A REPORT

ON

WORKING OF FINANCE WITH REFERENCE TO

CAPITAL BUDGETING

BHILAI STEEL PLANT

1
 ACKNOWLEDGEMENT

We express our sincere thanks & regards to Bhilai Steel Plant, for giving us the
opportunity to study on the topic “Working of finance with reference to capital
budgeting”.
First and foremost we express our hearty thanks to our co-ordinator Mr.
S.S.Kshatriya (Manager, Finance Expansion) for his guidance. We also express our
sincere thanks to all the heads of concerned sections of finance department, Mr.G.V.Rao,
Mr.N.Tamilarasan and Mr.A.Kashipati Rao for their kind cooperation in this project
work.
We are also thankful to all the staff of Bhilai Training Institute & HR department
for their kind cooperation to complete this project work successfully.

......

2
 CERTIFICATE

This is to certify that Muktesh Kanhe students of FORTUNE INSTITITE OF

INTERNATIONAL BUSINESS, NEW DELHI has completed their field work report
at BHILAI STEEL PLANT on the topic REPORT ON WORKING OF FINANCE
WITH REFERENCE TO CAPITAL BUDGETING and has submitted the field work
report in partial fulfillment the requirement of 2 Year Full Time Post Graduate Diploma
in Management (PGDM) for academic year 2008-10. They have worked under our
guidance and direction. The said report is based on bonafied information.
I wish them best of luck for their future.

S.S.Kshatriya
MANAGER (Finance Expansion)
BHILAI STEEL PLANT

3
 Index

1. INTRODUCTION………………………………………………………………… 6

2. STEEL AUTHORITY OF INDIA LIMITED (SAIL)…………………………... 8

3. BHILAI STEEL PLANT (BSP)…………………………………………………... 23

4. STATEMENT OF OBJECTIVE…………………………………………………. 32

5. FINANCE AND ACCOUNTS DEPARTMENT OF BSP………………………. 33

6. PROJECT FINANCE AND ACCOUNTS………………………………………. 35

7. CAPITAL BUDGETING………………………………………………………….. 48

8. CONCLUSION……………………………………………………………………. 63

9. BIBLIOGRAPHY ………………………………………………………………… 64

4
 INTRODUCTION
There’s a little bit of SAIL in everybody’s life….
“STEEL is the basic framework which has built nations, and it is on this strength that
nation stand apart. This manmade metal has an extraordinary quality of contributing to
every aspect of life. While it keeps the wheels of industry turning. It also lends ever-
lasting quality to all kinds of structure and infrastructure.”
‘SARDAR VALLABBHAI PATEL’
This project has been undertaken to study the procedures and practices followed in
Project finance and accounts which included the capital budgeting, project concurrence,
zonal accounts and work completion and Import section from time to time. Bhilai Steel
Plant exports its products to various countries around the world and also imports items
like Coking Coal, Minor Raw Materials, Stores & Spares and Capital Plant &
Equipments from around the globe. This report is prepared on the basis of the extensive
study carried out at Finance & Accounts Department of SAIL, Bhilai Steel Plant.
Changes are inevitable with the passage of time. So is the case with the functions
of Finance & Accounts Department of any organization. This department is gradually
assuming advisory role to management apart from its basic function of financial
management and book keeping. The F & A Department of Bhilai Steel Plant is divided
into various sections and each section specializes in different activities. In project
Finance and Accounts Import Accounts Section deals with the entire activities relating to
import of goods and services , involving transaction in foreign currency.

5
HISTORY

During struggle for independence, Pt. Jawaharlal Nehru, our first Prime Minister, had a
very clear vision about the role of steel in the development of our country. Although
TATA Iron and Steel Company (TISCO) have been established in 1907 marking the
beginning of Indian Steel Industry followed by Indian Steel Company (1918), they were
too small to meet the development requirements of a big country like, India. Therefore, in
the 1st industrial policy resolution of Government. Soon after independence, Govt.
decided to establish steel plants in public sector only. However, work could be started at
fasted pace only in 1954 when Hindustan Steel Ltd., was formed and three steel plants of
1MT capacity each were established with provision of further expansion at Bhilai,
Rourkela and Durgapur with assistance from U.S.S.R, West Germany and U.K.
respectively.

To improve the functioning of Steel Industry, Govt. decided to form a holding company
during 1972, which was named as Steel Authority of India Limited (SAIL) and was
incorporated on January 24, 1973 with an authorized capital of Rs.2000 crores.

SAIL was formed by the registration of a company under the companies Act and not by
the Act of Parliament, Govt., decided to abandon the holding company concept in 1978
and a bill was presented to Lok Sabha. Accordingly, SAIL was again recognized in the
following manner.

Hindustan Steel Ltd., Bokaro Steel Ltd., Salem Steel Ltd., SAIL international Ltd., Bhilai
Ispat Ltd., Rorkela Ispat Ltd., Durgapur Mishra Ispat Ltd., wholly owned subsidiaries of
SAIL merged into it and started functioning as units of SAIL.

6
MECON, HSCL and NMDC became independent under companies Act and started
functioning under Dept. of steel. However, Kiriburu and Meghatuburu Iron Ore Mines
were attached with BSL as their Captive Mines.

Bharat Refactories Ltd., also became

independent under the Dept. of steel and
refactory units also came under them.

Steel Authority of India Limited (SAIL)

Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It
is a fully integrated iron and steel maker, producing both basic and special steels for
domestic construction, engineering, power, railway, automotive and defense industries
and for sale in export markets.
Ranked amongst the top ten public sector companies in India in terms of turnover, SAIL
manufactures and sells a broad range of steel products, including hot and cold rolled
sheets and coils, galvanized sheets, electrical sheets, structural’s, railway products, plates,
bars and rods, stainless steel and other alloy steels. SAIL produces iron and steel at five
integrated plants and three special steel plants, located principally in the eastern and
central regions of India and situated close to domestic sources of raw materials, including
the Company's iron ore, limestone and dolomite mines. The company has the distinction
of being India’s largest producer of iron ore and of having the country’s second largest
mines network.

7
SAIL's wide range of long and flat steel products is much in demand in the domestic as
well as the international market. This vital responsibility is carried out by SAIL's own
Central Marketing Organization (CMO) and the International Trade Division.
With technical and managerial expertise and know-how in steel making gained over four
decades, SAIL's Consultancy Division (SAILCON) at New Delhi offers services and
consultancy to clients world-wide.

SAIL has a well-equipped Research and Development Centre for Iron and Steel (RDCIS)
at Ranchi which helps to produce quality steel and develop new technologies for the steel
Industry. Besides, SAIL has its own in-house Centre for Engineering and Technology
(CET), Management Training Institute (MTI) and Safety Organization at Ranchi. Our
captive mines are under the control of the Raw Materials Division in Kolkata. Almost all
the plants and major units are ISO Certified.

VISION: TO BE A RESPECTED WORLD CLASS CORPORATION AND THE

LEADER IN THE INDIAN STEEL BUSINESS IN QUALITY, PRODUCTIVITY,
PROFITABILITY AND CUSTOMER SATISFACTION.

8
ORGANISATION STRUCTURE OF SAIL

CHAIRMAN
DIRECTOR (TECH) MANAGING DIRECTOR, BSP)

DIRECTOR
MANAGING DIRECTOR, BSL
(PERSONNEL)

DIRECTOR (FINANCE) MANAGING DIRECTOR, RSP

CHIEF VIGILANCE
MANAGING DIRECTOR, DSP

EXE. DIR (OPRAN)

EXE. DIRECTOR VISL

EXE. DIR (IA)

EXE. DIRECTOR SSP

ED (TECH & LEGAL
SERVICE)

EXE. DIRECTOR ASP

EXE. DIR (PROJECTS)

EXE. DIR (CMMG)

EXE. DIR. (CIG)

9
EXE. DIR. (CP)
SAIL Today
SAIL today is one of the largest industrial entities in India. Its strength has been the
diversified range of quality steel products catering to the domestic, as well as the export
markets and a large pool of technical and professional expertise.
Today, the accent in SAIL is to continuously adapt to the competitive business
environment and excel as a business organization, both within and outside India.
Major Units
Integrated Steel Plants
† Bhilai Steel Plant (BSP) in Chhattisgarh
† Durgapur Steel Plant (DSP) in West Bengal
† Rourkela Steel Plant (RSP) in Orissa
† Bokaro Steel Plant (BSL) in Jharkhand
† IISCO Steel Plant (ISP) in West Bengal

Special Steel Plants

† Alloy Steels Plants (ASP) in West Bengal
† Salem Steel Plant (SSP) in Tamil Nadu
† Visvesvaraya Iron and Steel Plant (VISL) in Karnataka
Subsidiary
† Maharashtra Elektrosmelt Limited (MEL) in Maharashtra
† Joint Ventures
SAIL has promoted joint ventures in different areas ranging from power plants to e-
commerce.
NTPC SAIL Power Company Pvt. Ltd: A 50:50 joint venture between Steel Authority
of India Ltd. (SAIL) and National Thermal Power Corporation Ltd. (NTPC Ltd.), it

