companies, National Capital Territory of Delhi & Haryana.

Statutory Auditors/Auditors The statutory auditors of our Company being M/s K.B. Chandna & Co.

and M/s M.K. Aggarwal & Co.

Subsidiaries The direct and indirect subsidiaries of our Company, as mentioned in the

section titled History and Certain Corporate Matters on page 146.

Issue related terms

Term Description

Allotment/ Allot/ Allotted The issue and allotment of the Bonds to successful Applicants pursuant to

the Issue.

Allotment Advice The communication sent to the Allottees conveying details of Bonds

allotted to the Allottees in accordance with the Basis of Allotment.

Allottee(s) The successful Applicant to whom the Bonds are Allotted either in full or part,

pursuant to the Issue

Applicant/ Investor A person who applies for the issuance and Allotment of Bonds pursuant

to the terms of the Draft Shelf Prospectus, Shelf Prospectus and relevant

Tranche Prospectus(es) and the Application Form for any Tranche Issue.

Application An application to subscribe to the Bonds offered pursuant to the Issue by

submission of a valid Application Form and payment of the Application

Amount by any of the modes as prescribed under the respective Tranche

Prospectus.

Application Amount The aggregate value of the Bonds applied for, as indicated in the

Application Form for the respective Tranche Issue.

4

Term Description

Application Form The form in terms of which the Applicant shall make an offer to subscribe

to the Bonds and which will be considered as the Application for

Allotment of Bonds in terms of respective Tranche Prospectus(es).

ASBA or Application

Supported by Blocked Amount

or ASBA Application

The application (whether physical or electronic) used by an ASBA

Applicant to make an Application by authorizing the SCSB to block the

bid amount in the specified bank account maintained with such SCSB.

ASBA Account An account maintained with an SCSB which will be blocked by such

SCSB to the extent of the appropriate Application Amount of an ASBA

Applicant.

ASBA Applicant Any Applicant who applies for Bonds through the ASBA process.

Banker(s) to the Issue/ Escrow

Collection Bank(s)

The banks which are clearing members and registered with SEBI as

bankers to the issue, with whom the Escrow Accounts and/or Public Issue

Accounts will be opened by our Company in respect of the Issue, and as

specified in the Tranche Prospectus for each Tranche Issue.

Base Issue Size As specified in the Tranche Prospectus for each Tranche Issue.

Basis of Allotment As specified in the Tranche Prospectus for each Tranche Issue.

Bond Certificate(s) A certificate issued to the Bondholder(s) who has applied for Allotment

of the Bonds in physical form or in case the Bondholder(s) has applied for

rematerialisation of the Bonds held by him.

Bondholder(s) Any person holding the Bonds and whose name appears on the list of

beneficial owners provided by the Depositories (in case of bonds in

dematerialized form) or whose name appears in the Register of

Bondholders maintained by the Issuer (in case of bonds in physical form).

Bonds Tax free bonds in the nature of secured, redeemable, non-convertible

debentures of face value of ` [] each having benefits under Section 10(15)(iv)(h) of the Income Tax Act, proposed to be issued by our Company

under the terms of the Shelf Prospectus and respective Tranche

Prospectus(es).

BSE BSE Limited.

Working Days All days excluding Saturday, Sundays or a public holiday in New Delhi.

CARE Credit Analysis & Research Limited.

Category I*

Qualified Institutional Buyers as defined in SEBI (Issue of Capital and

Disclosure Requirements) Regulation, 2009 as amended including:

Public Financial Institutions, scheduled commercial banks, multilateral and bilateral development financial institutions, state

industrial development corporations, which are authorised to

invest in the Bonds;

Provident funds and pension funds with minimum corpus of ` 25 crores, which are authorised to invest in the Bonds;

Insurance companies registered with the IRDA;

Foreign Portfolio Investors (FPI), Foreign Institutional Investors (FII) and sub-accounts (other than a sub account

which is a foreign corporate or foreign individual), Qualified

Foreign Investors (QFIs), not being an individual, registered

with SEBI; **

National Investment Fund (set up by resolution no. F. No. 2/3/2005-DDII dated November 23, 2005 of the GoI and

published in the Gazette of India);

Insurance funds set up and managed by the army, navy or air force of the Union of India or set up and managed by the Department of

Posts, India;

Mutual funds registered with SEBI; and

Alternative Investment Funds, subject to investment conditions applicable to them under the Securities and Exchange Board of

India (Alternative Investment Funds) Regulations, 2012.

* The MCA has, through its circular (General Circular No. 06/2015) dated April 9,

2015, clarified that companies investing in tax-free bonds wherein the effective yield

5

Term Description on the bonds is greater than the prevailing yield of one year, three year, five year or

ten year Government Security closest to the tenor of the loan, there is no violation of

sub-section (7) of Section 186 of the Companies Act, 2013.

** Please refer to section titled Risk Factors Our Company will be unable to

redeem or buy back the Bonds issued to FPIs, QFIs, FIIs (together RFPIs) in the

event that listing of the Bonds on the BSE is not completed within 15 days of the

issuance on Page 44.

Category II* Companies within the meaning of section 2(20) of the Companies Act, 2013*;

Statutory bodies/corporations*; Cooperative banks; Public/ private/ religious/charitable trusts; Limited liability partnerships formed and registered under the

provisions of the Limited Liability Partnership Act, 2008;

Societies in India registered under law and eligible to invest in Bonds; Regional rural banks; Partnership firms in the name of partners; and Any other foreign/ domestic legal entities/ persons as may be

permissible under the CBDT Notification and authorised to invest in

the Bonds in terms of applicable laws.**

* The MCA has, through its circular (General Circular No. 06/2015) dated April 9,

2015, clarified that for companies investing in tax-free bonds wherein the effective

yield on the bonds is greater than the prevailing yield of one year, three year, five year

or ten year Government Security closest to the tenor of the loan, there is no violation

of sub-section (7) of Section 186 of the Companies Act, 2013.

** Please refer to section titled Risk Factors Our Company will be unable to




Category III The following Investors applying for an amount aggregating to above ` 10 lakhs across all Series of Bonds in each Tranche Issue:

Resident Indian individuals; QFIs and FPIs being individuals;* Eligible NRIs on a repatriation or non repatriation basis; and Hindu Undivided Families (HUF) through the Karta. *Please refer to section titled Risk Factors Our Company will be unable to




Category IV The following Investors applying for an amount aggregating to up to and

including ` 10 lakhs across all Series of Bonds in each Tranche Issue:

Resident Indian individuals; QFIs and FPIs being individuals;* Eligible NRIs on a repatriation or non repatriation basis; and Hindu Undivided Families through the Karta.

*Please refer to section titled Risk Factors Our Company will be unable to



issuance on Page 44. CBDT Notification Notification No. 59/2015, dated July 6, 2015 issued by the Central Board

of Direct Taxes, Department of Revenue, Ministry of Finance,

Government of India.

