Kanoria Chem

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	25015
Company name	Kanoria Family
Country	India
Sector	Chemicals
Environmental category	B
Department	Oil, Gas, Mining And Chemicals
Status	Completed

Date SPI disclosed	March 16, 2007
Projected board date	April 16, 2007
Previous Events	Invested: April 30, 2007 Signed: April 26, 2007 Approved: April 25, 2007

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

Kanoria, which was established in 1960 to set up production facilities of chlor alkali chemicals, has since diversified into other specialty chemicals such as alcohol chemicals and various chlorine derivatives. As a result, over the years, Kanoria developed a strong manufacturing capability and integrated production facilities in Renukoot, Uttar Pradesh and Ankleshwar, Gujarat.

The company is now in the process of increasing the production capacity of its caustic soda and chlorine derivative products to improve its profitability and growth while better serving the increasing needs of its growing customer base. In addition, the company plans to invest over $25 million to gradually reduce production of caustic soda based on mercury cell technology by increasing production based on more environment friendly membrane cell technology. The company also has plans to finally phase out its mercury-cell based caustic soda capacity and replace it with more environmentally friendly membrane-cell based technology over the next few years.

Project sponsor and major shareholders of project company

The Kanoria Family established the company’s chlor alkali production operations in Renukoot in 1960. The family subsequently founded other companies which, together with Kanoria, comprise the Kanoria Group. In addition to Kanoria, other business interests of the Group include jute manufacturing (Aekta Limited) and international trading (KPL International Limited or KPL).

The collective turnover of the Group in FY06 was in excess of $107 million with an annual net profit of over $7 million.

Mr. R.V. Kanoria and his family are the main Sponsors of Kanoria. Together with affiliate entities controlled by himself and his father, Mr. S.S. Kanoria, R.V. Kanoria holds about 64% of Kanoria’s shares. The remaining shares of Kanoria are held by banks, financial institutions and insurance companies (about 11.4%), public (about 13%) and private corporations (about 11.6%).

CRISIL, a leading Indian ratings, research, risk and policy advisory company majority-owned by Standard & Poors, has rated Kanoria’s corporate governance practices as 'CRISIL GVC Level 3', indicating a strong capability and track record of wealth creation for all its stakeholders while adopting sound corporate governance practices.

Kanoria has also received numerous industry and environmental awards. The Indian Chemicals Manufacturers Association (ICMA) has awarded Kanoria the prestigious ICMA Award for Water Resource Management in Chemical Industry for the year 2003-04. In addition, Kanoria has also been awarded the ICMA D.M. Trivedi Award for Introducing Advancement in Technology having a Widespread Impact on Chemical Industry for the year 2003-04, through a certificate of merit. Kanoria was also awarded the TERI Award for Corporate Excellence in Environment Management for the year 2003-04 in recognition of its leadership efforts towards environmental management and sustainable initiatives.

Total project cost and amount and nature of IFC's investment

The company’s capital expenditure and additional working capital plan for the next two years is estimated to cost over $40 million which is to be financed with a $20 million bond issue, $5 million IFC equity investment, $15 million IFC Loan and the balance from internal cash generation.

Location of project and description of site

The company plans to invest up to $35 million in capacity expansion in its caustic soda plant at Renukoot. The capacity of this plant was expanded recently to 90,000 tonnes per annum (tpa) and it will further go up to 130,000 tpa after the implementation of the proposed investment, which is scheduled to be completed by March 2008. The key demand driver for caustic soda is the aluminum industry in eastern India which is undergoing significant expansion resulting in increase in demand for caustic soda from the current 280,000 tpa to more than 800,000 tpa in the next 5 years.

Anticipated development impact of the project

The proposed investment plan is expected to assist Kanoria’s efforts to become more internationally competitive by improving the company’s operational efficiencies, rationalizing its capacities to meet market demand and achieve economies of scale. Specifically, the following developmental benefits are expected to be achieved:

- Sustainability Impact:

The replacement of the company’s mercury cell plant with a significantly more environmentally friendly membrane cell plant, in addition to the upgrading of the company’s health and safety practices, would be among the benefits realized by the company. The company’s shareholders and management have developed a time table to eliminate mercury cell technology from its operations. In addition, this conversion will have additional positive environmental impacts since the new membrane cell plant will be about 20% more energy efficient than the mercury cell plant. Moreover, over time the company’s need to handle and sell liquid chlorine is also expected to reduce.