10
manages the captive power plants at Rourkela, Durgapur and Bhilai with a combined
capacity of 314 megawatts (MW).
Bokaro Power Supply Company Pvt. Limited: This 50:50 joint venture between SAIL
and the Damodar Valley Corporation formed in January 2002 is managing the 302-MW
power generation and 1880 tonnes per hour steam generation facilities at Bokaro Steel
Plant.
Mjunction Services Limited: A joint venture between SAIL and Tata Steel on 50:50
basis, this company promotes e-commerce activities in steel and related areas.
SAIL – Bansal Service Centre Limited: SAIL has formed a joint venture with BMW
industries Ltd. on 40:60 basis to promote a service centre at Bokaro with the objective of
adding value to steel.
Bhilai JP Cement Limited: SAIL has also incorporated a joint venture company with
M/s Jaiprakash Associates Ltd to set up a 2.2 MT cement plant at Bhilai.
SAIL has signed an MOU with Manganese Ore India Ltd (MOIL) to set up a joint
venture company to produce Ferro-manganese and silica-manganese at Bhilai.

SAIL into the Future

Much has happened ever since SAIL’s Corporate Plan was announced in 2004.
Investment plans for the three specialty steel plants have been firmed up. Company has
grown in size with the amalgamation of IISCO (now renamed as IISCO Steel Plant).
Production targets have been revised from 19 million tones (MT) of steel to about 24 MT.
Estimated investments has increased from Rs 25,000 crore to around Rs 40,000 crore.
And the time period has been squeezed by two years, bringing the targeted year of
completion of major projects from 2012 to 2010.

11
Saleable Steel Production Capacity

7
6
2.3
Million Tonne

5 2.7
4
3 1.9
2 4.2 3.8
1.2
1 1.6 1.9 2.0
0 0.4
LA
R
I

O
A

C
IL

E
P

II S
K
BH

K
UR
G

O
R

B
RO
DU

Existing capacity Planned increase

SAIL’s Growth Plan 2010

Much has happened ever since SAIL’s Corporate Plan was announced in 2004.
Investment plans for the three specialty steel plants have been firmed up. Company has
grown in size with the amalgamation of IISCO (now renamed as IISCO Steel Plant).
Production targets have been revised from 19 million tones (MT) of steel to about 24 MT.
Estimated investments has increased from Rs 25,000 crore to around Rs 40,000 crore.
And the time period has been squeezed by two years, bringing the targeted year of
completion of major projects from 2012 to 2010.

12
 Saleable Steel Capacities (MT)
PLANT 2010
Bhilai Steel Plant 6.21
Durgapur Steel Plant 2.85
Rourkela Steel Plant 2.90
Bokaro Steel Plant 6.50
IISCO Steel Plant 2.37
Alloy Steels plant 0.43
Salem Steel Plant 0.36
Visvesvaraya Iron & Steel Plant 0.22

Dynamic Adjustments

SAIL’s Growth Plan is essentially a directional document. With the changing market
scenario and technological advancements the company shall continue to fine-tune our
growth plans keeping in mind the steel plants’ operational requirements.

As such, the company’s growth plan is in tune with the boom being experienced by the
global steel industry and the high rates of growth being established by the Indian
economy and the major steel-consuming sectors. The Endeavour is not only in tandem
with India’s National Steel Policy of achieving a production level of 110 MT of crude
steel by the year 2020, but also amply reflects the company’s Vision of achieving market
leadership. The target of 110 mt of steel has been worked out on the basis of a
compounded annual growth rate of 7.3% per annum.

Enhancing Competitiveness

The objective, however, remains the same. Beside capacity enhancement, the growth plan
addresses the need of the SAIL plants and other units towards eliminating technological

13
gaps in the production process, improving productivity levels for all stages right from raw
materials to rolling mills, bringing in technologies for energy savings, yield
improvement, pollution control and automation. The long term plan is to build
sustainable competencies.
MECON, a leading consultant in the field of metallurgical industry, has been assigned the
task of preparing composite project feasibility reports (CPFRs) for Bhilai, Durgapur,
Rourkela and Bokaro Steel Plants of SAIL, indicating various schemes required to be
implemented along with all requisite auxiliary services, essential utilities logistics and
infrastructure support necessary to achieve the enhanced production.

The key technological up-gradations undertaken during the growth period is expected to
achieve the following:

1. 100% production of steel through BOF route

2. 100% processing of steel through continuous cast route
gradual implementation of alternative fuel injection methods like coal dust/tar injection
3.
in all the blast furnaces
4. state-of-the-art process control computerisation / automation
5. state-of-the-art online testing and quality control facilities
6. Gradual implementation of Enterprise Resource Planning (ERP) across its plants.

The focus is on producing wider product-mix with emphasis on value added products and
improved product quality. Some of the new products that are in the pipeline are SAW line
pipes for the fast-growing oil and gas sector, CRGO steels - a product in severe short
supply globally, wide flange beams for the construction sector and color coated sheets.
The IT initiatives like ERP are also being integrated with the existing business systems.

SAIL’s growth plan 2011-12 also entails modernization of three of its special steel plants
– Alloy Steels Plant (ASP) at Durgapur, Visvesvaraya Iron & Steel Plant (VISL) at
Bhadravati and Salem Steel Plant (SSP) at Salem. This will ensure increase in the
production of saleable steel from SAIL’s special steel plants from a level of 0.379 MT in
2004-05 to 0.993 MT by 2010.

14
Ensuring Raw Materials

The iron ore production has been estimated to go up to the level of 35 MT per annum.
The plan includes developing two major mechanised iron ore mines – at Rowghat in the
western region and Chiria in the east. Both the mines will be developed with latest
technology to ensure assured supply of required quantity of quality iron ore to SAIL
plants. Under its corporate plan SAIL aims at setting up of pellet plants (one at Bhilai and
another near Manoharpur), which would enable utilization of huge iron ore fines
generated during the mining operations, apart from reducing cost of hot metal production.

SAIL has adopted the following four pronged strategy to meet the enhanced requirement
of iron ore:

1. Developing new blocks/mines

2. Maximizing production from existing mines
3. Improving the quality of iron ore by suitable beneficiation, and
4. Achieving operating efficiencies by economic scale of operations

Renewal of existing iron ore mining leases and grant of some of the new leases are
essential for making investment for development of new mines and expansion of some of
the mines. This is critical for fulfillment of SAIL’s Corporate Plan.

The total coking coal requirement is likely to increase from the current level of 15 MT to
around 28 MT by 2010. Plans are on the anvil to enter into strategic investments/ tie-ups
for coking coal blocks in India and abroad to ensure assured supply of Coking coal.
SAIL’s corporate plan envisages investment in collieries at Tasra, Ramnagore, Chasnalla
and Jitpur.

Prevailing Scenario

15
True, SAIL is looking into future and the journey has begun. As of now, projects worth
around Rs 28,000 crore are in various stages of implementation. This includes ongoing
28 numbers of projects worth more than Rs 2,800 crore spread over six production units
across the country. The tendering for rest of the approved projects worth around Rs
25,000 crore is presently under progress. And, more importantly, three new production
facilities have recently been commissioned at a total cost of Rs 187 crore at Bhilai Steel
Plant (BSP).

In a significant development, the company now obtains consolidated approval for the
major projects instead of piece meal approvals. For instance, the SAIL board has in the
last one year granted ‘in-principle’ approval for the entire package of Rs 1,553 crore of
projects for Sales Steel Plant (SSP), Rs 9,592 crore for IISCO Steel Plant (ISP) and Rs
9,265 crore for Bokaro Steel Plant (BSL).

Some of the important ongoing projects include Installation of Slab Caster at Bhilai Steel
Plant, Installation of Bloom Caster at Durgapur Steel Plant, Installation of Pipe Coating
Plant at Rourkela Steel Plant, Rebuilding of Coke Oven Battery No. 5 and Up gradation
of Automation System of Tandem Mill in CRM Complex at Bokaro Steel Plant and
Installation of Argon Oxygen Decarburization (AOD) and High Powered Electric Arc
Furnace (EAF) at Alloy Steels Plant.

Unique Features

As per the Growth Plan, BSL is likely to become the first steel plant in SAIL to have a
state-of-the-art thin slab caster. With this, Bokaro plant will acquire capability to process
100% of steel through continuous casting process. ISP for the first time will boast of
having sinter making facilities with the installation of two new sinter plants and
continuous casting facilities with the installation of continuous billet and beam blank/
bloom casters. The steel plant at Burnpur will also be added with a new wire & rod mill

16
of 1.2 MT capacity. With the installation of a new Bar & Rod Mill (1.4 million tones) and
a new Structural Mill (0.4 million tones), the production of semis will come down from
current level of 56% to 7% at Durgapur Steel Plant. Similarly, Salem Steel Plant for the
first time will have steel making facilities along with continuous slab caster. Presently,
SSP is entirely dependent on external sources for supply of stainless steel slabs.