Consolidated Bond Certificate A single consolidated certificate issued by the Issuer to the Debenture

Trustee for the benefit of the Bondholder(s) for the aggregate amount of

the Bonds in each Series that are Allotted to them in physical form under

6

Term Description

each Tranche Issue(s) or rematerialized and held by them.

Consortium Agreement Consortium Agreement dated [] entered amongst our Company and the

Consortium Members for the Issue.

Consortium Members For the present Issue, in addition to the Lead Managers, it includes A.K.

Stockmart Private Limited and Edelweiss Securities Limited and [].

Credit Rating Agencies For the present Issue, the credit rating agencies, being CRISIL, ICRA and

CARE.

CRISIL CRISIL Limited.

Debenture Trustee Agreement The agreement dated August 28, 2015 entered into between the Debenture

Trustee and our Company.

Debenture Trust Deed The trust deed to be entered into between the Debenture Trustee and our

Company within three months from the Issue Closing Date.

Debenture Trustee/ Trustee Debenture Trustee for the Bondholders, in this case being Milestone

Trusteeship Services Private Limited.

Debt Application Circular Circular no. CIR/IMD/DF 1/20/ 2012 issued by SEBI on July 27, 2012.

Debt Listing Agreement The Listing Agreement entered into between our Company and the

relevant stock exchange(s) in connection with the listing of the debt

securities of our Company.

Deemed Date of Allotment The date on which the Board of Directors or the duly constituted

committee approves the Allotment of the Bonds for each Tranche Issue or

such date as may be determined by the Board of Directors or the duly

constituted committee and notified to the Designated Stock Exchange. The

actual Allotment of Bonds may take place on a date other than the Deemed

Date of Allotment. All benefits relating to the Bonds including interest on

Bonds (as specified for each Tranche Issue by way of the relevant Tranche

Prospectus) shall be available to the Bondholders from the Deemed Date

of Allotment.

Demographic Details The demographic details of an Applicant, such as his address, occupation,

bank account details, Category, PAN for printing on refund orders which

are based on the details provided by the Applicant in the Application

Form.

Designated Branches Such branches of the SCSBs which shall collect the ASBA Applications

and a list of which is available on

http://www.sebi.gov.in/sebiweb/home/list/5/33/0/0/Recognised-

Intermediaries or at such other website as may be prescribed by SEBI from

time to time.

Designated Date The date on which Application Amounts are transferred from the Escrow

Accounts and Non-Resident Escrow Accounts to the Public Issue

Accounts, Non-Resident Public Issue Accounts or the Refund Account, as

appropriate and the Registrar to the Issue issues instruction to SCSBs for

transfer of funds from the ASBA Accounts to the Public Issue Account(s)

or Non Resident Public Issue Accounts following which the Board shall

Allot the Bonds to the successful Applicants, provided that the sums

received in respect of the Issue will be kept in the Escrow Accounts and

Non Resident Escrow Accounts up to this date.

Designated Stock Exchange BSE.

Direct Online Application The application made using an online interface enabling direct application

by investors to a public issue of their debt securities with an online

payment facility through a recognized stock exchange .This facility is

available only for demat account holders who wish to hold the Bonds

pursuant to the Issue in dematerialized form.

Draft Shelf Prospectus The Draft Shelf Prospectus dated September 10, 2015 filed by our

Company with the Designated Stock Exchange for receiving public

comments, in accordance with the provisions of the SEBI Debt

Regulations.

Eligible QFIs QFIs from such jurisdictions outside India where it is not unlawful to make

an offer or invitation under the Issue (and where an offer or invitation

under the Issue to such QFIs would not constitute, under applicable laws
http://www.sebi.gov.in/sebiweb/home/list/5/33/0/0/Recognised-Intermediarieshttp://www.sebi.gov.in/sebiweb/home/list/5/33/0/0/Recognised-Intermediaries

7

Term Description

in such jurisdictions, an offer to the public generally to subscribe for or

otherwise acquire the Bonds) and who have opened demat accounts with

SEBI registered Qualified Depository Participants.

Equity Listing Agreement The agreement entered into between our Company and each Stock

Exchange in relation to listing of the equity shares on the Stock

Exchange(s).

Escrow Accounts Accounts opened with the Escrow Collection Bank(s) into which the

Members of the Syndicate and the Trading Members, as the case may be,

will deposit Application Amounts from resident non-ASBA Applicants,

in terms of the Shelf Prospectus, relevant Tranche Prospectus and the

Escrow Agreement.

Escrow Agreement Agreement dated [] entered into amongst our Company, the Registrar to

the Issue, the Lead Managers and the Escrow Collection Banks for

collection of the Application Amounts from non-ASBA Applicants and

where applicable, refunds of the amounts collected from the Applicants on

the terms and conditions thereof.

FII Foreign Institutional Investor (as defined under the SEBI (Foreign

Institutional Investors) Regulations, 1995), registered with the SEBI under

applicable laws in India which term shall include the Foreign Portfolio

Investors as defined under the Securities and Exchange Board of India

(Foreign Portfolio Investors) Regulations, 2014, as registered with SEBI.

FPI Foreign Portfolio Investor as defined under the Securities and Exchange

Board of India (Foreign Portfolio Investors) Regulations, 2014, as

amended

ICRA ICRA Limited.

Interest Payment Date Interest Payment Date as specified in the relevant Tranche Prospectus

for the relevant Tranche Issue.

Issue Public issue by our Company of tax free bonds of face value of ` [] each, in the nature of secured, redeemable, non-convertible debentures having

benefits under Section 10(15)(iv)(h) of the Income Tax Act, aggregating up

to ` 700 crores. Issue Closing Date Issue Closing Date as specified in the relevant Tranche Prospectus for

the relevant Tranche Issue.

Issue Opening Date Issue Opening Date as specified in the relevant Tranche Prospectus for the

relevant Tranche Issue.

Issue Period The period between the Issue Opening Date and the Issue Closing Date

inclusive of both days, during which prospective Applicants may submit

their Application Forms.

Lead Managers/ LMs Edelweiss Financial Services Limited, A.K. Capital Services Limited, RR

Investors Capital Services Pvt. Ltd., Karvy Investor Services Limited.

Market Lot One Bond.

Members of the Syndicate Collectively, the Lead Managers, the Consortium Members (for the

purpose of marketing of the Issue), sub-consortium members, brokers and

sub brokers registered with the sub-consortium members.

Non Resident Escrow Accounts Accounts opened with the Escrow Collection Bank(s) into which the

Members of the Syndicate and the Trading Members, as the case may be,

will deposit Application Amounts from non-resident non-ASBA

Applicants, in terms of the Draft Shelf Prospectus, Shelf Prospectus,

relevant Tranche Prospectus and the Escrow Agreement.

