IndusLaw recently spoke in Singapore on the subject of Projects & Project Financing in India, highlighting the broad regulatory and document structures encountered and key risks to consider

1. Projects & Project Finance in India
An Overview
Ran Chakrabarti
Partner
23 November 2017

2. Overview
 The Current Market
 Key Regulatory Issues
 Typical Document Structures
 Common Project Risks
 The Bankruptcy & Insolvency Code
 Enforceability of Arbitration Awards
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3. The Current Market
 In 2016, project financing in India amounted to USD 8.5 billion, just over 3.5 per cent of the global
market (PFI International (2016))
 In a sharp contrast to this is the Australian project finance market, which stood at USD 24.3 billion in
2016, almost three times the size of the Indian market
 In India, during 2016, approximately 50 deals accounted for the USD 8.5 billion spend
 Out of this figure, State Bank of India did 12 deals, totaling just under USD 5.3 billion
 GMR’s Delhi International Airport raised USD 522 million through the only Indian project bond in
2016 (Singapore listed) refinancing high cost domestic debt
 ADB financed Mytrah Energy with a USD 175 million loan to develop wind and solar projects
 Flurry of INR denominated Masala Bonds listed on foreign markets in 2017: investors take the risk
 July 2017 SEBI circular temporarily put a halt to Masala Bonds; though they are now carved out of
the combined corporate debt limit
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4. The Current Market
 Recent big ticket project financing deals include
– Adani Power Maharashtra Limited’s 3,300 MW thermal power project for USD 1.59 billion
– Masala Bonds worth INR 5 billion issued by Adani Transmission Limited
– ONGC Petro Addition Limited’s 1.1 MMTPA petrochemicals complex worth USD 2.184 billion
 In October 2017, the Asian Development Bank and the Government of India signed a USD 65.5
million loan agreement to continue interventions to check coastal erosion on the western coast in
Karnataka
 In November 2017, Adani Power signed a PPA with Bangladesh to supply power from its 1,600 MW
plant being constructed in Jharkhand
 Masala Bonds are back: HDFC recently raised INR 1,300 Crore (approximately USD 200 million)
from the IFC
 Data from Bloomberg suggests that Indian corporates have raised over USD 3 billion from Masala
Bonds between July 2016 and October 2017
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5. Key Regulatory Issues
 No umbrella legislation
 Local Lenders – The Banking Regulation Act and the notifications of the Reserve Bank of India (the
“RBI”) from time to time
 Foreign Lenders – The Foreign Exchange Management Act (1999) read with the:
- Foreign Exchange Management (Borrowing or Lending in Rupees) Regulations (2000);
- Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations
(2000);
- Master Direction on External Commercial Borrowings, Trade Credit, Borrowing and Lending in
Foreign Currency (the “ECB Regulations”)
 SEBI (Debenture Trustee) Regulations (1993)
 The Bankruptcy & Insolvency Code (2016)
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6. Key Regulatory Issues
 ECB Regulations
- Obtain a loan registration number from the RBI
- ECBs must have a minimum average maturity of at least 3 years
- Pre-payment requires a prior no-objection certificate from the Authorised Dealer Bank
- mandatory prepayments triggered by change in law?
- insurance or liquidated damages payments?
- The current ECB framework consists of 3 Tracks based on the Minimum Average Maturity and
currency denomination
- Infrastructure companies cannot access shorter term foreign currency denominated ECBs
under Track I but only long term foreign currency denominated ECBs under Track II and INR
denominated ECBs under Track III
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7. Key Regulatory Issues
 Non Convertible Debentures
- Financing through debt instruments such as non convertible debentures (“NCDs”)
- Issued by companies through private placement or public issue to domestic or foreign
portfolio investors (“FPIs”)
- Recently, regulations amended to allow Indian corporates to issue unlisted NCDs to FPIs
- Secured NCDs are governed by the provisions of (Indian) Companies Act, 2013 and other
regulations issued by the Securities and Exchange Board of India (“SEBI”)
- Subject to the RBI’s combined corporate debt limit, which was recently restructured,
introducing a temporary auction process
- Secured NCDs require a Security Trustee
- Minimum maturity period of 3 years
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8. Key Regulatory Issues
 Masala Bonds
- Indian Rupee denominated listed on foreign stock exchanges
- In September 2017, Masala Bonds were removed from the corporate bond investment limit
for FPIs and effective October, 2017 constitute a part of the ECB regime
- Unlike ECBs, the currency risk lies with the investor and not the issuer
- No optionality clause for prepayment before the completion of the applicable maturity period
- Mandatory prepayment arising out of change in law?
