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Project Finance in India

An interview with Piyush Joshi, Anuradha R V and Sumiti Yadava


Piyush Joshi has extensive multi-sectoral experience in both project development and project financing transactions, as well as in disputes that frequently arise in implementation of infrastructure projects in India. He has advised on the development, financing, operations and maintenance of projects in the energy sector (power, renewable energy, natural gas sectors), urban infrastructure sector (urban planning, township development, urban transport, metro railway networks, tramways, a bus rapid transit system (BRTS), regional railways networks, urban mobility), and environment infrastructure sector (municipal solid waste projects, landfill development, landfill capping and landfill reclamation projects). He has also advised project developers in acquisition and restructuring of distressed infrastructure projects. He has authored the book Law Relating to Infrastructure Projects (LexisNexis Butterworths), which is the leading book on infrastructure law in India.

RV Anuradha heads the team on international trade and investment laws, and climate change law and policy. She has advised on the development and financing of environment infrastructure projects relating to municipal solid waste management, sewerage treatment, biomass power, ecosystem restoration, renewable energy and agreements for sale of carbon emission reductions generated from such projects. She advices both government and private sector clients on legal issues arising from India’s engagement at the WTO and other trade and investment agreements.

Sumiti Yadava focuses on project development and project financing transactions, and general corporate law. Sumiti has extensive experience in the natural gas sector, urban infrastructure sector (urban planning, urban transport, metro railway networks, BRTS, regional railways networks, urban mobility) and environment infrastructure sector (municipal solid waste projects, landfill development, landfill capping and landfill reclamation projects).

“A significant proportion of project financing in the past year has been in the renewable energy and transportation sectors and this has mostly been from the government or PSU banks.”

GTDT: What have been the trends over the past year or so in terms of deal activity in the project finance sector in your jurisdiction?

Piyush Joshi, RV Anuradha, Sumiti Yadava: Our firm advises primarily on all aspects of development, financing and implementation of Indian infrastructure projects, including disputes arising in relation to the implementation of such projects. We represent clients before judicial forums, including High Courts and the Supreme Court of India, as well domestic and international arbitration. We are also active in providing services relating to evaluation of project documentation for infrastructure projects based in the Indian sub-continent, particularly in Sri Lanka, Nepal, Bangladesh and Myanmar. Our clients include developers, lenders (both domestic and multilateral lenders) and investors in a wide range of infrastructure projects with a focus on the energy sector, natural gas sector (LNG, E&P, gas pipelines, city gas distribution and gas sales), transportation sector (covering national highways, state highways, private roads, ports, airports, and railways) and urban infrastructure projects (covering township development, water and sanitation, municipal solid waste, city bus services, metro railways, parking, urban mobility projects and city green space rejuvenation projects).

‘Project financing’, in terms of ‘non-recourse’ project financing, does not exist in India, since regulatory requirements governing lending require promoter guarantees and undertakings, as well as other recourse outside the relevant project. As a result, there is no complete reliance on project and project revenues, and the term ‘project financing’ in India has morphed to refer to any form of financing of infrastructure projects generally. Furthermore, financing of infrastructure projects is primarily undertaken by banks that are public sector undertakings (PSUs), controlled by either the government of India or the government of a State. A significant proportion of project financing in the past year has been in the renewable energy and transportation sectors and this has mostly been from the government or PSU banks.

The general trend in the past few years has been a gradual receding of private sector investment in the development of infrastructure projects in India to focus on a narrow sliver of opportunities in the renewable energy and transportation sectors. The primary reasons for this include scarcity of availability of land, delays in obtaining multiple clearances, and absence of regulatory certainty. Private sector investment has been changing its course with project developers going back to executing projects as contractors or sub-contractors, where there is revenue certainty and a buffer from the risks to which infrastructure development is exposed in India.