Non Resident Public Issue

Account

An account opened with the Banker(s) to the Issue to receive monies from the

Non Resident Escrow Accounts for the Issue and/ or the SCSBs on the

Designated Date.

NSE National Stock Exchange of India Limited.

Overseas Corporate Body/

OCB(s)

A company, partnership firm, society and other corporate body owned

directly or indirectly to the extent of at least sixty percent by Non-Resident

Indian and includes overseas trust in which not less than sixty percent

beneficial interest is held by Non-Resident Indian(s) directly or indirectly

but irrevocably and which was in existence on the date of commencement

8

Term Description

of the Foreign Exchange Management (Withdrawal of General Permission

to Overseas Corporate Bodies (OCBs) Regulations, 2003) (the

Regulations) and immediately prior to such commencement was eligible

to undertake transactions pursuant to the general permission granted under

the Regulations. The OCBs are not permitted to invest in the Issue.

Public Issue Account An account opened with the Banker(s) to the Issue to receive monies from the

Escrow Accounts for the Issue and/ or the SCSBs on the Designated Date.

QFIs or Qualified Foreign Investor Person, who is not resident in India, other than SEBI registered FIIs or sub-

accounts or SEBI registered FVCIs, who meet Know Your Client

requirements prescribed by SEBI and are resident in a country which is (i) a

member of Financial Action Task Force or a member of a group which is a

member of Financial Action Task Force; and (ii) a signatory to the

International Organisation of Securities Commissions Multilateral

Memorandum of Understanding or a signatory of a bilateral memorandum of

understanding with SEBI.

Qualified Foreign Investors

Depository Participant or QFIs DP

Depository Participant for Qualified Foreign Investors

Record Date 15 (fifteen) days prior to the relevant interest payment date, relevant

Redemption Date for Bonds issued under the relevant Tranche Prospectus.

In the event the Record Date falls on second Saturday or fourth Saturday

or Sunday or a public holiday in India, the succeeding Working Day will

be considered as the Record Date.

Redemption Amount In respect of Bonds Allotted to a Bondholder, the face value of the Bonds

along with any interest at the applicable interest/coupon rate that may have

accrued as on the Redemption Date.

Redemption Date The date on which our Company is liable to redeem the Bonds in full as

specified in the relevant Tranche Prospectus(es).

Reference G Sec Rate The average of the base yield of G sec for equivalent maturity reported

by the Fixed Money Market and Derivative Association of India on a daily

basis (working day) prevailing for two weeks ending on Friday

immediately preceding the filing of the Tranche Prospectuses with the

Designated Stock Exchange and the RoC.

Refund Account The account opened with the Refund Bank(s), from which refunds, if any,

of the whole or part of the Application Amount shall be made (excluding

all Application Amounts received from ASBA Applicants).

Refund Banks As specified in the relevant Tranche Prospectus.

Register of Bondholders The Register of Bondholders maintained by the Issuer in accordance with

the provisions of the Companies Act, 2013 and as more particularly

detailed in the section titled Terms of the Issue Register of

Bondholders on page 239.

Registrar to the Issue/ Registrar Bigshare Services Private Limited

Registrar Agreement Agreement dated September 2, 2015 entered into between our Company

and the Registrar to the Issue, in relation to the responsibilities and

obligations of the Registrar to the Issue pertaining to the Issue.

RFPI FII, FPI and QFI collectively

Security The security for the Bonds proposed to be issued, being a charge on the

book debts of our Company by a first pari passu, and/ or any other

security, movable or immovable property pursuant to the terms of the

Debenture Trust Deed, to be created within three months of Deemed Date

of Allotment, in accordance with the SEBI Debt Regulations and

Companies Act, 2013.

Self Certified Syndicate Banks

or SCSBs

The banks which are registered with SEBI under the Securities and

Exchange Board of India (Bankers to an Issue) Regulations, 1994 and

offer services in relation to ASBA, including blocking of an ASBA

Account, a list of which is available on



time to time.

9

Term Description

Series of Bonds A series of Bonds which are identical in all respects including, but not

limited to terms and conditions, listing and ISIN number (in the event that

Bonds in a single Series of Bonds carry the same coupon rate) and as

further referred to as an individual Series of Bonds in the relevant Tranche

Prospectus.

Shelf Limit

The aggregate limit of the Issue, being 700 crores to be issued under this Draft Shelf Prospectus, through one or more Tranche Issues, which limit

may be enhanced by the Government (i.e. Central Board of Direct Taxes)

from time to time.

Shelf Prospectus

The Shelf Prospectus dated [] shall be filed by our Company with the

SEBI, BSE and the RoC in accordance with the provisions of the

Companies Act, 2013 and the SEBI Debt Regulations.

Stock Exchanges BSE Limited and NSE

Syndicate ASBA Application

Locations

Application centers at Mumbai, Chennai, Kolkata, Delhi, Ahmedabad,

Rajkot, Jaipur, Bengaluru, Hyderabad, Pune, Vadodra and Surat.

Syndicate SCSB Branches In relation to ASBA Applications submitted to a Member of the Syndicate,

such branches of the SCSBs at the Syndicate ASBA Application Locations

named by the SCSBs to receive deposits of the Application Forms from

the members of the Syndicate, and a list of which is available on



time to time.

Transaction Registration Slip

or TRS

The acknowledgement slip or document issued by any of the Members of

the Syndicate, the SCSBs, or the Trading Members as the case may be, to

an Applicant upon demand as proof of registration of his application for

the Bonds.

Trading Members Intermediaries registered with a Broker or a Sub-Broker under the SEBI

(Stock Brokers and Sub-Brokers) Regulations, 1992 and/or with the Stock

Exchanges under the applicable byelaws, rules, regulations, guidelines,

circulars issued by Stock Exchanges from time to time and duly registered

with the Stock Exchanges for collection and electronic upload of

Application Forms on the electronic application platform provided by

Stock Exchanges

Tranche Issue Issue of the Bonds pursuant to the respective Tranche Prospectus(es).

Tranche Prospectus The Tranche Prospectus containing the details of Bonds including

interest, other terms and conditions, recent developments, general

information, objects, procedure for application, statement of tax benefits,

regulatory and statutory disclosures and material contracts and

documents for inspection, in respect of the relevant Tranche Issue.

Tripartite Agreements Tripartite agreement dated September 4, 2015 among our Company, the

Registrar and CDSL and tripartite agreement dated September 7, 2015

among our Company, the Registrar and NSDL.

Working Days Days other than a Sunday or a public holiday in Delhi or Mumbai on which

commercial banks are open for business, except with reference to Issue

Period and Record Date, where working day shall mean all days,

excluding Saturdays, Sundays and public holidays in Delhi or Mumbai, on

which commercial banks are open for business.

Conventional and general terms or abbreviation

Term/Abbreviation Description/ Full Form

` or Rupees or ` or Indian Rupees or INR The lawful currency of India.

