25015 - Kanoria Chem

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Summary of Proposed Investment

Project Number

25015

Company Name

KANORIA CHEMICALS AND INDUSTRIES LIMITED

Date SPI Disclosed

Mar 16, 2007

Country

India

Industry

Manufacturing

Projected Board Date

Apr 16, 2007

Status

Completed

Sector

Alkalies and Chlorine

Department

Regional Industry - MAS Asia & Pac

Environmental Category

B - Limited

Previous Events

Approved : Apr 25, 2007
Signed : Apr 26, 2007
Invested : Apr 30, 2007

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.

Sponsor / Cost / Location

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	15.0
Equity	5.0

Development Impact

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.

- 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.

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).

Contacts

For Inquiries About the Project, Contact

Mr. N. K. Nolkha, Chief Financial Officer
Kanoria Chemicals & Industries Ltd.
Park Plaza, 71 Park Street
Kolkata 700016
India
Telephone: +91 33 2249 9472
Fax: +91 33 2249 9466

ESRS (Environmental and Social Review Summary) and the summary of the same is available at the website of IFC and will also be available at following address of KCIL for perusal from 19.03.2007 to 18.04.2007 between 10.00 AM to 5.00 PM on working days.

Local Address:

Renukoot Chemical Works
P.O. Renukoot – 231 217, Dist. Sonebhadra, Uttar Pradesh
INDIA.
Phone: +91 5446 52044
Fax: +91 5446 52088

For Inquiries and Comments About IFC, Contact

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Washington DC 20433
Telephone: 202-473-3800
Fax: 202-974-4384
E Mail: Webmaster

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. It is not an offer of shares to the public and is intended solely to enhance the transparency of IFC’s activities. This document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only. The following SPI is disclosed in accordance with IFC’s Policy on Disclosure of Information that went into effect April 30, 2006.

The map is for illustrative purposes and does not imply the expression of any opinion on the part of the World Bank, concerning the legal status of any country or territory or concerning the delimitation of frontiers or boundaries. Country borders or names do not necessarily reflect the World Bank Group's official position. In some cases, available project location information is limited to the country of the project's activities. Locations are approximate.

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