Over the past few years, there has also been a higher level of legal risk in Indian infrastructure projects arising from ‘public interest litigation’ (PILs) against such projects. Judicial rulings resulting from PILs may lead to uncertainty of enforcement of long-term contracts. As a result, a project finance lawyer in India necessarily needs to be adept at developing strategies for handling dispute resolution scenarios and advising on long-term risk mitigation measures. An example of a recent ruling resulting from a PIL is that of the High Court of Allahabad (State of Uttar Pradesh) in the case of the Federation of Noida Residents Welfare Association v Noida Toll Bridge Company Limited, in which the court extended the scope of PIL to allow judicial intervention into the scrutiny of commercially agreed terms of a concession agreement for the development of a toll bridge project entered into by government authorities. The court also evaluated the provision relating to consideration that had been agreed under the concession agreement and directed that collection of user charges be stopped, and that the provision assuring 20 per cent returns to the concessionaire be severed from the agreement. The PIL in this case was filed 15 years after the concession agreement relating to the project had been executed and the project SPV and the private sector project sponsor had discharged their obligations by building and financing the greenfield road and bridge network to be implemented. In fact, this was one of the few projects that had been developed without any recourse to government funding. The main fallout of the ruling is that it has extended the litigation risk for infrastructure projects to the entire term of the project, even after the project has been successfully constructed and is operating smoothly. Although there is an appeal pending before the Supreme Court of India against this judgment, it would be some time before any change is seen in the law laid in this judgment, if at all.

Complex project disputes are arising in other infrastructure sectors as well in India, and deal with issues such as commercial, regulatory and competition. In-depth knowledge of specific sectors, such as the oil and natural gas sector, has led to our firm’s increasing involvement to address disputes arising from issues relating to competition, tariff and environmental concerns. We advise on the strategy for such disputes, draft of submissions and represent clients in proceedings before arbitration forums, regulatory authorities and judicial forums. These include matters before the Petroleum and Natural Gas Regulatory Board, the Central Electricity Regulatory Commission, the Appellate Tribunal on Electricity, the Competition Commission of India, the National Green Tribunal, High Courts across India and the Supreme Court.

GTDT: In terms of project finance transactions, which industry sectors have been the most active and what have been the most significant deals to close in your jurisdiction?

PJ, RVA, SY: The most active infrastructure sectors in the past year have been renewable energy and transportation. Government funding and focus on renewables through the National Solar Mission, and the emphasis on development of national highways through the National Highways Authority of India (NHAI), a statutory authority that can acquire and hold the land needed for highway projects and also raise low-cost financing through issuance of tax-free bonds, has resulted in significant financing in these sectors.

Other than schemes that provide for viability gap funding for such projects, the State Bank of India (a PSU bank) has also extended credit facilities for the financing of grid-connected rooftop solar projects, including those by several companies such as Tata Renewable Energy, Adani Group and Hinduja Renewables. The State Bank has a loan agreement with the World Bank to the tune of US$675 million for the rooftop solar project.

Road infrastructure has been receiving significant focus from the government. Under the 2018 Budget of the government of India, the allocation for national highways has been increased. There has also been a focus on upgrading select airports in Tier 2 cities, pursuant to which the Airport Authority of India has initiated the process for the operation and maintenance of Ahmedabad and Jaipur Airports in a public–private partnership (PPP) mode.

Metro Railway and similar mass rapid transit systems for various major cities in India are also receiving significant attention in light of the rapid growth of urbanisation and need for cleaner public transport systems. Our firm has been engaged as the legal adviser on the development of the metro rail system for the city of Vishakhapatnam, in the State of Andhra Pradesh, which is being developed on a PPP basis.

GTDT: Which project sponsors have been most active in driving activity? Which banks have been most active in providing debt finance?

PJ, RVA, SY: The maximum international investment in the past couple of years has been focused on the national highway sector in India, primarily because of the specific regulatory framework and documentation having succeeded in mitigating land-related risks, and creation of annuity and hybrid annuity models enabling suitable mitigation of traffic and toll collection risks. As discussed previously, a key reason for this has been the presence of a specific statutory authority – the NHAI, to which all national highways are vested and which acquires the land before a project is identified or its implementation commenced. The NHAI also raises low-cost financing through the issuance of tax-free bonds. These developments have been able to mitigate the major risks associated with the development of infrastructure projects in India. Disputes arising under the NHAI concession agreements are subject to arbitration, which has proved acceptable to investors and developers.