- Community Engagement:

Kanoria is active in various community and social development programs. The increased financial stability afforded by the IFC financing should enable the company to afford to continue with such efforts.

- Local Expenditures:

The company sources a significant amount of materials and other services from local sources. As the company and its operations grow, such purchases from local suppliers and service providers should also increase.

- Preserving Employment:
The company currently employs 1,055 salaried employees and an additional 1,295 contract workers. The IFC financing is expected to help the company preserve jobs in a competitive and capital intensive industry.

The key development indicators that are proposed to be monitored during the life of the IFC investment are:

- reduction in amount of mercury sludge discharged;
- reduction in amount of liquid chlorine sold;
- annual spending on local SME suppliers;
- annual spending on/implementation of community and social development programs; and
- direct employment levels.

IFC's expected development contribution

- Fit with World Bank Group Strategy:

The World Bank Group Country Assistance Strategy (CAS) supports India’s Tenth Five Year plan, which aims to strengthen the enabling environment for private sector-led growth and support critical interventions of special benefit to the poor and disadvantaged. To support the first objective, the World Bank Group will concentrate its assistance on improving government effectiveness and on promoting private sector led growth by:

- increasing the availability of high quality infrastructure;
- promoting accelerated rural growth;
- promoting the competitiveness of industry and services; and
- supporting financial sector development.

As part of this strategy, IFC will invest in companies which are:

- developing new products and markets;
- restructuring and modernizing to become internationally competitive; and
- expanding and moving towards a regional or global presence.

IFC will provide these firms with long-term debt and equity which may not be available from domestic financial markets; add value in the areas of global best practices, creating international partnerships, entering new markets, environmental and social sustainability and corporate governance.

This proposed investment is a clear fit with this strategy, as it helps Kanoria to invest in modern production processes which improve productivity and help the company expand into regional and international markets.

- IFC Role:

To help Indian industry meet the challenges of globalization, IFC plays an important role by investing in second tier manufacturing companies that are restructuring and modernizing to become internationally competitive. IFC’s role in this transaction is to enable the company to access longer term financing than available to the company from local banks and to support the company’s efforts to further upgrade its Environment, Health and Safety practices. As such, IFC’s investment is expected to strengthen the company’s image and is expected to be seen as a vote of confidence by the market. In particular, IFC will make its contribution in the following ways:

- Providing long-term funding:

IFC is enabling Kanoria, a medium-sized, locally owned company in a highly capital-intensive business, to access long-term capital in line with its business requirements and to promote sustainable growth of the company. The company is seeking long-term funding to complement a five-year $20 million foreign currency convertible bond (FCCB) it recently issued, to finance the company’s capital expenditure program and general corporate needs. The longest of the company’s existing debt has a five year tenor and approximately two-thirds of the company’s total existing debt is scheduled to be repaid between now and March 2009. Hence, the company greatly values IFC’s ability to offer extended tenors beyond what is currently available to it from the domestic market, as a means to achieving a more balanced capital structure. Long term funding is seen as critical to allowing the company, which is a medium sized player amongst 31 existing chlor-alkali producers in India, to grow dynamically in a competitive, capital intensive industry. For Kanoria, the ability to realign its capital structure by securing long-term loan and equity financing from IFC is an important long-term benefit.

- Environmental, Health and Safety Management:

As reflected in the ESAP, IFC and Kanoria have identified several areas for further enhancement and optimization of the company’s EHS management. IFC has provided guidance on possible improvements in these areas, thereby minimizing a key risk for operations.

IFC’s participation is, therefore, expected to help strengthen the company’s long-term cash flows and EHS management, thereby allowing it to become more competitive in this cyclical and capital-intensive industry.

- IFC Additionality:

IFC’s financing will help make possible the company’s proposal to reduce the mercury cell operations by using more environment friendly membrane cell technology feasible at this time. Furthermore, as a middle tier player in the industry, the company is unlikely to have been able to obtain from the local market the long term funding it needs to finance and implement its investment program with a balanced capital structure that will allow it to be competitive in this capital-intensive and cyclical industry. The financial stability that the proposed IFC financing would provide will allow the company to compete more effectively than would be possible with shorter term local financing.

Environmental and social issues - Category B

This is a Category B project according to IFC’s Environmental and Social Review procedures because a limited number of specific environmental and social impacts may result which can be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria. Mitigation measures for the potential environmental and social impacts are identified and incorporated in the Environmental and Social Action Plan (ESAP).

IFC PROJECTS