AGM Annual General Meeting.

AS Accounting Standards issued by Institute of Chartered Accountants of India.

ASBA Application Supported by Blocked Amount.

CAGR Compounded Annual Growth Rate.

CBDT Central Board of Direct Taxes, Department of Revenue, MoF.

10


CDR Corporate Debt Restructuring

CDSL Central Depository Services (India) Limited.

CEIC Census Economic Information Centre

Companies Act/ Act Companies Act, 1956, as amended.

Companies Act, 2013 The Companies Act, 2013 (18 of 2013), to the extent notifed by the MCA

and in force as on the date of this Draft Shelf Prospectus

CPI Consumer Price Index.

CPSE ETF Exchange Traded Fund of select central public sector enterprises,

launched as a mutual fund scheme.

CRAR Capital to Risk-Weighted Assets Ratio.

CSR Corporate Social Responsibility.

ESOP Employee Stock Option Scheme

Depositories Act Depositories Act, 1996.

Depository(ies) CDSL and NSDL.

DIN Director Identification Number.

DP/ Depository Participant Depository Participant as defined under the Depositories Act, 1996.

DRR Debenture Redemption Reserve.

DTC Direct Tax Code.

FCNR Account Foreign Currency Non Resident Account.

FDI Foreign Direct Investment.

FEMA Foreign Exchange Management Act, 1999.

FIMMDA Fixed Income Money Market and Derivative Association of India.

Financial Year/ Fiscal/ FY Period of 12 months ended March 31 of that particular year.

FIR First Information Report.

GDP Gross Domestic Product.

GoI or Government Government of India.

HNI High Networth Individual.

HUF Hindu Undivided Family.

IAS Indian Administrative Service.

ICAI Institute of Chartered Accountants of India.

IFRS International Financial Reporting Standards.

IMF International Monetary Fund

Income Tax Act Income Tax Act, 1961.

India Republic of India.

Indian GAAP Generally Accepted Accounting Principles followed in India.

IRDA Insurance Regulatory and Development Authority.

ISTS Inter State Transmission System

IT Information Technology.

JV Joint Venture

LIBOR London Inter-Bank Offered Rate.

MCA Ministry of Corporate Affairs, GoI.

MoF Ministry of Finance, GoI.

MoP Ministry of Power, GoI.

NBFC Non Banking Financial Company, as defined under applicable RBI

guidelines.

NECS National Electronic Clearing System.

NEFT National Electronic Fund Transfer.

NHPC National Hydro-Electric Power Corporation Limited.

NPCIL Nuclear Power Corporation of India Limited.

NPEL National Power Exchange Limited.

NRI or Non-Resident A person resident outside India, as defined under the FEMA.

NSDL National Securities Depository Limited.

NSE National Stock Exchange of India Limited.

NTPC National Thermal Power Corporation.

p.a. Per annum.

PAN Permanent Account Number.

PAT Profit After Tax.

11


PCG Partial Credit Enhancement Guarantee.

PECAP Power Equity Capital Advisors Private Limited.

PESB Public Enterprises Selection Board.

PFCCAS PFC Capital Advisory Services Limited.

PFCCL Power Finance Corporation Consulting Limited.

PFCGEL PFC Green Energy Limited.

PFI Public Financial Institution, as defined under Section 2(72) of the

Companies Act, 2013

PGCIL Power Grid Corporation of India Limited.

PPP Public Private Partnership.

PTC PTC India Limited.

PXIL Power Exchange India Limited.

RBI Reserve Bank of India.

RBI Act Reserve Bank of India Act, 1934 as amended.

RTGS Real Time Gross Settlement.

SEBI Securities and Exchange Board of India

SEBI Act Securities and Exchange Board of India Act, 1992 as amended.

SEBI Debt Regulations Securities and Exchange Board of India (Issue and Listing of Debt

Securities) Regulations, 2008 as amended.

USAID United States Agency for Internationsl Development

WPI Wholesale Price Index

Business/ Industry related terms


ADB Asian Development Bank.

ALCO Asset Liability Management Committee.

APDP Accelerated Power Development Program.

APDRP Accelerated Power Development Reform Program.

AT&C Aggregated Technical and Commercial.

CDM Clean Development Mechanism

CEA Central Electricity Authority.

CERC Central Electricity Regulatory Commission

DPE Department of Public Enterprises, GoI.

ECBs External Commercial Borrowing.

FCNR Foreign Currency Non-Resident.

IFC Infrastructure Finance Company

IPP Independent Power Producer

IRM Integrated Enterprise wide Risk Management.

ISO International Organization for Standardization.

ITP Independent Transmission Projects.

LIC Life Insurance Corporation of India

MNRE Ministry of New and Renewable Energy.

MoU Memorandum of Understanding.

NPAs Non-Performing Assets.

PSU Public Sector Undertaking.

R-APDRP Restructured Accelerated Power Development and Reform Programs.

SEB State Electricity Boards.

SERC State Electricity Regulatory Commission.

SLR Statutory Liquidity Ratio

SPU State Power Utilities.

SPV Special Purpose Vehicle.

STL Short Term Loan.

TRA Trust and Retention Account.

UMPP Ultra Mega Power Projects.

UTI Unit Trust of India

WCDL Working Capital Demand Loan.

12


Yield Ratio of interest income to the daily average of interest earning assets.

Notwithstanding anything contained herein, capitalised terms that have been defined in the sections titled Capital

Structure, Regulations and Policies, History and Certain Corporate Matters, Statement of Tax Benefits,

Our Management, Financial Indebtedness, Outstanding Litigation and Material Developments and

Issue Procedure on pages 86, 137, 146, 96, 156, 170, 200 and 252 respectively will have the meanings ascribed

to them in such sections.

13

CERTAIN CONVENTIONS, USE OF FINANCIAL, INDUSTRY AND MARKET DATA AND

CURRENCY OF PRESENTATION

Certain Conventions

All references in this Draft Shelf Prospectus to India are to the Republic of India and its territories and

possessions.

Financial Data

Unless stated otherwise, the financial data in this Draft Shelf Prospectus is derived from our audited standalone

financial statements, prepared in accordance with Indian GAAP and the applicable Companies Act for the fiscals

2015, 2014, 2013, 2012 and 2011. All decimals have been rounded off to two decimal points. The audits for the

financial year ended March 31, 2015 and March 31, 2014 were conducted jointly by M/s N.K. Bhargava & Co.,

Chartered Accountants and M/s K.B. Chandna & Co., Chartered Accountants, for the year ended March 31, 2013

and March 31, 2012 were conducted jointly by M/s Raj Har Gopal & Co., Chartered Accountants and M/s N.K.

Bhargava & Co., Chartered Accountants, and for the year ended March 31, 2011 were conducted by M/s Raj Har

Gopal & Co., Chartered Accountants jointly with M/s Mehra Goel & Co., Chartered Accountants.

