Extended Annual Review Report Project Number: 31901 Equity Investment Number: 7138-IND Project Number: 38926 Loan Number: 2169-IND December 2011 Equity Investment and Long-Term Loan to Infrastructure Development Finance Company (India) In accordance with ADB’s public communications policy (PCP, 2005), this abbreviated version of the XARR excludes confidential information and ADB’s assessment of project or transaction risk as well as other information referred to in paragraph 126 of the PCP. CURRENCY EQUIVALENTS Currency Unit – Indian rupee (Rs) At Appraisal At Project Completion 19 April 2005 31 March 2011 Rs1.00 – $0.02 $0.02 $1.00 – Rs43.73 Rs44.75 ABBREVIATIONS ADB – Asian Development Bank CAGR – compounded annual growth rate CAR – capital adequacy ratio CSR – corporate social responsibility ECB – external commercial borrowing EMSP – environmental management system and procedure EROIC – economic return on invested capital ESDD – environmental and social due diligence ESG – environmental, social, and corporate governance ESMG – environmental and social management group FI – financial intermediary FID – foreign direct investment GDP – gross domestic product HUF – Hindu undivided families IDFC – Infrastructure Development Finance Company IFC – infrastructure finance company IFI – international financial institution IPO – initial public offering LIBOR – London interbank offered rate NBFI – non-bank financial intermediary NPA – nonperforming asset OCB – overseas corporate body PAI – project administration instructions PAU – project administration unit PB – private bank PPP – public–private partnership PSB – public sector bank QIP – qualified institutional placement RBI – Reserve Bank of India REC – Rural Electrification Corporation ROAA – return on average assets ROAE – return on average equity ROIC – return on invested capital SBI – State Bank of India SBU – strategic business unit SCB – scheduled commercial bank WACC – weighted average cost of capital XARR – extended annual review report ii NOTES (i) The fiscal year of Government of India and most of India’s public and private institutions and corporations runs from 1 April to 31 March. The fiscal year (FY) of Infrastructure Development Finance Company ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2011 ends on 31 March 2011. (ii) In this report, "$" refers to US dollars. Vice-President L. Venkatachalam, Private Sector and Cofinancing Operations Director General P. Erquiaga, Private Sector Operations Department (PSOD) Director R. van Zwieten, Capital Markets and Financial Sectors Division, PSOD Team leader C. Engstrom, Dealing Officer, PSOD Team members C. Abuel, Project Analyst, PSOD I. Chua, Investment Officer, PSOD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area. CONTENTS Page BASIC DATA i EXECUTIVE SUMMARY ii I. THE PROJECT 1 A. Project Background 1 B. Key Project Features 2 C. Progress Highlights 2 II. EVALUATION 3 A. Project Rationale and Objectives 3 B. Development Impact 4 C. ADB Investment Profitability 17 D. ADB Work Quality 18 E. ADB’s Additionality 20 F. Overall Evaluation 20 III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS 20 A. Issues and Lessons 20 B. Recommended Follow-Up Actions 21 APPENDICES 1. Project-Related Data 22 2. Private Sector Development Indicators and Ratings: Infrastructure 27 3. Industry and Operations Review 33 4. Financial Statements 37 BASIC DATA Equity Investment: Infrastructure Development Finance Company, Ltd. (7138 - IND) As per ADB Equity Investment Documents Actual Key Project Data ($ million) ($ million) Total project cost 30.0 30.0 ADB investment: Equity: Committed 30.0 30.0 Disbursed 30.0 30.0 Key Dates Expected Actual Board approval 1997 1997 First disbursement 1998 30 Mar 1998 First disposal 2005 29 Aug 2005 Final disposal 2006 15 Sep 2006 No. of Person- Project Administration and Monitoring No. of Missions Days Fact-finding 2 Mar and Apr 1997 Appraisal 1 June 1997 Project administration 2 Mar 2004 and Sep 2004 XARR mission 1 19 Sep 2011 ADB = Asian Development Bank, ORM = Office of Risk Management, PSCM = Capital Markets and Financial Sectors Division, XARR = extended annual review report. ii BASIC DATA Loan: Infrastructure Development Finance Company (2169-IND) As per ADB Loan Documents Actual Key Project Data ($ million) ($ million) Total Project Cost 50.0 50.0 ADB Investment: Loan: Committed 50.0 50.0 Disbursed 50.0 50.0 Key Dates Expected Actual Concept Clearance Approval 2004 23 Sep 2004 Board Approval 2005 19 Apr 2005 Signing of Loan Agreement 2007 20 Mar 2007 First Disbursement 2007 07 May 2007 Loan Maturity 2017 ( ) No. of Person- Project