Effective Implementation

The mere statistics may not tell the real story. The logistics, the tonnages, the number of
executing agencies, the procedures, the contract labourers, the finance, so on and so forth
– the sheer scale of operations and the range of activities are staggering. Needless to
mention, the key to success lies in meticulous planning, continuous monitoring and
effective finishing. The task becomes all the more daunting due to the additional
challenge of simultaneous management of ongoing operations in steel plants.

On its part, the company firms up concrete plans to pull out all the stops. Integrated
Project Management, Delegation of Power to Project Managers, Prequalification of
Conference with Prospective Bidders, MoUs with Vendors for Regular Jobs and
Performance Evaluation of Contracting Agencies are some of the new initiatives in this
regard. SAIL has also simplified its purchase and contract procedures that will surely go
a long way in facilitating timely completion of the projects on such a large scale.

Human Resource

Thrust on human resource development continues with a renewed focus on inculcating a

greater value orientation across the company. A series of initiatives are being taken to
improve the competence level of the employees in tune with changing technologies,
customer demands and market dynamics. Accordingly, training modules have been
redesigned with a clear focus on competence mapping, skill gap analysis, multi-skilling
and multi-tasking apart from imparting training on new technologies of steel making.

17
Efforts are also on to put a system in place to institutionalize the sharing of knowledge
among the employees.

Ensuring competitiveness
Achieving cost competitiveness remains a prime target of SAIL’s future plans. Today in
SAIL, the focus of the sustained cost control exercise is on shortening cycle time,
reducing specific usage of inputs, eliminating wastages and improving yields. The work
has begun in right earnest. The challenge before SAIL is to ensure that the projects are
implemented without time and cost overruns. Today, the accent in SAIL is to
continuously adapt to the competitive business environment and excel as a business
organization, both within and outside India.

SWOT Analysis of SAIL

STRENGTH

• Largest player in the Indian Steel industry.

• Strong backward integration like iron ore and power.
• Very aggressive expansion plans.
• The single largest rail manufacturer in the world.
• Merger with IISCO would boost its profitability, as SAIL would have access to
IISCO’s underutilized iron ore and coalmines.
• All its plants are a profit centers.
• SAIL is a virtually Debt-Free Company.
• The approved acquisitions and merger of NINL, NISCO and MEL would result in
synergy benefits, operating efficiencies, cost savings and thus higher profit.

WEAKNESS

• Concern in obtaining new mining leases and renewal of old leases.

18
• Low liquidity in Stock Exchange (85.82% shares is held by GOI itself).
• Heavily dependent on import of raw materials (coking coal).
• It has high operation cost when compared to its peers like Tata Steel, JSW Steel.

OPPORTUNITIES
• Strong Economy growth (second fastest growing economy after China).
• Booming infrastructure sector (Roads, Ports, Airports, SEZs, Power).
• Strong demand in automobile sector, consumer durables sector and engineering goods
sector. Robust demand in construction and retail industry.
• Low per capita steel consumption offers a higher growth.
• Rich Geological Resource base.
• Large consumer base, low labor cost and high productivity.

THREAT

• Steel prices may remain stumpy on account of over supply from China.
• Bureaucratic nature of Government - Socio-Political interventions (in leasing mines).
• Rising interest rates could affect expansion programmed (High cost of Finance).
• High cost of energy.
• Big ticket investment by POSCO and Mittal could swallow the market (specifically
export). Cyclical nature of Steel Industry.
• Deficit infrastructure.
• High ash coal.

Product Mix of SAIL

19
 Plant Wise Product Mix
Blooms, Billets and Slabs
Beams
Channels, Angles
Bhilai Steel Plant Crain Rails
Plates
Rails
Pig Iron, Chemicals and Fertilizers
HR Coils and Sheets
Plates
Bokaro Steel Plant CR Coils and Sheets
GP Sheets and Coils / GC Sheets
Pig Iron, Chemicals and Fertilizers
Blooms, Billets and Slabs
Joists, Channels, Angles
Bars, Rods and Rebar’s
Durgapur Steel Plant
Skelp
Wheels, Axles, Wheel Sets
Pig Iron, Chemicals and Fertilizers
HR Coils

Plates
CR Coils and Sheets
Rourkela Steel Plant GP Sheets / GC Sheets
Tinplates
Electrical Steel
Pipes
Pig Iron, Chemicals and Fertilizers

Product Wise Product Mix

Semis Blooms, Billets and Slabs

20
 Structurals
Crane Rails
Bars, Rods and Rebars
Long Products
Wire Rods

HR Coils, Sheets and Skelp

Plates
CR Coils and Sheets
GC Sheets / GP Sheets and Coils

Flat Products Tinplates

Electrical Steel

Pipes
Tubular Products
Rails

Railway Products Wheels, Axels and Wheel Sets

BHILAI STEEL PLANT (BSP)

Bhilai Steel Plant, a unit of Steel Authority of India Limited - a public sector undertaking
was conceived under aegis of Indo - USSR Treaty in the 2nd

21
Five year plan. This was in accordance with erstwhile government policy for
strengthening economy and self reliance through development of core sector.
Seven - time winner of Prime Minister’s Trophy for best Integrated Steel Plant in the
country, Bhilai Steel Plant (BSP) is India’s sole producer of rails and heavy steel plates
and major producer of structural. The plant is the sole supplier of the country's longest
rail tracks of 260 meters. With an annual production capacity of 4.5 MT of saleable steel,
the plant also specializes in other products such as wire rods and merchant products.
Since BSP is accredited with ISO 9001:2000 Quality Management System Standard, all
saleable products of Bhilai Steel Plant come under the ISO umbrella.
Living up to the demand of the growing economy of the country, the plant produces wide
range of products. This includes Rails, Wire Rods, Plates and Merchant products.
Commitment to quality and customer satisfaction has resulted in consistent R & D efforts
culminating in development and commercialization of distinctive new grades like
SAILMA, UTS - 90 etc.

PROCESS CHART OF BHILAI STEEL PLANT

22
Tar Products, Benzol Products
Ammonium Sulphate
Rajhara Mines (90 KM)
Dalli Mines (96 KM)

Coal

Coal Preparation Bye Product Plant

Iron Ore lumps

Plant
Coke Oven
Gas
Coke Oven
Batteries

BF Coke
Ore Fines

SP-1, 2 & 3
Raw Materials

Hirri Mines (150 KM)

Limestone

Dolomite

Nandini Mines (25 KM) Blast Furnaces

Slag Granulation
Plant Blast Furnaces
Granulated Slag

Foundry
Pig Casting
Machine Steel Melting Shop - 2
Oxygen
Cold Pig Iron Blown
Semis for Converters
Sale
Twin Hearth
Furnaces
Steel Melting Shop - 1
Merchant Mill Slab
Casters
Blooming & Billet mill
Continuous Casting M/c
Slabs
Wire Rod Mill
Bloom Casters
Billets
Blooms

Rail&Structural Mill Plate Mill

To Rail & Structural Mill
CC Blooms

Plates

About BSP

23
Bhilai Steel Plant is a flag ship unit of Steel Authority of India Limited. SAIL, a fully
integrated iron and steel maker, produces both basic and special steels for domestic
construction, engineering, power, railway, automotive and defense industries and for sale
in export markets. In terms of annual production SAIL is the 18th largest steel producer
in the world.
Living up to the description by Jawaharlal Nehru as significant symbol of a new age in
India, Bhilai Steel Plant has been performing consistently despite many odds and has
achieved profits for the 18th consecutive year. It broke its own record of highest ever
profit of Rs 1932 crore by any steel plant in 2003-04 and registered a profit of Rs 4042
crores in 2004-05. In the year 2005-06 also it earned a handsome profit of Rs. 2781
Crores despite input price escalation. The true testimony to BSP’s status of a world class
steel plant is that BSP’s EBITDA margin of 33% is quiet comparable to many
International steel players like POSCO (30%), NIPPON (19%), MITTAL STEEL (16%0,
ARCELOR (16%), etc. Its Gross Margin to average capital employed at 182% is a Global
Benchmark. Maintaining the track record, BSP continued to operate above the rated
capacity in production of the three main items viz. Hot Metal, Crude Steel and Saleable
Steel. BSP is the first steel plant in India to have crossed the annual production of 5MT
crude steel in the year 2005-06.
In order to meet the challenges of Corporate Plan 2012 and to maintain the leadership
position of BSP in Indian steel industry, the leadership has taken bold steps to make
significant investments for breakthrough improvements in efficiency, resource
management, knowledge and skill by deploying world class tools. This year is a
milestone in BSP journey when new tools have been introduced viz. ERP, Knowledge
Management, Six Sigma, Multi-skilling etc.
Building Future Capabilities
BSP is on its way to equip itself with assets required by 21st century. New state of the art
technologies for improvement in productivity, yield, quality and operational costs have
been planned under Corporate Plan 2012. The plant capacity will be 7 MT of hot metal
by 2012. The key goals of CP-2012 are capacity enhancement, 100% Comcast
production, reduction in semis, achieving international benchmarks in eight selected
parameters, higher percentage of value added products and essentially to become a true

24
world class steel plant. Apart form investing in plant, technology and machinery, BSP has
taken bold steps to make significant investments to leverage its most precious and
differentiating resource, the human resource by deploying ERP, Knowledge
Management, Six Sigma, and Multi-skilling and other performance enhancing tools.