The financial year of our Company commences on April 1 and ends on March 31 of the next year, so all references

to particular Financial year, Fiscal year and Fiscal or FY, unless stated otherwise, are to the 12 months

period commencing on April 1 of the immediately preceding calendar year and ended on March 31 of that year.

The degree to which the Indian GAAP financial statements included in this Draft Shelf Prospectus will provide

meaningful information is entirely dependent on the reader's level of familiarity with Indian accounting practices.

Any reliance by persons not familiar with Indian accounting practices on the financial disclosures presented in

this Draft Shelf Prospectus should accordingly be limited.

Currency and Unit of Presentation

In this Draft Shelf Prospectus, references to , Indian Rupees, INR and Rupees are to the legal currency of India, references to US$, USD, and U.S. dollars are to the legal currency of the United States of America,

references to Yen, JPY and are to the legal currency of Japan, references to DM are to the erstwhile

legal currency of Germany, references to FRF are to the erstwhile legal currency of France and references to

Euro or or EUR are to the Euro, the single currency of the participating member states in the third stage

of the European Economic and Monetary Union of the Treaty establishing the European Community, as amended

from time to time. Except as stated expressly, for the purposes of this Draft Shelf Prospectus, data will be given

in in crores.

Industry and Market Data

Any industry and market data used in this Draft Shelf Prospectus consists of estimates based on data reports

compiled by Government bodies, professional organizations and analysts, data from other external sources

available in the public domain and knowledge of the markets in which we compete. These publications generally

state that the information contained therein has been obtained from publicly available documents from various

sources believed to be reliable, but it has not been independently verified by us, its accuracy and completeness is

not guaranteed and its reliability cannot be assured. Although we believe that the industry and market data used

in this Draft Shelf Prospectus is reliable, it has not been independently verified by us. The data used in these

sources may have been reclassified by us for purposes of presentation. Data from these sources may also not be

comparable. The extent to which the industry and market data presented in this Draft Shelf Prospectus is

meaningful depends on the readers familiarity with and understanding of the methodologies used in compiling

such data. There are no standard data gathering methodologies in the industry in which we conduct our business

and methodologies and assumptions may vary widely among different market and industry sources.

Exchange Rates

The exchange rates (in ) of the USD, JPY and Euro as for last 5 years are provided below:

Currency March 31, 2015 March 31, 2014 March 31, 2013** March 31, 2012* March 31, 2011

USD 63.06 60.49 54.80 51.5300 45.1400

JPY 0.5263 0.5903 0.5847 0.6318 0.5484

14

Currency March 31, 2015 March 31, 2014 March 31, 2013** March 31, 2012* March 31, 2011

EURO 68.42 83.48 70.28 69.0500 63.9900

(Source: SBI TT Selling rates) * March 31, 2012 was a trading holiday; hence exchange rates for the last working day of March, 2012, i.e.,

March 30, 2012 have been used

** March 31, 2013 and March 30, 2013 were Sunday and Saturday, respectively, and March 29 was a holiday;

hence, exchange rates for the last working day of March, i.e., March 28, 2013 have been used.

Further, in case of specific provision in the loan agreement for a rate other than the SBI TT selling rate, the rate

has been taken as prescribed as in the respective loan agreement.

In this Draft Shelf Prospectus, any discrepancy in any table between total and the sum of the amounts listed are

due to rounding off.

15

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Draft Shelf Prospectus that are not statements of historical fact constitute

forward-looking statements. Investors can generally identify forward-looking statements by terminology such

as aim, anticipate, believe, continue, could, estimate, expect, intend, may, objective, plan,

potential, project, pursue, shall, seek, should, will, would, or other words or phrases of similar

import. Similarly, statements that describe our strategies, objectives, plans or goals are also forward-looking

statements. All statements regarding our expected financial conditions, results of operations, business plans and

prospects are forward-looking statements. These forward-looking statements include statements as to our business

strategy, revenue and profitability, new business and other matters discussed in this Draft Shelf Prospectus that

are not historical facts. All forward-looking statements are subject to risks, uncertainties and assumptions about

us that could cause actual results to differ materially from those contemplated by the relevant forward-looking

statement. Important factors that could cause actual results to differ materially from our expectations include,

among others:

our ability to manage our credit quality; interest rates and inflation in India; inability to take advantage of certain tax benefits or if there are adverse changes to the tax regime in the

future;

volatility in interest rates for our lending and investment operations as well as the rates at which our Company borrows from banks/financial institution;

growth prospects of the Indian power sector and related policy developments; changes in the demand and supply scenario in the power sector in India; general, political, economic, social and business conditions in Indian and other global markets; our ability to successfully implement our strategy, growth and expansion plans; competition in the Indian and international markets; availability of adequate debt and equity financing at commercially acceptable terms; performance of the Indian debt and equity markets; our ability to comply with certain specific conditions prescribed by the GoI in relation to our business

changes in laws and regulations applicable to companies in India, including foreign exchange control

regulations in India; and

other factors discussed in this Draft Shelf Prospectus, including under the section titled Risk Factors on page 16.

Additional factors that could cause actual results, performance or achievements to differ materially include, but

are not limited to, those discussed in the section titled Our Business and Outstanding Litigation and Material

Developments on page 112 and 200 respectively of the Draft Shelf Prospectus. The forward-looking statements

contained in this Draft Shelf Prospectus are based on the beliefs of management, as well as the assumptions made

by, and information currently available to management. Although our Company believes that the expectations

reflected in such forward-looking statements are reasonable as of the date of this Prospectus, our Company cannot

assure investors that such expectations will prove to be correct. Given these uncertainties, investors are cautioned

not to place undue reliance on such forward-looking statements. If any of these risks and uncertainties materialize,

or if any of our underlying assumptions prove to be incorrect, our actual results of operations or financial condition

could differ materially from that described herein as anticipated, believed, estimated or expected. All subsequent

forward-looking statements attributable to us are expressly qualified in their entirety by reference to these

cautionary statements.

16

SECTION II-RISK FACTORS

Prospective investors should carefully consider all the information in this Draft Shelf Prospectus, including the

risks and uncertainties described below, and under the section titled Our Business on page 112 and under

Financial Statements in Annexure A of this Draft Shelf Prospectus, before making an investment in the Bonds.

The risks and uncertainties described in this section are not the only risks that we currently face. Additional risks

and uncertainties not known to us or that we currently believe to be immaterial may also have an adverse effect

on our business prospects, results of operations and financial condition. If any of the following or any other risks

actually occur, our business prospects, results of operations and financial condition could be adversely affected

and the price of and the value of your investment in the Bonds could decline and you may lose all or part of your

redemption amounts and/ or interest amounts.