- Mandatory prepayments from insurance proceeds or liquidated damages receipts?
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9. Typical Document Structures
 Project Structures
- Non recourse or limited recourse financing is rare
- Shareholder Guarantees and Sponsor Support
- Not uncommon to see a single legal entity develop two or more projects
- General lack of off-take support from off-takers (6 months letter of credit support)
- Sometimes EPC Contractors try to get away with corporate guarantees instead of third party
support
 Domestic Lending & ECB
- Generally has the same documentation structure as foreign project financings
- Indian loan agreements generally have hair-pin triggers when compared to foreign loan
agreements
- Difficult to procure inter-creditor agreements with other, existing lenders for other projects
- Security Trustee holds secured assets for Beneficiaries
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10. Typical Document Structures
 Domestic Lending & ECB
- In syndicated lending, practical difficulty in conforming covenants, representations and events
of default with a common terms agreement, with each Lender often retaining mismatching
terms
 NCDs
- Subscription Agreement, Debenture Trust Deed, Debenture Trustee Agreements, Offer Letter,
Application Forms, Security Documents
- SEBI (Debenture Trustee) Regulations (1993) specify the particular requirements for the Trust
Deed (mostly information covenants relating to the Issuer)
- Issuer appoints the Debenture Trustee (to act on behalf of the Subscribers)
- Security Trustee holds secured assets for Beneficiaries
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11. Typical Document Structures
 Security Documents
- Generally, similar to English law and held by a Security Trustee for the beneficiaries
 Stamp Duty
- Stamp duty payable on transaction documents according to applicable state Stamp Act
- The Supreme Court in Chief Controlling Revenue Authority vs. Coastal Gujarat Power Ltd &
Others held that a mortgage deed executed between a borrower and a security trustee in a
consortium lending transaction, would not be treated as a single document
- The Supreme Court said that the document encompassed 'distinct transactions’ with each of
the lending banks and therefore, stamp duty was charged for each distinct mortgage in
relation to each particular beneficiary
 Conditions Precedent
- No objection certificates from third parties are generally time consuming to procure and are
often caveated
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12. Common Project Risks
 Project risks depend on the sector, though delay due to land acquisition or licensing and permitting
are common, resulting in cost overrun
 Concession agreements should clearly specify authority actions as conditions precedent to
financing
 Often difficult to re-negotiate standard form project documentation tendered by a state authority
 Project documentation often executed before the financing documentation - risk mismatch is
common and pass through is rarely structured
 Projects often stall for failure to procure land acquisition, local agitation and site risks
 Consequences of delay are generally not well structured in project documentation
 Project developers are reluctant to formally trigger suspension
 Contractors at risk with supply chain costs relating to storage, warehousing and equipment
degradation
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13. The Bankruptcy & Insolvency Code
 Key Provisions of the Code
- Default should be at least INR 100,000 (USD 1,495)
- Two-stage process: Insolvency Resolution Process (“IRP”) and liquidation
- During the IRP, Financial Creditors assess whether the debtor’s business is viable and options
for its revival.
- If the IRP fails, Financial Creditors may liquidate and distribute the debtor’s assets
- The National Company Law Tribunal (the “NCLT”) appoints an insolvency professional to
administer the IRP
- Management of the debtor is taken over by the insolvency professional
- Financial Creditors constitute a Creditors Committee and Operational Creditors may attend
- The Creditors Committee consider proposals for revival within 180 days (or within 270 days
with a one-time extension of 90 days) before triggering liquidation
- The adjudicating authority is the NCLT, with appeal to the National Company Law Appellate
Tribunal and thereafter to the Supreme Court of India
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14. The Bankruptcy & Insolvency Code
 Moratorium and Waterfall Distribution
- A moratorium period of 180 days (can be extended up to 270 days) on the corporate debtor's
operations and standstill for creditors
- During the Insolvency Resolution Process, no judicial proceedings for recovery of debt,
enforcement of security interest or sale or transfer of assets of the corporate debtor can be
pursued by a creditor
- If the Creditors Committee choose to liquidate the company (75 per cent) or no plan is
adopted after 270 days, the proceeds are distributed to pay:
- the costs of the insolency process
- workmen’s dues of 24 months
- secured creditors
- Employees’ dues of 12 months
- Unsecured creditors
- Government dues and claims made by preference and equity shareholders
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15. Enforceability & Arbitration Awards
 Arbitration Awards and Interim Measures