International equity investors such as Cube Highways have been active in the national highways sector. Cube Highways has created an India platform into which other investors such as the Abu Dhabi Investment Authority have invested and its portfolio comprises projects aggregating to more than 1,300km.

The creation and success of equity investment platform in national highways sector shows the ability of a sector to attract private capital if its risk and regulatory issues are suitably addressed. There is a need for the government to take what has been learnt from the national highway sector and replicate the same into other major infrastructure sectors. This NHAI model, however, has not been successfully replicated in other sectors with the same degree of success, since there are several sector-specific issues that remain to be addressed.

The most active bank providing debt financing has been the State Bank of India, the largest PSU bank in India, which has led 22 deals with a combined worth of US$10.4 billion. The majority of projects in India are financed by domestic sponsors and debt financiers including SBI, Axis Bank, IndusInd Bank Ltd, Yes Bank, ICICI Bank, L&T Financial Services among others. Among multilateral agencies, the Asian Infrastructure Investment Bank and the Asian Development Bank (ADB) have been actively engaged in financing projects in India.

“The World Bank’s Ease of Doing Business Reports have been consistently identifying the main bottlenecks in India as the difficulties in obtaining construction permits.”

GTDT: What are the biggest challenges that your clients face when implementing projects in your jurisdiction?

PJ, RVA, SY: The biggest challenges in implementing projects in India are:

  • legal risks relating to enforceability of long-term agreements in India; and
  • procurement of land required for the project.

As discussed in our response to question 2, judicial interference with executed long-term contracts through the use of PIL, poses a significant challenge in implementation of projects in India. Another aspect of concern is availability of land, which has always been an issue in relation to infrastructure projects in India. The government has been developing structures whereby the land is either pooled or acquired by a government authority in advance, and leased to the identified developer project to mitigate the land risk that has stalled and delayed projects across the sectors.

The World Bank’s Doing Business Reports have consistently identified the main bottlenecks in India as being the difficulties in obtaining construction permits, enforcing contracts and resolving insolvency issues. However, India has jumped 30 places to break into the top 100 in the World Bank’s Doing Business Report 2018 on the basis of recent regulatory developments such as the passing of the Insolvency and Bankruptcy Code (IBC) 2016. Another significant development has been in the area of taxation reform, with the Goods and Services Tax being implemented. Its significance lies in the replacement of a fragmented taxation regime at the central and state levels, which has now been replaced with a centralised mechanism.

The real benefits of both these regulatory developments, however, remains to be tested, as both continue to have several teething problems in actual implementation.

GTDT: Are there any proposed legal or regulatory changes that may give rise to new opportunities in project development and finance? Do you believe these changes will open the market up to a broader range of participants?

PJ, RVA, SY: The main regulatory changes that have occurred recently and could potentially provide new opportunities in project development and finance include:

  • evolution of the regulatory framework governing infrastructure financing funds, which are funds established with the specific purpose of financing the development of infrastructure;
  • enactment of regulations to facilitate issuance of municipal debt and listing of debt securities by municipalities;
  • liberalisation of the foreign direct investment (FDI) regime, which has led to the majority of infrastructure sectors being open to 100 per cent FDI;
  • creation of regulatory framework for pooling land in most states as an alternative to a cumbersome land acquisition process; and
  • greater focus on urban infrastructure and development of specific framework in several states in India relating to urban infrastructure.

The World Bank Doing Business 2018 has reported other facilitative developments that make it easier to do business. For example, with the merging of the applications for the permanent account number and the tax account number in Delhi and Mumbai, there has been improvements in the online application systems. Mumbai also made the process faster by merging the application for value added tax and profession tax. Another development is the establishment of the National Judicial Data Grid, which makes it possible to generate case reports in local courts, which would improve enforcement of contracts.