The financial and other related implications of risks concerned, wherever quantifiable, have been disclosed

below. However, there are certain risk factors where the effect is not quantifiable and hence has not been

disclosed in the below risk factors. The numbering of risk factors has been done to facilitate ease of reading and

reference, and does not in any manner indicate the importance of one risk factor over another.

In this section, unless the context otherwise requires, a reference to the Company, we, us, and our is

a reference to Power Finance Corporation Limited. Unless otherwise specifically stated in this section, financial

information included in this section have been derived from our standalone financial statements for Fiscal 2011,

2012, 2013, 2014 and 2015.

RISKS RELATING TO OUR BUSINESS AND INDUSTRY

1. We have a significant concentration of outstanding loans to certain borrowers, particularly public sector power utilities, many of which are historically loss-making, and if these loans become non-

performing, the quality of our asset portfolio may be adversely affected.

We are a Public Financial Institutions (PFI) focused on financing of the power sector in India, which

has a limited number of borrowers, primarily comprising of state power utilities (SPUs) and state

electricity boards (SEBs), many of which have been historically loss making. Our past exposure has

been, and future exposure is expected to be, concentrated towards these borrowers. As of March 31,

2015, our State sector, Central sector, joint sector and private sector borrowers accounted for 68.76%,

8.23%, 6.40% and 16.60% respectively, of our total outstanding loans. Historically, SPUs or SEBs have

had a relatively weak financial position and have in the past defaulted on their indebtedness.

Consequently, we have had to restructure some of the loans sanctioned to certain SPUs and SEBs,

including rescheduling of repayment terms. In addition, many of our public sector borrowers,

particularly SPUs, are susceptible to various operational risks including low metering at the distribution

transformer level, high revenue gap, high receivables, low plant load factors and high AT&C losses,

which may lead to further deterioration in the financial condition of such entities.

As of March 31, 2015, our single largest borrower accounted for 7.93% (` 17,211.57 crores) of our total outstanding loans, and our top five and top ten borrowers accounted for, in the aggregate, 27.09% (` 58,789.94 crores) and 43.29% (` 93,958.46 crores), respectively, of our total outstanding loans amounting to ` 2,17,042.22 crores. In addition, we have additional exposure to these borrowers in the form of non-fund based assistance. Our most significant borrowers are primarily public sector power

utilities. Any negative trends, or financial difficulties, or inability on the part of such borrowers to

manage operational, industry, and other risks applicable to such borrowers, could result in an increase

in our non-performing assets (NPAs) and adversely affect our business, financial condition and results

of operations.

2. We may not be able to recover, or there may be a delay in recovering, the expected value from security and collaterals for our loans, which may affect our financial condition.

Although we endeavour to obtain adequate security or implement quasi-security arrangements in

connection with our loans, we have not obtained such security or collateral for all our loans. In addition,

in connection with certain of our loans, we have been able to obtain only partial security or have made

disbursements prior to adequate security being created or perfected. There can be no assurance that any

security or collateral that we have obtained will be adequate to cover repayment of our loans or interest

payments thereon or that we will be able to recover the expected value of such security or collateral in a

17

timely manner, or recover at all. As of March 31, 2015, 64.92% of the Issuers outstanding loans were

secured, 12.08% were unsecured (but guaranteed by the state government), and 23.01% were unsecured.

Our loans are typically secured by various movable and immovable assets and/ or other collaterals. We

generally seek a first ranking pari passu charge on the relevant project assets for loans extended on a

senior basis, while for loans extended on a subordinated basis we generally seek to have a second pari

passu charge on the relevant project assets. In addition, some of our loans may relate to imperfect security

packages or negative liens provided by our borrowers. The value of certain kinds of assets may decline

due to operational risks that are inherent to power sector projects, the nature of the asset secured in our

favour, and any adverse market or economic conditions in India or globally. The value of the security or

collateral obtained may also decline due to an imperfection in the title or difficulty in locating movable

assets. Although some parts of legislations in India provide for various rights of creditors for the effective

realization of collateral in the event of default, there can be no assurance that we will be able to enforce

such rights in a timely manner, or enforce them at all. There could be delays in implementing bankruptcy

or foreclosure proceedings. Further, inadequate security documentation or imperfection in title to

security or collateral, requirement of regulatory approvals for enforcement of security or collateral, or

fraudulent transfers by borrowers may cause delays in enforcing such securities. Furthermore, in the

event that any specialised regulatory agency assumes jurisdiction over a defaulting borrower, actions on

behalf of creditors may be further delayed.

Certain of our loans have been granted as part of a syndicate, and joint recovery action implemented by

a consortium of lenders may be susceptible to delay or not favourable to us. In this regard, RBI has also

developed a corporate debt restructuring (CDR) process to enable timely and transparent debt

restructuring of corporate entities. The CDR process is a voluntary non-statutory system based on debtor-

creditor agreement and inter-creditor agreement. If 75% of creditors by value and 60% of the creditors

by number agree to a restructuring package of an existing debt (i.e. an outstanding debt), the agreement

is also binding on the remaining creditors. The CDR mechanism covers multiple banking accounts and

syndication/consortium accounts where all banks and institutions together have an outstanding aggregate

exposure of ` 10 crores and above. As of the date of this Draft Shelf Prospectus, we are not a member of the CDR process.

In February 2014, RBI has framed guidelines on revitalising distressed assets applicable to lending under

consortium arrangements and multiple banking arrangements which has also been made applicable to

NBFCs. Under these guidelines, the lenders are required to identify incipient stress, before a loan account

turns into non-performing asset and mandatorily refer it to Joint Lenders Forum (JLF) mechanism for

taking corrective action plan. These guidelines are applicable, if fund-based and non-fund-based

aggregate exposure in a loan is ` 100 crores and above and where the principal and interest are overdue between 61 and 180 days. The corrective action plan may include rectification (specific commitment

from borrower to regularise the loan account so that the loan account does not slip into non-performing

asset), restructuring viable loan account or initiating recovery process. Corrective action plan agreed

upon by a minimum of 75% of creditors by value and 60% of the creditors by number in a JLF would

be binding on all lender members of JLF, who have signed inter-creditor agreement under JLF

mechanism. Any lender member who has agreed to the restructuring package and has signed inter-

creditor agreement, but changes its stance or refuses / delays implementing the restructuring package is

subjected to accelerated provisioning on the loan account. If lenders fail to convene JLF or fail to agree

upon a common corrective action plan within the time stipulated in the RBI guidelines, the loan account

will attract accelerated provisioning. Our Company has agreed to abide by the RBI guidelines on JLF

mechanism.

In circumstances where other lenders with such exposure / loan account by value and number and are

entitled to determine corrective action plan for any of our borrowers, we may be required by such other

lenders to agree to such corrective action plan, irrespective of our preferred mode of settlement of our

loan to such borrower or subject our loan account to accelerated provisioning. Furthermore, with respect

to any loans made as part of a consortium arrangement and multiple banking arrangement, a majority of

the relevant lenders may elect to pursue a course of action that may not be favourable to us. Any such

corrective action plan / accelerated provisioning could lead to an unexpected loss that could adversely

affect our business, financial condition or results of operations.