Existing Technology and Future Roadmap

There have been rapid advancements in all areas of iron and steel technology in the
world. BSP has a mix of old and new technologies. Its 55% production is through
outdated twin hearth furnace route. Initially priority was given to modernization of other
steel plants and later due to resource crunch faced by SAIL; modernization of the BSP
had to be deferred. A new Sinter Plant, secondary refining technology in steel making,
long rail technology for rolling and finishing and installation of optical fiber network
(ATM) throughout the plant are some of the new technologies embraced by the plant in
recent past. Now that resources for modernization have been committed to BSP under
Corporate Plan 2012, BSP is set to embrace new state of the art technologies for
improvement in productivity, yield and quality and for reducing operational costs. Plans
have been drawn where BSP is destined to be a 7 MT hot metal plant by 2012. Along
with capacity enhancement, 100% Comcast production, reduction in semis to 9%,
achieving international benchmarks in eight selected parameters, several other schemes
are being planned to produce higher percentage of value added products through state of
the art technology.
Technologies that are being considered are for state of the art coke oven batteries with
dry quenching, improving sinter & Blast Furnace productivity and reducing coke
consumption - through hot metal desulphurization outside blast furnace, oxygen
enrichment, coal dust injection/tar injection, higher hot blast temperature through stove
modernization. Technologies are also being considered for improving BOF productivity
while reducing energy/refractory consumption, for secondary refining of steel for higher
proportion of value added products, for achieving energy consumption benchmarks and
for state of the art rolling for high strength, zero tolerances, improved surface finish and

25
improved yield. The key new technologies envisaged are continuous thin strip casting,
large diameter pipe manufacture and state of the art bar & rod mill. As regards
Information Technology, Enterprise Resource Planning and Manufacturing Execution
System are under implementation.
Products of National Importance
BSP has made immense contribution to the national economy by continuously upgrading
the quality of its products to meet the requirements. It is the single supplier to Indian
Railways, the largest network of rails under one umbrella and supplied rails whose length
is many times the periphery of the earth. It is a case of classic partnership and
collaboration to contribute to the development of the nation. The nation moves on Bhilai
Rails.

Long Rail Project for supplying 260 meter Rail Panel to Indian Railways
In order to meet the changing requirements of its long term partner ‘Indian Railways’,
BSP has set up state of art technology for manufacture of Long Rails which includes
most modern equipment for Inspection, testing and handling of longer rails. The facilities
and equipments include Walking Beam Cooling Bed with Pre-Cambering facilities from
M/s VAI, Pomini, Austria, Bi-planar Rail Straightening Machine with Manipulator from
M/s SMS, Germany, On-line Laser based Straightness Measurement System, Eddy
Current Testing Equipment (for surface defect detection) and Ultrasonic Testing Unit (for
checking internal soundness) from M/s NDT-Canada, 4-directional Hydraulic Press with
Laser based straightness measurement (for ensuring end-straightness) from M/s Berner,
Germany, Synchronized PLC controlled long rail handling facilities from M/s VAI,
Pomini, Austria. For welding of 65 meter long rails into panels of 260 meter long rails,
Bhilai Steel Plant has installed state of art welding, measuring, pressing, grinding and
handling systems from M/s Geismer, France and others. Introduction of such modern
technology has propelled Bhilai Steel Plant into the select group of rail manufacturers
who have the capability to produce and handle longer rails of 130 meter and above,
thereby reinforcing the status of Bhilai Steel Plant as one of the leading rail
manufacturers of the world.

26
Plates for aircraft carrier for Indian Navy
In the recent times BSP has collaborated with Indian Navy with the development of
DMR-249A (ABA) grade Naval application for its strategic applications, which were
hitherto being imported. The primary quality characteristics of this group of steel are their
high strength and enhanced impact toughness at sub-zero temperatures. BSP along with
Defence Metallurgical Research Laboratory and Indian Navy, has embarked upon
developing ABA grade of steel plates through Thermo-Mechanical Controlled Processing
(TMCP) Technology, instead of Quenching and Tempering (Q&T) route being followed
in case of steel procured from imported source. Consequent upon this development, the
plant has started servicing regular commercial orders from Indian Navy. BSP is also
making steel for manufacture of Submarine.
Existing Technology and Future Road Map
There have been rapid advancements in all areas of iron and steel technology in the
world. BSP has a mix of old and new technologies. It’s 55% production is through
outdated twin hearth furnace route. Initially priority was given to modernization of other
steel plants and later due to resource crunch faced by SAIL, modernization of the BSP
had to be deferred. A new Sinter Plant, secondary refining technology in steel making,
long rail technology for rolling and finishing and installation of optical fiber network
(ATM) throughout the plant are some of the new technologies embraced by the plant in
recent past. Now that resources for modernization have been committed to BSP under
Corporate Plan 2012, BSP is set to embrace new state of the art technologies for
improvement in productivity, yield and quality and for reducing operational costs. Plans
have been drawn where BSP is destined to be a 7 MT hot metal plant by 2012. Along
with capacity enhancement, 100% Concast production, reduction in semis to 9%,
achieving international benchmarks in eight selected parameters, several other schemes
are being planned to produce higher percentage of value added products through state of
the art technology.
Technologies that are being considered are for state of the art coke oven batteries with
dry quenching, improving sinter & Blast Furnace productivity and reducing coke
consumption - through hot metal desulphurisation outside blast furnace, oxygen
enrichment, coal dust injection/tar injection, higher hot blast temperature through stove

27
modernization. Technologies are also being considered for improving BOF productivity
while reducing energy/refractory consumption, for secondary refining of steel for higher
proportion of value added products, for achieving energy consumption benchmarks and
for state of the art rolling for high strength, zero tolerances, improved surface finish and
improved yield. The key new technologies envisaged are continuous thin strip casting,
large diameter pipe manufacture and state of the art bar & rod mill. As regards
Information Technology, Enterprise Resource Planning and Manufacturing Execution
System are under implementation.
The principal products and key customers of Bhilai Steel Plant along with key segments,
key competitors and market share in that segment are given as per the format specified in
Table.

Table: Main Products and Market Share (2006-07)

Main Products Key Segment Market Size (MT) Market Share

Rails Railway Track 0.72 100%

Heavy M/c.
Boiler & PV
Line-pipe –water
Plates 3.8 24%
Line Pipe- Crude & Gas
Construction/Fabrication
Export-Europe, FE
Wire Rods Electrode Qlty
Bars, Rods & Structurals Wire drawers Construction 17.0 4.8%
TMT bars Structurals

Re-rolling Industry
Semis 13.7 6%
Export –Neighboring countries

28
A glimpse of product portfolio and targeted market share after proposed implementation
of unit perspective Plan 2012 is given in Table.
Table: Main Products & Expected Market Share 2011-12
Expected Domestic
Main Products Current Market Share
Market Share
Rails 100% 100%
Plates 24% 30%
Bars, Rods & Structurals. 4.8% 10%
HR Coils / Sheets Nil 6%
Pipes Nil 6%

Quality Policy of BSP

† Attaining market leadership through enhancing customer satisfaction.
† Achieving continual improvement in productivity, quality and saleability of the
products.
† Active improvement of all the employees in achieving organisation goals,
objectives and products.
† Adherence to a quality management system, based on ISO: 9001:2000 and its
periodic review for continued effectiveness.
Objectives of BSP
To enhance customer satisfaction through
† Improvements in productivity and product quality.
† Skill enhancement of the employees by competence and commitment.
† Production as per customer requirement.