Administration and Monitoring No. of Missions Days Fact-Finding 1 Sep 2004 Appraisal 1 Oct 2005 Project Administration 3 24−25 Nov 2006 29 Nov−3 Dec 2007 28−29 Nov 2008 XARR Mission 1 19 Sep 2011 ( ) = not applicable, ADB = Asian Development Bank, ORM = Office of Risk Management, PSCM = Capital Markets and Financial Sectors Division, XARR = extended annual review report. iii EXECUTIVE SUMMARY India began economic reforms in 1991 that liberalized trade and industry, opened up several sectors to foreign and private investment, and increased the role of market forces in the economy to encourage greater participation by the private sector. As the economy grew rapidly in years that followed, the Government of India recognized that huge amounts of investment would be required to develop and rehabilitate the infrastructure sector if the country was to sustain targeted economic growth of 9% a year. India’s financial markets also needed strengthening because the supply of long-term funding to match the longer tenor requirements of infrastructure financing was grossly inadequate. To help meet these challenges and provide impetus to infrastructure development, the government successfully sought the help of ADB and other international financial institutions (IFIs) in the establishment of the Infrastructure Development Finance Company (IDFC) in 1997. With an equity investment of $30 million in IDFC for a 6.1% equity stake, ADB was one of the founding investors in IDFC and helped formulate the company’s business plan and strategy. The presence of nominees of ADB and other IFIs on the IDFC board enhanced IDFC’s lending practices and standards. The IDFC became the premier infrastructure finance company for catalyzing private capital participation in commercially viable infrastructure investments in India. By July 2005, the initial mandate of the ADB and its partner IFIs to help the government establish and nurture the IDFC had been fulfilled and the company’s success had paved the way for it to enter the public equity markets. Prior to the IPO, ADB approved a $50 million foreign currency loan in 2005 to supplement the company’s long-term funding requirements through Loan to Infrastructure Development Finance Company (India). ADB’s loan helped the IDFC leverage additional financing from foreign investors and domestic financial institutions. ADB’s presence in IDFC has continued to provide comfort to IDFC’s other creditors and has encouraged commercial banks to participate in infrastructure finance. The development impact of ADB’s loan and equity investment in IDFC is rated excellent when evaluated against four criteria: (i) private sector development; (ii) business success; (iii) economic development; and (iv) environment, social, health, and safety performance. This extended annual review report rates overall impact of ADB’s investment on private sector development excellent. The IDFC today is not only the largest private infrastructure finance company in India but also highly regarded for innovative products and effectively channeling retail funds into infrastructure projects and for its major contribution to the marked growth in the private sector’s share in infrastructure financing. The IDFC’s financial and business performance remained robust despite the economic slowdown during FY2008. The IDFC’s contribution to overall economic development was also measured by its significant involvement in almost every large infrastructure project in India since 1997 through project financing and advisory services. ADB’s loan to the IDFC was classified in the financial intermediary category under ADB's Environment Policy (2002). The IDFC adopted comprehensive environmental management systems and procedures that are consistent with ADB’s and other IFIs’ standards. ADB’s loan was classified as a Category C project for impact on indigenous peoples. No involuntary resettlement of indigenous peoples has resulted from the IDFC's activities. The IDFC employs a robust environmental and social management system and ADB’s loan is rated satisfactory in this regard. iv ADB's work quality is rated excellent based on (i) the screening, appraisal, and structuring of the project; (ii) monitoring and supervision; and (iii) ADB's role and contribution. ADB’s screening, appraisal, and structuring of the equity and the loan projects were excellent because the investments fulfilled their objective of establishing a premier infrastructure finance company in India. ADB’s continuing participation in the IDFC through the existing loan demonstrates ADB’s commitment to expanding infrastructure finance by encouraging more active