18

3. With power sector financing industry becoming increasingly competitive, our growth will depend on our ability to maintain a low effective cost of funds; inability to do so could have a material adverse

effect on our business, financial condition and results of operations

Our ability to compete effectively is dependent on our timely access to capital, the costs associated with

raising capital and our ability to maintain a low effective cost of funds in the future that is comparable

or lower than that of our competitors. Many of our competitors have greater and cheaper resources than

us. Competition in our industry depends on, among other things, the ongoing evolution of Government

policies relating to the industry, the entry of new participants into the industry and the extent to which

there is consolidation among banks and financial institutions in India. Our primary competitors are public

sector infrastructure finance companies, public sector banks, private banks (including foreign banks),

financial institutions and other NBFCs. As a Government owned NBFC, loans made by us to Central

and state entities in the power sector are currently exempt from the RBI's prudential lending (exposure)

norms that are applicable to other non-Government owned NBFCs. Our borrowing costs have been

competitive in the past initially due to the sizeable equity contribution by the GoI as a 100% owner, the

availability of tax-free bonds, SLR bonds and loans guaranteed by the GoI and subsequently as a result

of our strong credit ratings.

Following a general decrease in the level of direct and indirect financial support by the GoI to us in

recent years, we are fundamentally dependent upon funding from the equity and debt markets and

commercial borrowing and are particularly vulnerable in this regard given the growth of our business.

The market for such funds is competitive and there can be no assurance that we will be able to obtain

funds on acceptable terms, or obtain funds at all. Many of our competitors have greater and cheaper

sources of funding. Furthermore, many of our competitors may have larger resources or greater balance

sheet strength than us and may have considerable financing resources. In addition, since we are a non-

deposit taking NBFC, we may have restricted access to funds in comparison to banks and deposit taking

NBFCs. While we have generally been able to pass any increased cost of funds onto our customers, we

may not be able to do so in the future. If our financial products are not competitively priced, there is a

risk of our borrowers raising loans from other lenders and in the case of financially stronger SPUs and

SEBs and private sector borrowers, there is a risk of their raising funds directly from the market. Our

ability to raise capital also depends on our ability to maintain our credit ratings in order to access various

cost competitive funding options.

We are also dependent on our classification as an IFC which enables us, among other things, to diversify

our borrowing through the issuance of Rupee-denominated infrastructure bonds to bondholders as and

when such schemes are notified by the GoI and to raise, under the automatic route (without the prior

approval of the RBI), ECBs of up to USD 750 million or its equivalent each Fiscal year, subject to the

aggregate outstanding ECBs not exceeding 75% of our owned funds including outstanding foreign

currency borrowing. In addition, adverse developments in economic and financial markets or the lack of

liquidity in financial markets could make it difficult for us to access funds at competitive rates.

If we are not able to maintain a low effective cost of funds, we may not be able to implement our growth

strategy, competitively price our loans and, consequently, we may not be able to maintain the

profitability or growth of our business, which could have a material adverse effect on our business,

financial condition and results of operations.

4. Inability to develop or implement effective risk management policies and procedures could expose our Company to unidentified risks or unanticipated levels of risk.

Our Company has put in place an Integrated Enterprisewide Risk Management (IRM) policies and

procedures that list all risks we face, which may have an impact on profitability and business of our

Company, their root causes, existing mitigations factors and action plans for further mitigations, where

required. The risks have been prioritized and key performance indicators identified for measuring and

monitoring. A Risk Management Committee of the Board is constituted for monitoring the risks,

mitigations and implementation of action plans. Our Company has Currency Risk Management

(CRM) Policy and has appointed a consultant to manage risks associated with foreign currency

borrowing. Our Company has also put in place an effective Asset Liability Management System,

constituted an Asset Liability Management Committee (ALCO) to monitor and mitigate risks related

to liquidity and interest rate.

19

Although our Company follows various risk management policies and procedures to identify, monitor

and manage risks, there can be no assurance that such policies and procedures will be effective in

addressing all risks that our Company encounters in its business and operations or that such policies and

procedures are as comprehensive as those implemented by banks and other financial institutions. Our

Companys risk management policies and procedures are based, among other considerations, on

historical market behaviour, information regarding borrowers, and market knowledge. Consequently,

these policies and procedures may not predict future risk exposures that could vary from or be greater

than those indicated by historical measures. In addition, information available to our Company may not

be accurate, complete, up-to-date or properly evaluated. Unexpectedly large or rapid movements or

disruptions in one or more financial markets or other unforeseen developments could have a material

adverse effect on our Companys results of operations and financial condition. Our Companys risk

management policies and procedures are also influenced by applicable GoI policies and regulations, and

may prove inadequate or ineffective in addressing risks that arise as a consequence of any development

in GoI policies and consequently can have an adverse effect on our Companys business and operations.

In addition, our Company intends to continue to diversify its borrower portfolio and extend fund based

and non-fund based financial and other assistance and services to projects that represent forward and

backward linkages to the core power sector projects. These business initiatives may involve operational

and other risks that are different from those our Company currently encounters or anticipates, and there

can be no assurance that our Company will be able to effectively identify and address any additional

risks that apply to such business initiatives. Inability to develop, modify and implement effective and

dynamic risk management policies and procedures may adversely affect our Companys growth strategy.

Management of operational, legal, and regulatory risk requires, among others, policies and procedures

to accurately record and verify transactions and events. There can be no assurance that our Companys

policies and procedures will effectively and accurately record and verify such information. Failure of

our Companys risk management policies and procedures or exposure to unanticipated risks could lead

to losses and adversely affect our Companys business, financial condition and results of operations.

5. We have received a order from the RoC in relation to non-compliance with certain provisions of the Companies Act, which if determined against us, could adversely impact our business and financial

condition.

Under Section 234 (1) of the Companies Act, 1956, the RoC issued an order on July 24, 2013 to our

Company requiring us to furnish information and/or explanation on certain issues pertaining to our

financial statements for FY 2007-08 to 2011-12, where the RoC had observed that our Company had

prima facie contravened certain provisions of the Companies Act, 1956 read with Accounting Standards

which include, inter alia, the accounts of our Company not being prepared on an accrual basis,

incomplete disclosures in the balance sheet, overstatement of profit, classification of doubtful debts as

good, not reflecting true and fair view, non-compliance with ICAI suggestions on creation of deferred

tax liability on special reserve for the period 2001-02 to 2003-04 by charging the profit and loss account

and crediting the reserve.