BHILAI STEEL PLANT-At a glance

Captive Mines
Iron-Ore - Dalli-Rajhara Iron Ore Complex, 80 kms from Bhilai
Limestone - Nandini, 23 kms from Bhilai

29
Dolomite - Hirri, 150 kms from Bhilai

Facilities Available in Bhilai Steel Plant

Sr. Department Unit Capacity
No
1 Coke Oven 8 Batteries of 65 Ovens and 4.3 M 3.3 million ton
High of BF Coke
2 Batteries of 67 Ovens and 7.0 M
High
2 Sinter Plants 3 Machines of 50 sq. M Hearth Area 8.3 million ton
3 Machines of 75 sq. M and 1 of Sinter
Machine of 80 sq. M Hearth Area
1 Machines of 320 sq. M Hearth Area
3 Blast Furnace 3 Furnaces of 1033 Cum 4.71 million
3 Furnaces of 1719 Cum ton of Hot
1 Furnace of 2000 Cum Metal
4 Steel Melting Shop -1 4 Twin Hearth Furnaces 2.5 million ton
of Steel
5 Steel Melting Shop – 2 3 BOF of 100 / 130 T Capacity 1.425 million
ton of Steel
6 Concast 3 Single Strand and 1 Combi Caster 1.425 million
ton of Steel
7 Blooming & Billet 1150 mm Blooming Mill 2.15 million
Mill 1000 / 700 / 500 mm continuous Billet ton of Bloom
Mill
8 Rail & Structural Mill 950 / 800 2 High Reversing Mill 0.75 million
ton of Product
9 Merch. Mill 350 mm Cross Country Mill 0.5 million ton
of Product
10 Wide Rod Mill 4 Strand Continuous Mill 0.4 million ton
of Product
11 Plate Mill 3600 mm 4 High Reversing Mill 0.95 million
ton of Product

30
 STATEMENT OF OBJECTIVE
The project report on “Capital budgeting” is a humble attempt to:
• To study the need and importance of Capital budgeting.
• To study the relevancy of Capital budgeting in financial department of an
organization
• To see how the day-to-day operation of an organization take place
• To see whether the company is prepared with enough Capital budgeting
• To asses how much investment shall be done in the plant for next financial year
2008-2009
• To study what measures should be taken for maintaining expenses on Capital
budgeting
• To study the method adopted by the organization in making decisions of Capital
budgeting

FINANCE AND ACCOUNTS DEPARTMENT

OF
BHILAI STEEL PLANT

Introduction

31
Finance and accounts department of Bhilai steel plant is one of the key departments in the
total organization. It has two main functions that are finance and accounts. These
functions are carried out by various sections of finance and accounts department. The
objectives of finance and accounts department is always to meet the requirement of line
department while doing its own line functions such as accounts maintaining, meeting
statutory requirements,budgetery control and advising on financial matters etc.
This training report is an attempt to consolidate various functions of finance and accounts
department of Bhilai steel plant. This report is based on the latest practices and system
being followed and would be very useful to every one functioning finance and accounts
executives and for others as well. This will throw light on functions and importance of
finance and accounts department in total organization.
This report is prepared with the contribution of all managers of finance and accounts
department
The sections of finance and accounts department covered are as follows
• Mines coordination
• Stores and raw material section
• Freight and claims
• Purchase and contract concurrence section
• Project finance accounts
• Costing and budgeting section
• Operation account section
• Wages section
• Cash section
• Sales invoicing and accounting section
• Excise and sales tax section
• Central accounts and assets

ORGANISATIONAL STRUCTURE OF

32
 FINANCE AND ACCOUNT DEPARTMENT OF BHILAI
STEEL PLANT

GM(F&A)

CFM
D.G.M. (F&A) CFM CFM CFM
D.G.M. (F&A)

PROJECT FINANCE,
CAPITAL BUDGET,
MINES, ZONAL WORKS FINANCE
WAGES, WAGES ZONAL A/CS & WORKS
COORDINATION COMPILATION
CASH, WAGES-I
WAGES-III A,
INCENTIVE CELL,
STORES, FIN.
ESTABLISHMENT
ADMINISATION & RAW MATERIALS
COORDINATION A/C, FREIGHT & SALES, EXCISE,
CLAMS, STOCK SALES TAX, FRT.
VERIFICATION, OUTWARD
TOWNSHIP
SERVICES,
CENTRAL A/CS, MANAGEMENT HOSPITAL A/CS
A/CS, ASSETS A/CS,
OPERATION BUDGET, COST A/CS,
ENERGY CELL,
OPERATION A/CS, PC, CC.

PROJECT FINANCE & ACCOUNT

33
 At the time of the country’s independence in 1947, it was confronted with
various economic and social problems that require to be tackled in a planned and
systematic manner. India was primarily an agrarian economy; it had a very weak
industrial base, low level of savings/investments and lacked infrastructural facilities. A
vast percentage of the population was extremely poor .Their existed considerable
inequalities in income and regional imbalances in economic attainments. Under such
circumstances, a bag effort was required from the government s the private sector had
neither the necessary resources in terms of funds, nor the will to assume risks involved in
long neither the necessary resources in terms of funds, nor the will to assume risks
involved in long generation investment projects. Moreover, the financial returns on such
projects were too low to attract private sector enterprises investment. Give the type and
range of problems faced by the country on its economic, social and strategic fronts and
the various imperatives such as the necessity on the part of government to use the public
sector as an instrument for self-reliant economic growth so as to develop a sound
agricultural and industrial base, diversify the public economy and overcome the
economic backwardness.

In view of the above expectations for continued large investment in PSU,

there has been a significant growth, both in number and investments, in such enterprises
over the years, their declining role in the recent years notwithstanding. For instance, from
a modest investment of Rs. 29 crore in 5 PSU as on April 1, 1951, investments grew to
Rs 3, 24,632 crore in 240 such enterprises by march 31, 2002.

The predominant considerations for continued large investments in PSU

were

(i) To accelerate the growth of core and strategically important sectors like railways,
telecommunications, defense, etc;
(ii) To invest in the consumer oriented industries such as drugs and food industries, with a
view to ensure easier availability of vital articles of mass consumption at economic and
reasonable prices;

34
(iii) To take over sick units from private sector enterprises in order to sustain production and
protect employment.

The project finance & accounts section of BSP is broadly covered under the following
five headings:

1. Capital Budget
2. Project Concurrence
3. Zonal Accounts
4. Works Compilation
5. Import Account

1. CAPITAL BUDGET SECTION

A) Initiation and submission of investment proposal.

Capital investment proposals are initiated by various shops/departments.

These shops/departments submit their investment proposal in the prescribed format to the
project planning & Engineering Department (PP&E). PP&E is the nodal agency for
submission, processing and decision of all investment proposals. PP&E makes a
preliminary scrutiny and sends the investment proposals for finance capital budget
section, industrial engineering department, O&M and BEDB.

These proposals are studies in capital budget section and checked with respect to
following points:-

1. Whether any techno-economic/feasibility report for the proposal has been

prepared or not. If any techno-economics has been prepared, the pay-back
period, NPV, IRR, ROI & Sensitivity analysis of the investment proposal
is checked.

35
 2. If the proposal is for replacement of the asset, whether write-off sanction
of assets being replaced has been obtained by the shop.
3. Whether the cost estimate prepared by the shop/consultant is correct.
4. Proposal is studies with respect to need, the process, benefits, and
technical/legal/financial implications.

These proposals are then discussed in investment planning units (IPU) meetings.
The in-charge of PP&E is chairman of the IPU committee. Officers of the capital budget
section attend the IPU meeting as member of the committee. Other members of the IPU
committee are:

1. Representatives from industrial Engineering Department

2. Representatives of the Organizations & Methods Department
3. Consultant (BEDB, CET or other)
4. Proposing Department
5. Material Management Department
6. Executing Agency
7. Specialized agencies/Consultant

The IPU committee thoroughly examines the investment proposal under the
following aspects:

a) Technical feasibility
b) Economic viability
c) Commercial aspects
d) Financial aspects
e) Others
Depending on the merits of the proposal, the IPU committee either recommends it or may
reject it or may suggest modifications for further consideration.

B) Approval of the investment proposal

36
 Proposals recommended by IPU are put up for Management’s approval by PP&E Deptt.
These proposals are received in the capital budget section before management approval
for final scrutiny of the proposal.
Scheme sanctioning Authorities are as under:
Project cost limit Sanctioning Authority
1. Up to Rs. 10 Cr. MDs of Integrated plant
Director (commercial)
ED , ASP/SSP/VISL

2. Rs 10 Crore to Rs. 25 Crores Chairman, SAIL

3. Above Rs. 25 Crore SAIL Board

C) Budget Certification

All contractual agencies (incl. contract cell, Turnkey cell and Material management
department) before issuing award letter/placement of final purchase order/Letter of
intent/for procurement/work to be done under any capital scheme are required to obtain
budget certification from capital budget section. While certifying budget section has to
verify the availability of budget and has to see that whether the material being procured
or work order/contract being awarded is as envisaged at the time of approval.

D) Monthly Expenditure Report

A monthly report of capital expenditure incurred on various project is compiled at the

month end and is sent to corporate office (project Directorate and Finance Directorate).