“Liberalisation of the FDI regime... has led to majority of infrastructure sectors being open to 100 per cent foreign direct investment.”

GTDT: What trends have you been seeing in terms of range of project participants? What factors have influenced negotiations on commercial terms and risk allocation? Are there any particularly innovative features?

PJ, RVA, SY: Transactions in India are mostly funded through commercial bank debt, with PSU banks leading the way. As discussed earlier, the State Bank of India has been the most active over the past year in providing debt financing to projects. Additionally, multilateral agencies and development banks, including the World Bank, the ADB and the Asian Infrastructure Investment Bank have recently injected large amounts of capital into infrastructure development in India, especially in the renewable energy sector.

The renewable energy sector was only recently identified as a priority area by the Reserve Bank of India, and financing from domestic banks has recently been gradually increasing. This is a shift from reliance on development funding (World Bank, ADB, etc) and export credit finance options from international sources (such as the United States’ EXIM bank).

Sectors such as transportation and urban infrastructure rely significantly on government funding schemes. As explained earlier, there are regulatory requirements for banks to seek  promoter guarantees and undertakings, and there are no exclusive, non-recourse project financing deals in India.

In order to enable the development of suitable structures it is critical for the risks and regulatory issues surrounding the sector to have been, if not suitably resolved, then at least quantified and contained. The creation and success of an equity investment platform for national highways in India by Cube Highways clearly indicates the potential for creating similar platforms for other major infrastructure sectors, if the risks and regulatory issues in those sectors can be suitably mitigated and contained.

The Inside Track

What three things should a client consider when choosing counsel for a complex project financing?

A project finance lawyer in India cannot only be a transaction specific lawyer. Given the legal risks arising from the enforceability of complex documentation in India, the focus of the client has to be choose a counsel who not only has extensive transactional experience, but one who also has experience in addressing disputes relating to such projects. Documentation for the transaction also needs to ensure that the key provisions survive dispute scenarios and would remain enforceable. The divide that exists between ‘transaction counsel’ and ‘dispute/litigation counsels’, as exists in other jurisdictions, will not serve clients well in India. Our firm has evolved in the past few years from a pure transactional practice to one that now has extensive experience in complex dispute resolution. In-depth knowledge of sectoral regulation and interface with related areas, such as competition and investment laws, are other key strengths for a project finance lawyer.

What are the most important factors for a client to consider and address to successfully implement a project in your country?

Project structuring is crucial in order to effectively mitigate land, legal and regulatory risks. For instance, the onus for land acquisition or obtaining rights of way and other major clearances, cannot be placed on the private sector developer, and would necessarily need to be backed by adequate state support. Regulatory uncertainties pertaining to taxes, particularly tax laws that are applied with retrospective effect, need to be hedged with carefully drafted provisions.

What was the most noteworthy deal that you have worked on recently and what features were of key interest?

We are legal advisers to the Metro Rail project for the city of Vishakhapatnam in the state of Andhra Pradesh. The project is currently at the international competitive bid process stage. This project has been structured to mitigate land, tariff and ridership risks for private sector participants.

We are legal advisers to project developers of a waste-to-energy plant with a 12MW capacity located in Delhi. The project is being developed under a concession arrangement with the Municipal Corporation of Delhi. This is the only waste-to-energy project in India that complies with European emission norms.

We have also advised the Solar Energy Corporation of India on the documentation for the Solar Park schemes being developed under the National Solar Mission. The scope of work included review and documentation to ensure mitigation of land-related risks, and other political risks to ensure smooth development of the solar park and essential facilities for Solar Power Developers.

We are currently engaged in advising the development of a multi-billion-dollar infrastructure fund aimed at investing into and enabling the implementation of ‘green mobility’ urban transportation projects across various cities in India.

Piyush Joshi, RV Anuradha and Sumiti Yadava
Clarus Law Associates
New Delhi
www.claruslaw.com


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