- The Arbitration and Conciliation Act, 1996 was amended on 23 October 2015
- Pursuant to the amendment, Indian courts may grant interim measures (such as injunctions)
in relation to arbitrations outside India
- Parties are now free to choose arbitration to be conducted in London, Singapore or elsewhere
and still apply to Indian courts for interim protection should the need arise
- However, once an arbitral tribunal is constituted, the courts cannot entertain an application
for interim measures. In such cases, the courts can grant interim measures only where the
circumstances point that the interim measures ordered by the arbitral tribunal would not be
‘efficacious’
- Applications arising out of an international commercial arbitration and applications to enforce
foreign awards must now be made to a High Court only
- An interim measure granted by an arbitral tribunal can be enforced in the same manner as a
court order
- Other relevant amendments include the requirement of issuance of an award by Indian
arbitrators within 12 months (extendable to a further period of 6 months either before or
after expiry on application to a court) from the date of their appointment
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16. Enforceability & Arbitration Awards
 Arbitration Awards and Interim Measures
- The dilemma created by the BALCO judgment has been addressed
- Previously, in accordance with BALCO, the parties could either choose foreign arbitration
without interim measures in India or arbitration in India without the element of neutrality of
a foreign seat of arbitration
- Public Policy can no longer be invoked as a wide ground to resist enforcement of an
international arbitration award or a foreign award
- Only limited circumstances involving fraud, corruption or contravention of ”the fundamental
policy of Indian law” or “the most basic notions of morality or justice”
- Essentially, a foreign lender should now be able to enforce an interim award (such as an
injunction) by an offshore arbitration tribunal (or otherwise go to court in India, seeking an
injunction) protecting assets from being syphoned off
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17. Enforceability & Arbitration Awards
 Recent Decisions
 NTT DoCoMo Inc. vs. Tata Sons Limited (Delhi High Court, April 2017)
- Concerned the validity of a pre-determined put option price and whether it was consistent
with FEMA and the RBI guidelines on pricing
- Consequently, NTT DoCoMo initiated arbitration proceedings at the LCIA, which ordered Tata
to pay $1.18 billion as damages for failing to adhere to the terms of the Shareholders’
Agreement
- “RBI’s refusal of special permission did not render performance impossible. There were
other methods of performance which were unaffected by refusal.”
- “The Tribunal rejects the argument that an award of damages for breach of clause 5.7.2
would amount to a circumvention of the relevant FEMA regulations”
- The RBI sought to intervene to prevent the enforcement of the award in India, pursuant to
terms of consent reached between the parties
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18. Enforceability & Arbitration Awards
 NTT DoCoMo Inc. vs. Tata Sons Limited (Delhi High Court, April 2017)
- RBI argue that the terms of consent were void or voidable pursuant to Indian law and
therefore opposed to the public policy of India
- Court ruled that the award made was in the nature of a damages payment (and not a
payment made in relation to the valuation of the shares)
 IDBI Trusteeship Services Limited vs. Hubtown Limited (Supreme Court of India, December 2016)
- FMO subscribed to 10% equity shares and 3 compulsorily convertible debentures (“CCDs”) in
Vinca Developers Private Limited “(Vinca”)
- The rest of Vinca’s equity was owned by its promoters and Hubtown, an Indian company and
upon conversion, the CCDs would result in FMO holding 99% equity in Vinca
- FMO’s subscription money was intended to be invested in Vinca’s subsidiaries and Vinca
invested in optionally fully convertible debentures (“OPCDs”) issued by its subsidiaries
- Hubtown issued a guarantee in favor of IDBI (the debenture trustee) in order to guarantee
repayments under the OPCDs
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19. Enforceability & Arbitration Awards
 IDBI Trusteeship Services Limited vs. Hubtown Limited (Supreme Court of India, December 2016)
- IDBI enforced the corporate guarantee issued by Hubtown, following payment defaults by the
subsidiaries under the OPCDs
- Following Hubtown’s failure to pay, IDBI filed a summary suit before the Bombay High Court
to enforce the corporate guarantee
- The Bombay High Court held that the corporate guarantee was a part of an illegal structure,
which was aimed at circumventing Indian foreign exchange regulations, and therefore
unenforceable
- The Supreme Court analyzed the transaction structure and observed that the corporate
guarantee did not violate the foreign exchange regulations
- The overall transaction structure was also held to be valid. Hubtown was asked to deposit the
principal amount of the OPCDs before being allowed to dispute its guarantee obligations
 These judgments should deter Indian issuers and obligors from wriggling out of their payment
obligations and should provide a considerable degree of comfort to investors looking at
investments through multi-layered structures
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