37
Copies of the report are also too sent to project planning & Engg. Deptt. (PP&E) and
project Monitoring cell (PMC). A summarized monthly report of capital expenditure is
also sent to MD, ED (F&A), ED (Proj), ED (Works), ED (MM), GM (F&A), GM (Proj),
GM (PP&E & BEDB).
For the purpose of the monthly report information from various sections of finance
department has to be obtained. These sections are:

1. Zonal Accounts sections of project finance

2. Store Bills Section
3. Project Accounts section
4. Operation Accounts Section
5. Township Accounts Section

E) POST COMPLETION AUDITS:

All major schemes are reviewed by the post completion Audit (PCA) committee after one
year of commissioning of the scheme.

Committee for PCA:

a) Head of department where the project was executed is the chairman of the
committee.
b) Representative of concerned department
c) Project co-coordinator/Officer
d) Representative of Finance (capital budget section)
e) Representative of PP&E
f) Representative of executive agency
g) The consultant
h) Representative from IED & O&M as the case may be. Chairman of each post
completion audit committee convenes the post completion audit meeting and

38
 coordinates preparation of the “post completion Audit Report”. The post
completion report is prepared in the format issued by project directorate of SAIL.
The report is submitted to the Sanctioning Authority.

The capital budget section is required to compile following information for preparation of
post completion Audit report:
a) Activity-wise Actual completion cost of the project vs. sanctioned cost
b) Cost over-run analysis:
Physical factors
Fiscal factors
c) Time over-run Analysis
d) Phasing of Expenditure

F) Budget Provision & Annual Budget Preparation

During each financial year in the month of June-July, finance department prepares the
Revised Budget estimate (RE) & Budget estimate (BE) for capital expenditure against all
running/ recently completed and forthcoming AMR schemes.

2. PROJECT CONCURRENCE

Project concurrence section (also known as project/work finance) handles all the
contracts executing most of the works of capital nature, also executes work of revenue
nature off-loaded by works departments to project department and also, executes all the
works of revenue nature pertaining to project department itself like civil, repair and
maintenance jobs in Expansion building, site offices, TPL workshop, CEZ etc.

All the works of capital nature are cleared through IPU committee before
administrative approval of competent authority. Under schemes where the executing
agency is project department all activities like estimate, tender, award, operating,

39
contract closure etc for all contracts to be placed under the scheme are carried out by
project department through concurrence of project-finance (PF).

The contracts placed for execution of schemes can be broadly classified as

Turn-key and non-turn-key. For dealing with these two different types of contracts
separate contract cells have been formed under the project department viz, .Turn-key cell
(TKC) and project-contract-cell (PCC).Under a turn-key contract total scope of work and
entire responsibility of successful commissioning of the package is entrusted to the
contactor.

Various Stages of Concurrence by Project Finance:

1. Tendering and tender documents:-

Before calling of tender approval of management with the concurrence of finance is

obtained with respect to

a) Mode of tendering
b) tender schedule
c) Block estimate
d) Notice Inviting Tender (NIT)
e) Special terms of the contract
f) Payment terms and
g) Eligibility criteria

Each proposal is examined with respect to above mentioned points and concurred
keeping in view the guidelines given in various documents like project/contract
management manual, Rate contract with private party, Rate contract with HSCL,
Delegation of powers (DOP), Purchase/contract procedure 2000 and standard bidding
document.

40
 2. Receipts and Opening of Tenders:

Tenders are to be opened on due date of tender opening. However, before opening it is
ensured that three or more offers have received, earnest money as required is given by the
tenders. In case of less than three offers are received, it is ensured that three attempts
were made and competent authority’s approval is obtained to open the offers.

3. Tender Evaluation, Negotiation, Approval and Award:

Comparative statement along with complete offer of each party is checked in finance. In
case of non-turnkey contract, no commercial deviations to BSP’s terms and conditions
are normally allowed. Prices are compared taking into account any rebate/discount
offered by the bidder. In case the L1 offer is within the approved range of the estimate the
work is awarded. Otherwise negotiations are held with the L1 bidder only. If the prices
are found acceptable and workable, the work is awarded to L1 bidder after the approval
of competent authority subject to budget availability.

In case of a turnkey contract bidders normally give their deviations to our terms and
conditions of SBD (Standard Bidding Document). These deviations are examined and
discussed in the commercial committee before it is discussed with individual bidders.
Before price opening all the bidders are made commercially at par by either loading their
prices for acceptable deviations or intimating to other bidders about these deviations.
Deviations by the bidders on vital provisions of the SBD are asked to withdraw with or
without withdrawal price. Bids with unacceptable deviations are treated as non-
responsive and rejected. Before price opening it is also ensured that the bids are
technically acceptable.

4. Contract (Document) Finalization:

41
 Contract is finalized based on the SBD, Technical specifications and subsequent
clarifications/confirmations on agreed terms and conditions in commercial discussions
with the successful bidder.

5. Execution of contract:

During execution of the contracts that are vetted if finance include bank Guarantees,
Insurance policies, EPF clearance, sales tax and income tax clearance certificates, labour
licenses etc. it is also ensured that payments are made as per the terms and conditions of
the contract. Amendments to the contract are normally not accepted. In exceptional cases
they are examined and are incorporated after the approval of competent authority. Extra
claims and recoveries are settled as per the terms and conditions of the contract. Rates for
extra items are concurred in finance based on existing rates available or the market rates
whichever is lower.

6. Contract Closure:

In case of turnkey contracts a formal closure of the contract is done with the approval of
management. Issues like delay analysis and LD for delay, pending recoveries and claims
for extra work by contractors are discussed and finalized in closure committee. The
recommendations of the committee are processed for the approval of management and
contract is closed. In case of non-turnkey contracts final deviation statement is processed
for management’s approval before the contract is closed. Reasons for deviation are
analyzed and rates for extra items, if any, are concurred in finance.

3. ZONAL ACCOUNTS

Activity of Zonal accounts section starts after award of contracts (TK)/ Works
contract/work order to the contractors by project (TK Cell)/Contract cell for execution of
a project/work/job. This contract is operated until final payments are released based on
closure of contract/Final Deviation. During this period following activities are controlled.

42
 1. Accounting and control of materials issued to projects
a) For Issue of Material: Indents are floated by operating Engineers to collect materials
from store. Zonal Accounts verifies following details as per provision in the tender
schedule for items and quantities.

1) Reference of contract no. and date, name of work, party’s name.

2) Demanded quantities
3) Responsibility code, expense code and scheme no.
4) Material Description as per tender schedule/billing schedule
5) Mode of issue i.e. free of cost or cost recovery basis.

After ensuring above details, indents are registered and handed over to operating
department for collection of materials from store.

b) Accounting of Materials: After receiving debt from the a/c section for material issued
to contractors, the debit related to issue on cost recovery basis is transferred to
intermediary suspense account and issue of materials on free of cost basis is transferred to
the expense code. As regards recovery towards cost of materials through bills is
transferred to the expense code.

c) Control of Material A/C: After passing above journal entries contractor wise material
A/c is maintained till completion of work and this accounts is verified with party’s
material statement submitted with final deviation statement/ proposal for closure of
contract.

2. For payment to the contractor: Bills/invoices are processed by operating Engineers along
with measurement book duly certified and signed by them indicating following details.

a) For all contracts.

43
 1) Reference of contract no. and date, name of work,
contractor’s name
2) Contractor’s bill/invoice no. and date
3) Period of execution till date and measurement till date
4) Item wise execute, Rate and amount.
5) Deduction if any towards security deposit, Taxes and duties
and issue for material on cost recovery basis.
6) Labour License/ ESP clearance certificate
7) Registration of PAN NO. CGCT and CST NO.

4. WORKS COMPILATION

Accounting of capital expenditure incurred by Bsp

• maintenance of wip account for all running schemes
• monitoring of running schemes to identify and book to wip a/c any shortfall with
reference to actual execution
• identifying schemes with little or no progress for appraising management
• Capitalization of assets procured under all sanctioned schemes as and when
declared completed.
• identification of in-house expenditure resulting in a fixed asset, for capitalization
(after obtaining approval of management)
• ensuring capitalization with correct amount, date, location, asset code
• ensuring compliance of accounting policies and accounting standards

ACCOUNTING OF CAPITAL EXPENDITURE

1. Payments to contractors under A/Ts, work orders & TK contracts

Project finance & Accounts- Zonal A/cs

a) under turnkey contracts:
b) under Non-turnkey contracts

44
 c) Import A/cs
d) Store bills
e) Operation A/cs
f) Township A/cs

2. Consultancy charges:

Scheme wise debits for consultancy charges are received from CET, Ranchi every quarter
through IUCA. These debits are allocated to various running scheme and investment
proposals under consideration and booked to WIP by WC. In case any debit is received
against a completed scheme or an investment proposal, which is not going to be
considered for approval by management, the same is charged off to revenue by WC.

d) Expenditure during construction (EDC):

Accounting of EDC including interest during construction is dealt by central A/c section
based on inputs given by WC w.r.t. major schemes being executed by project dept. EDC
arises out of salaries and wages paid to the employees of project dept, the power
consumed by project dept etc. IDC is allocated by corporate office based on funding
pattern for BSP.