In addition, the RoC had asked our Company to furnish certain documents and details including details

of the issue on infrastructure bonds including the objects of raising such funds, utilization of funds raised

through the issue, unutilized amount and where such utilized amounts been invested, among others. Our

Company gave a detailed response on August 30, 2013 to the RoC order, explaining with reasons and

documents interalia that there were no contraventions of the provisions of Companies Act, 1956 or

Accounting Standards, nor are there was any wilful mistatement, the classification of the assets as

standard was in accordance with the prudential norms of our Company, non-creation of deferred tax

liability on special reserve was in line with the letter dated June 2, 2009 of the Accounting Standard

Board of the ICAI. Further, the details of issues of infrastructure bonds were also furnished in our letter

dated August 30, 2013. RoC, vide letter dated October 10, 2014 forwarded their comments to MoP on

our response and clarification, who in turn had asked for the comments of our Company, vide MoP letter

dated October 31, 2014. Our Company had furnished reply to MoP on December 12, 2014. The MoP,

vide letter dated April 27, 2015 asked our Company to place the observations of the RoC before the

Board of our Company. The Board had considered and ratified our Companys reply dated August 30,

2013 to the RoC order. This was informed to MoP vide our Companys letter dated June 2, 2015.

Thereafter, there was no further query or communication from RoC. For further details please refer to

the section titled Outstanding Litigations and Material Developments on page 200.

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If the alleged contraventions are determined against us, our Company and its officers in default may be

subjected to fines and penalties and our officers in default may be subjected to imprisonment, in

accordance with the Companies Act, 1956, which may have a material adverse impact on the business

and financial condition of our Company.

While presently no penalties have been levied on us nor any adverse action has been taken by RoC with

respect to the alleged contraventions, we cannot assure you that such action will not be taken in the

future.

6. Risks inherent to power sector projects, particularly power generation projects, could adversely affect our Companys business, financial condition and results of operations.

Our Company is a financial institution focused on providing financial and other assistance and related

services to power sector projects. Power sector projects, particularly power generation projects, typically

involve long gestation periods before they become operational and involve various project-specific risks

as well as risks that are generally applicable to the power sector in India. Many of these risks applicable

to power sector projects that our Company finances are beyond our control and include:

political, regulatory, fiscal, monetary and legal actions and policies that may adversely affect the viability of power sector projects, including changes in any tariff regulations applicable to power

plants;

delays in the implementation of GoI policies and initiatives;

changes in Government and regulatory policies relating to the power sector;

environmental concerns and environmental regulations applicable to power sector projects that, including, for example, relevant coal mining areas being classified as no-go areas;

delays in obtaining environmental clearances or land for the projects;

extent and reliability of power sector infrastructure in India;

strikes, work stoppages or increased wage demands by employees or any other disputes with employees that affect the project implementation schedule or operations of the projects ;

adverse changes in demand for, or the price of, power generated or distributed by the projects ;

disruption of projects due to explosions, fires, earthquakes and other natural disasters, breakdown, failure or substandard performance of equipment, improper installations or operation of

equipment, accidents, operational problems, transportation interruptions, other environmental

risks and labour disputes;

the willingness and ability of consumers to pay for the power produced by the projects;

shortages of, or adverse price fluctuations in, fuel and other raw materials and key inputs involved in power generation, including coal, oil and natural gas;

increase in project development costs due to environmental challenges and changes in environmental regulations;

changes in credit ratings of our Companys borrowers affecting their ability to finance projects;

interruption or disruption in domestic or international financial markets, whether for equity or debt funds;

delays in the construction and operation of projects;

domestic power companies face significant project execution and construction delay risks i.e. longer than expected construction periods due to delays in obtaining environmental permits and

infrastructure related delays in connecting to the grid, accessing offtake and finalising fuel supply

agreements could cause further delays

potential defaults under financing arrangements of project companies and their equity investors;

failure of co-lenders (with our Company under consortium lending arrangements) to perform their contractual obligations;

failure of third parties such as contractors, fuel suppliers, sub-contractors and others to perform their contractual obligations in respect of the power projects;

adverse developments in the overall economic environment in India;

the provisions of the Electricity Act, 2003 have significantly increased competition in the power generation industry which may negatively impact individual power generation companies;

failure to supply power to the market due to unplanned outages of any projects, failure in transmission systems or inter-regional transmission or distribution systems;

adverse fluctuations in liquidity, interest rates or currency exchange rates;

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changes in technology may negatively impact power generation companies by making their equipment or power projects less competitive or obsolete;

fluctuating fuel costs; and

economic, political and social instability or occurrences such as natural disasters, armed conflict and terrorist attacks, particularly where projects are located in the markets they are intended to

serve.

The long-term profitability of power sector projects, when commissioned, is partly dependent on the

efficiency of their operation and maintenance of their assets. Delayed implementation, initial

complications, inefficient operations, inadequate maintenance and similar factors may reduce the

profitability of such projects, adversely affecting the ability of our Companys borrowers to repay its

loans or service interest payments thereon. Furthermore, power sector projects may be exposed to

unplanned interruptions caused by catastrophic events such as floods, earthquakes, fires, major plant

breakdowns, pipeline or electricity line ruptures or other disasters. Operational disruption, as well as

supply disruption, could adversely affect the cash flows available from these projects. Furthermore, the

cost of repairing or replacing damaged assets could be considerable. Repeated or prolonged interruption

may result in a permanent loss of customers, substantial litigation or penalties and/or regulatory or

contractual non-compliance. To the extent the risks mentioned above or other risks relating to the power

sector projects that our Company finances, materialise, the quality of our Companys asset portfolio and

our Companys results of operations may be adversely affected. Furthermore, as our Company continues

to expand its operations, its loans to individual projects may increase, thereby increasing its exposure

with respect to individual projects and the potential for adverse effects on our Companys business,

financial condition and results of operations in the event these risks were to materialise.

7. If inflation increases, our Companys results of operations and financial condition may be adversely affected.

India has experienced high levels of inflation since 1980. The average annual inflation rates from

January, 2010 to December, 2014 remained at 9.6%. (Source: CEIC (CPI for Industrial Workers)) Indias

persistently high inflation has moderated recently due to favourable base effects, a tight monetary stance,

lower global commodity prices and Government efforts to contain food inflation. (Source: IMF Country

Report No. 15/61). CPI inflation has receded from 11.2% in November 2013 to 3.78% in July 2015

wholesale price inflation receded from 7.52% in November 2013 to -4.05% in July 2015. The upside

risks to inflation stem from the possibility of significant Fiscal slippage, uncertainty on the spatial and

temporal distribution of the monsoon during fiscal 2016 as also the risks of a reversal of international

crude prices due to geo-political events. Heightened volatility in global financial markets, including

through the exchange rate channel, also constitute a significant risk to the inflation

Power Finance Corporation Limited– Draft Shelf Prospectus

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Transcript of Power Finance Corporation Limited– Draft Shelf Prospectus