4. Issue of steel & other stores:

For all stores to scheme whether drawn by shops or project Zones, the debit for the cost
of that item is received from stores A/c section through MMIS every month.

For stores issued to project, the debit is first received in zonal A/c section where after
scrutiny the debit is passed on to WC. But in case of store issue to a contractor on cost
recovery basis, the debit is kept in a material issue suspense A/c and the recovery from
the party is credited to this A/c.

45
5. In-house fabrication:

Details of fabrication done at TPL workshop are every month by WC. Cost pertaining to
capital schemes is booked to WIP under the appropriate scheme.

For work done through various Engineering shops the total cost of work is obtained from
costing section with break-up of cost of material, labour, services, consumables, power,
machining etc. based on information given by WC. This cost is booked to WIP in WC by
crediting various revenue A/c codes. Thru ISA code 28555.88 or 28599.88.

A database is maintained by WC section for getting scheme-wise WIP and capitalization

details at any point of time. From same database account-wise WIP and capitalization can
also be obtained readily.

This sub-section of Project Finance & Accounts section is entrusted with the job of co-
coordinating with statutory, Govt. & internal audit.

46
 CAPITAL BUDGETING

Formulation of investment proposals at plant

For all investment proposals, a feasibility report (FR) should be prepared. The plants may
assign preparation of FR to the in-house consultant, centre for Engineering & Technology
(CET), for before submission to the IPU. In exceptional cases, outside consultant may be
appointed with due approval of the competent authority. The consultant may involve
representative from environment control division of the plant, if required. The Consultant
shall explore all options with techno-economics to arrive at the cost-effective scheme. FR
should, inter-alia, include minimum technical solution and cut-off capital cost.

In the case of market oriented proposals, specific vetting by the central marketing
organization (CMO) on the following shall be obtained by the plant before the proposal is
put-up for approval of competent authority:

• Increase in sales realization due to augmentation in production of finished

products;
• Increase in sales realization on account of improvement in mechanical/chemical
properties;
• Increase in sales realization on account of improvement in physical properties/
condition viz. better surface finish, removal of bends, better packaging etc.

While preparing FR, the consultant shall make a realistic assessment of input parameters,
so as to ensure proper designing of equipment and efficient operation of plant after
commissioning. The consultant shall also verify important input parameters, which are
vital for the success of the scheme.

a) FEASIBILITY REPORT
For each new project a feasibility report is prepared. The FR contents following details:

47
 1. Executive Summary:
• Summary of project background & history
• Summary of market analysis
• Raw material & Supplies
• Location, site & environment
• Engineering & technology
• Organization & overheads cost
• Human resource
• Investment appraisal
Advantages
Drawbacks

2. Project background & basic idea

* Description of the project idea
* Project promoter or initiator
* Project history (Development)
* Investigations already preformed
* Cost of preparatory studies & related investigations.

• Existing Facility
• Need of installation of facility
• Production details of five years
• Annual business plan

2. Selection of alternatives.
3. Project Description
• Proposal and Scope of work

48
 • Layout
• Demand
• Market analysis
• Envisaged technological parameters.
• Instrumentation, control & automation
• Utilities & Services
• Fire fighting system
• Civil work
• Design consideration
• Technical specification

4. Structural

• Dismantling
• Modification
• Design consideration
• Specifications of steel structural work
• Pollution control
• Manpower requirement
4. Location, site & environment
5. Engineering & technology
6. Organization overheads
• Wages and Salaries
• Factory overheads
• Maintenance
• Rent
• Insurance
• Taxes
• Overheads cost

49
 7. Raw material & supplies
• cost by Unit cost
• Annual cost
• Overheads cost
8. Human Resource
9. Project Implementation
• Implementation schedule
• Implementation strategy
• Technical eligibility criteria of bidders for proposed package
• Basic accounting statement
• Methods of investment appraisal
10. Financial analysis
• Capital cost estimates
• Taxes & Duties (excise duty, custom duty, Cst@, Vat@, service tax, education
tax, Fright & insurance)
• Mode of finance
• Phasing of capital expenditures
• Interest during construction
• Cost benefit analysis
• Financial analysis
Net working capital
NPV
Internal rate of return
Interpretation of the IRR
Interpretation of the payback
Simple & annual rate of return
11. Recommendations

b) Sanctioning Authority for investment proposals

50
Present delegation of powers for sanction of investment proposals for SAIL plant/ Units
is as follows:

Project cost limit Sanctioning Authority

1. Up to Rs. 10 Cr. MDs of Integrated plant

Director (commercial)
ED, ASP/SSP/VISL
2. Rs 10 Crore to Rs. 25 Crores Chairman, SAIL
3. Above Rs. 25 crore SAIL Board

c) Investment Planning Unit (IPU)

Investment planning unit shall be the nodal agency at the plant who will co-ordinate the
formulation and appraisal of capital investment proposals. The existing IPU or its
equivalent shall be strengthened with experienced executives drawn from various units/
shops of the plant and shall preferably report to the Head of project. IPU shall also make
initial prioritization of the proposals to be taken up depending upon fund availability and
the business plans of the company.

d) Project Appraisal Group (PAG)

The proposal after processing by IPU shall be considered by a high powered “Project
Appraisal Group” comprising head of works, finance, projects with head of IPU as

51
convener. In addition to a representative of CET and for market related proposals a
representative of CMO may be co-opted. PAG shall obtain commitment on benefits from
the project owner and also ensure final prioritization of proposals at the plant level and
“finance closure” i.e. sourcing of funds for financial concurrence and approval of the
chief executive. The proposals beyond the delegated powers of the chief executive shall
be forwarded to the corporate office for approval.

e) Budgetary provision

To facilitate examination of all critical aspects/ operations/ project parameters, the project
to be taken up should be in conformity with the Business plan of the company. Necessary
provision should exist in the five year plan. The proposal should be taken up within the
available provisions as per the prioritized list as well as the annual budget. For proposals
which are not covered in the prioritized list but are considered urgent for implementation,
adequate justification needs to be given for taking up the proposal indicating the schemes
which may be dropped in lieu of the same.

f) Two-stage project Approval

1. Stage-I (In-principal) Approval
2. Stage-II ( formed up cost ) Approval

g) Time Schedule for Appraisal of proposals

• Receipt of the proposal in project Directorate

• Dispatch of proposal copies to the Appraising agencies and receipt of comments
• Receipt of clarifications from the plant
• Holding of meeting at project directorate for freezing of all outstanding issues, if
needed
• Finalization of investment proposal on the basis of clarifications from plant
• Finalization of Approval Note by the project directorate

52
 • Concurrence of proposal by finance directorate and submission for approval of
Chairman, SAIL

h) Importance of investment decisions

Investment decisions require special attention because of the following reasons

• They influence the firm’s growth in the long run.
• They affect the risk of the firm.
• They involve commitment of large amount of funds.
• They are irreversible at substantial loss.
• They are among the most difficult decisions to make.

i) Types of investment decision

There are many ways to classify investments. One classification is as follows:-

• Expansion of existing business.
• Expansion of new business.
• Replacement and modernization.

ii) Expansion and diversification

A company may add capacity to its existing product lines to expand existing operations.
For example the Gujarat state fertilizer company (GSFC) may increase its plant capacity
to manufacture more urea. It is an expansion of new business requires investments in new
products and a new kind of production activity within the firm. There is also a kind of
unrelated diversification. Investment in existing or new products may also be called as
revenue expansion investment

iii) Replacement and modernization.

53
The main objective of modernization and replacement is to improve operating efficiency
and reduce costs. Cost savings will reflect in the increased profits, but the firm’s revenue
may remain uncharged. Assets become outdate and obsolete with technological changes.
The firm must decide to replace those assets with new assets that operate more
economically. Replacement decisions help to introduce more efficient and economical
assets and therefore, are also called cost reduction investments. However replacements
decisions that involve substantial modernization and technological improvements expand
revenues as well as reduce costs.
Yet another useful way to classify investments is as follows:-
• Mutually exclusive investments
• Independent investments
• Contingent investments

Trend of capital expenditure (Rs. in Crs.)

2004-05 2005-06 2006-07 2007-08
APRVD ACTUAL APRVD ACTUAL APRVD ACTUAL APRVD ACTUAL

Total 205.00 153.17 240.00 234.34 400.00 426.27 700.00 622.62

54
 700

600

500

400
Budget
300 Expenditure
200

100

0
2000-012001-02 2002-032003-042004-052005-062006-072007-08

INVESTMENT EVALUATION CRITERIA

Three steps are involved in the evaluation of an investment:-

• Estimation of cash flows
• Estimation of the required rate of return
• Application of a decision rule for making the choice.

Investment decision rule

The investment decision rules may be referred to capital budgeting techniques, or

investment criteria. A sound appraisal technique may be used to measure the economic
worth of an investment project. The essential property of a sound technique is that it
should maximize the shareholders wealth. The following other characteristics should also
be possessed by a sound investment evaluation criterion:

• It should consider all cash flows to determine the true profitability of the project.

55
 • It should provide for an objective and unambiguous way of separating good
project from bad projects
• It should help ranking of projects according to their profitability.
• It should recognize the fact that bigger cash flows are preferable to smaller ones
and early cash flows are preferable to later ones.
• It should help to choose among mutually exclusive projects that projects which
maximizes the share holders wealth.
• It should be a criterion which is applicable to any conceivable investment project
independent of others.

These conditions will be clarified with the features of various investment criteria.

Evaluation criteria

A number of investment criteria are in use in practice. They may be grouped in the
following two categories:

1. Discounted cash flow (DCF) criteria

• Net present value (NPV)
• Internal Rate of Return (IRR)
• Profitability Index (PI)

2. Non Discounted cash flow criteria

• Payback period (PB)
• Discounted payback period
• Accounting rate of return (ARR)

56
Discounted payback is a variation of the payback period method. It involves discounted
cash flows, but as we shall see latter it is not a true measure of investment profitability.
As practically NPV is the most valid technique of evaluating an investment project. It is
consistent with the objective of maximizing shareholder’s wealth.

NET PRESENT VALUE METHOD

The net present value method is the classic economic method of evaluating the
investment proposals. It is a DCF technique that explicitly recognizes the time value of
money. It correctly postulates that cash flows arising at different time periods differ in
value and are comparable only when their equivalents present values are found out. The
following steps are involved in calculating NPV’s:-

• Cash flow of the investment project should be forecasted based on realistic

assumptions.
• Appropriate discount rate should be identified to discount the forecasted cash
flows. The appropriate discount rate is the projects opportunity cost of capital,
which is equal to the required rate of return expected by investments of equivalent
risk.
• Present value of cash flows should be calculated using the opportunity cost of
capital as the discount rate.
• Net present value should be found out by subtracting present value of cash
outflows from present value of cash inflows. The project should be accepted if
NPV is positive (i.e. NPV>0)

Evaluation of NPV method

NPV is the measure of an investment’s profitability. It provides the most acceptable

investment rule for the following reasons:-

• Time value: It recognizes the time value of money a rupee received tomorrow.

57
 • Measure of true profitability: It uses all cash flows occurring over the entire life
of the project in calculating its worth. Hence it is a measure of the projects true
profitability. The NPV method relies on estimated cash flows and the discount
rate rather than any arbi9trary assumptions, or subjective considerations.
• Value additivity: The discounting process facilitates measuring cash flows in
terms of present values; that is in terms of equivalent current rupees. There fore
the NPV’s of projects can be added. This is called value additivity principle. It
implies that if we know the NPV’s of individual projects the value of the firm will
increase by the sum of their NPV’s. We can also say that if know values of
individual assets the firms value can simply be found out by adding their values.

• Shareholder value: The NPV method is always consistent with the objective of
the shareholder value maximization. This is the greatest virtue of the method.

Are there any limitations in using the NPV rule? The NPV method is a theoretically
sound method. In practice it may pose some computational problems.

1. Cash flow estimation- the NPV method is easy to use if forecasted cash flows are
known. In practice it is quite difficult to obtain the estimates of cash flows due to
uncertainty.

2. Discount rate- it is difficult in practice to precisely measure the discount rate.

3.Mutually exclusive projects- Further caution needs to be applied in using the NPV
method when alternative projects with unequal lives or under funds constraint are
evaluated. The NPV rule may not give unambiguous results in these situations.

4. Ranking of projects- It should be noted that the ranking of investments projects as per
the NPV rule is not independent of the discount rates. The impact of the discounting
becomes more severe for the cash flow occurring later in the life of the project; the higher
is the discount rate the higher would be the discounting impact.

58
INTERNAL RATE OF RETURN

The internal rate of return (IRR) method is another discounted cash flow technique,
which takes account of the magnitude and timing of cash flows. Other term used to
describe the IRR method are yield on an investment, marginal efficiency of capital, rate
of return over cost, time adjusted rate of internal return and so on. The concept of IRR is
quite simple to understand in the case of a one period project.

For example that you deposit Rs. 10000 with a bank and would get back Rs. 10800 after
one year. The true rate of return on your investment id s 8%. You may observe that the
rate of return of your investment (8 percent) makes the discounted (present) value of your
cash inflow (Rs. 10800) equal to your investment (Rs. 10000)
By formula if we calculate

R= C1-C0/C0
R= C1/C0-1
Here rate of return r depends on the project’s cash flows rather than any outside factor.
Therefore it is referred to as the IRR. The IRR is the rate that equates the investment
outlay with present value of cash inflow received after one period this also implies that
the rate of return is the discount rate which makes NPV=0. There is no satisfactory way
of defining the true rate of return of a long term assets. IRR is the best available concept.
We shall see that although it is a very frequently used concept in finance, yet at times it
can be a misleading measure of investment worth.

It can be noted that the IRR equation is the same as the one used for the NPV method. In
the NPV method the required rate of return, is known and the net present value is found,
while in the IRR method the value of r has to b determined at which the net present value
becomes zero.
Uneven cash flows: calculating IRR by Trial and Error

59
The accept rule of reject rule using the IRR method is to accept the project if its internal
rate of return is higher than the opportunity cost of capital (r>k). Here k is also known as
the required rate of return or cut off, or hurdle rate. The project shall be rejected if its
internal rate of return is lower than opportunity cost of capital (r<k) the decision maker
may remain indifferent if the internal rate of return is equal to the opportunity cost of
capital. Thus the IRR acceptance rules are:

* Accept the project when r>k

* Reject the project when r<k
* May accept the project when r=k

The reasoning for the acceptance rule becomes clear if we plot NPVs and discount rates
for the project.

Evaluation of IRR method

IRR method is like the NPV method. It is a popular investment criterion since it measures
profitability as a percentage and can be easily compared with the opportunity cost of
capital. IRR method has following merits:

• Time value The IRR method recognized the time value of money.
• Profitability measure It considers all cash flows occurring over the entire life of
the project to calculate its rate of return.
• Acceptance rule It generally gives the same acceptance rule as the NPV method.
• Shareholder value It is consistent with the shareholders wealth maximization
objective. When ever a project IRR is greater than the opportunity cost of capital,
the shareholders wealth will be enhanced.

60
Like the NPV method the IRR method is also theoretically a sound investment evaluation
criterion. However IRR rule can give misleading and inconsistent results under certain
circumstances. Here we briefly mention the problems that IRR method may suffer from:

• Multiple rates A project may have multiple rates or it may not have a unique rate
of return. As we explain later on those problems arise because of the mathematics
of IRR computation>
• Mutually exclusive project It may also fail to indicate a correct choice between
mutually exclusive projects under certain situations.
• Value additively Unlike in the case of the NPV method, the value additively
principle does not hold when the IRR method is used-IRR of projects does not
add.

Project life cycle

Conceptualisation

Formulation of proposal

Feasibility studies report

Investment decision

Environmental Clearance

61
Administrative Approval

Engagement of consultant

Detailed Project Report

Technical specification

Financial Closure

Contract Finalisation Post project Evaluation and Report

Execution of Contracts/project Completion cost and capitalisation

Monitoring and Control Closure of contracts

Completion of construction Handing over to operation

Commissioning of project Performance guarantee test

CONCLUSION

• Finance department of Bhilai steel plant follows a well designed procedure of

project financing
• The department covers every aspect of project before making any decision
• It undertakes proper procedure for approval of budget
• It makes sufficient budget plans for forth coming years well in advance
• Financial review & reports are also made by budgeting department

62
• It also prepares a five year plan with anticipated requirement against approved
outlays
• The organization follows a proper approval by Chief executive officer at
corporate office

Bibliography

The above report has been prepared from the following sources of data and information:

1. Websites

1.1. www.sail.co.in
1.2. www.moneycontro.com

63
 1.3. www.indiansteelalliance.org
1.4. www.ibef.org
1.5. www.wikipedia.org
1.6. www.tatasteel.com

2. Books

2.1. Financial Management, I M Pandey

2.2. Project Management And Control (2000),Narendra Singh

3. Other References

3.1. Annual Reports – BSP & SAIL

3.2. Functional Finance and Accounts Manual, F &A Department, BSP.

700
600
500
400
Budget
300
Expenditure
200
100
0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

64