Please see this firm's India Trends and Developments article.
This article discusses the latest developments in the Indian project finance market, including our thoughts around financial sector concerns, power sector reform and the effect of COVID-19-related measures on project finance transactions.
The Indian project finance market has a range of financial institutions which act as lenders. These include traditional Indian bank lenders, regulated non-bank lenders, overseas bank lenders, developmental financial institutions (DFIs) in India as well as foreign or multilateral developmental financial institutions which are active in the market.
Traditional Indian bank lenders are now seen as less active in the market in the wake of stressed balance sheets (attributable in part to distressed projects) with certain lenders significantly reducing their involvement in the project finance market. This has led to alternative state-owned financiers emerging as a source of long-term financing for infrastructure projects and some relatively new banks entering the market.
The Indian project finance market has traditionally comprised of Indian sponsors and conglomerates but over the last few years has seen a lot of interest from overseas financial and corporate sponsors, particularly in the renewable power and roads sectors.
Infrastructure-related matters are split between state governments and the central government in India; and in some cases, both the central and state governments have the jurisdiction over certain types of infrastructure. Therefore, there is no overarching legislation that applies to public-private partnerships (PPPs) or which requires that certain infrastructure be undertaken through PPPs – regulation is fragmented. Much of the implementation of PPPs is done through specific policy adoption by individual government departments at both the state and central government level.
The government of India has maintained a commitment to promoting PPPs, which has led to a complex set of arrangements being put in place to encourage PPPs at the state level – although some of these measures apply equally to PPPs promoted by the central government, such as roads. These include liberalising capital controls for investment, issuing broad guidelines for maintaining the competitiveness and transparency of bidding processes and recommending model concession agreements. The government of India also provides certain schemes for financial support for PPPs and has specifically set up internal DFIs for the provision of infrastructure finance such as the India Infrastructure Finance Corporation Limited and the National Infrastructure Investment Fund.
That said, there is no single model for PPPs and a variety of models are used even within the same sector and by different government departments.
The key issues regarding PPPs relate to appropriate risk allocation in project concessions, land acquisition and environmental issues, as well as regulatory uncertainty and fragmentation. These issues are not peculiar to PPPs and apply to projects in India generally. The experience gained from some PPPs suggest that they were brought to market without proper appraisal or a deep sophisticated investor pool which resulted in overly aggressive bids.
In addition to widespread project delays and cost overruns, these matters have resulted in the Indian banking market being more cautious about providing long-term debt, which has in turn reduced the financing options available to fund PPPs. The government of India has continued to make public commitments to address these issues in order to continue attracting mature private participation in Indian infrastructure.
The risk matrix for projects in India is similar to projects in other parts of the world and many of the structuring techniques used elsewhere are also adopted in India.
As with other jurisdictions, it is common to create a locally incorporated special purpose vehicle (the “project company”) which will hold the project assets – including all project agreements – to implement the project and which will be the recipient of both equity and debt funding. As noted below, security will usually be taken over all or substantially all project assets (except, for example, in road projects) and the shares of the project company, supplemented by direct agreements with principal project counterparties.
However, the usage of direct agreements is not universal and there are a substantial number of projects which are financed by lenders without direct agreements or other substitution arrangements in place. Sponsor completion support – by way of completion guarantees, cost overrun guarantees and shortfall guarantees – is typically required by lenders during the construction period.
A standard risk matrix for a project in India will seek to address the usual project finance risk heads such as:
While many of the risks above can be mitigated through standard project techniques, it is not always possible to (i) achieve an optimal project risk allocation between the various contracting parties (including state and quasi-state entities) (ii) address the creditworthiness of project counterparties (in particular, power sector offtakers) or (iii) address regulatory or political risk. Further, land acquisition objections and environmental approvals are key issues and experience suggests that these are often the subject of post facto litigation. In many cases, these risks cannot be materially mitigated by structuring or documentation. For this reason, many projects involve lenders requiring recourse to sponsor balance sheets during the operational phase of the project as well.
A project finance transaction will typically contemplate security over all or substantially all of the assets of the project company, such as:
As explained in 1.4 Structuring the Deal, there is no set market practice as to the usage of direct or substitution agreements, although certain government concessions grant the lenders some ability to substitute the project company where the project is in difficulty.
Security over immovable property is created either by way of a legal mortgage (referred to as an "English mortgage" under Indian law) or by deposit of title deeds (also known as an "equitable mortgage"). Both of these are statutory modes of creation of security. The advantage of a legal mortgage is that it is always registered, thereby providing public notice of the security. The advantage of an equitable mortgage on the other hand is that stamp duty and registration fees are not usually required to be paid.
In certain states in India, a legal mortgage and an equitable mortgage are required to be recorded with the relevant sub-registrar/registrar of assurances where the immovable property is located.
The document which creates a legal mortgage is generally called an "indenture of mortgage". An equitable mortgage is not created by an instrument – rather, it is created by delivery of title deeds – but a "memorandum of entry" is usually entered into to record the terms of the mortgage.
A floating charge over all present and future assets of a company can be created under Indian law, except for future immovable property.
The costs associated with registering security are not nominal in India. This is a factor while deciding court jurisdiction and the place of execution. Typically, the following costs are associated with registering security interests in India:
Stamp duty is required in order for a document to be admitted as evidence and failure to pay will have the additional implication of "impounding" and financial penalties. Stamp duty is a state subject and its amount varies from state to state; it is determined based on the nature of the document. In the case of security documents, they are calculated as a percentage of the value of the underlying loan. Some states have placed a cap on stamp duty. Registration fees in respect of registered mortgages vary from state to state and may also not be nominal.
Registration fees in respect of the registrar of companies, the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) or filings with depositaries are subject to nominal fees.
The only security document which creates security over more than one type of asset is the deed of hypothecation which usually has a fairly extensive general description of the categories of assets over which the security is created.
In the case of a mortgage or pledge of shares, details of the specific property and shares will typically be included.
For an Indian company to provide a security or guarantee which exceeds certain prescribed thresholds (in terms of paid-up capital and free reserves), an approval from at least 75% of shareholders of the company is required. However, this shareholders’ resolution is not required if the security provider is a private limited company or if the security is being provided by a wholly owned subsidiary of the shareholder(s) or joint venture.
In addition, except for limited exceptions, a company may not provide a guarantee or security on behalf of any other company in which the directors of the first company are interested or control a certain percentage of voting rights.
There is no centralised record or database maintained with respect to security creation in India. It is common practice to undertake the following searches:
Mortgages, where registered, are usually released pursuant to a deed of release. The deed of release must be filed with the registrar of assurances where the mortgage was registered.
In respect of movable property, no separate release agreement or deed is required, although a well-advised borrower will seek such a document.
For dematerialised shares, the depositary will need to be notified of the release of the pledge.
All title documents that are handed over as part of the creation of the security should be returned (for example, share certificates and title deeds). In addition, charge satisfaction forms will need to be filed at the relevant registrar of companies and CERSAI.
Under Indian law, lenders can enforce security for an amount due but unpaid. Documents are often drafted to permit enforcement only following the occurrence of an event of default. The procedure for enforcement of security is summarised below.
An English mortgage may be enforced by private sale, subject to certain notification requirements. The enforcement of an equitable mortgage, on the other hand, will require court involvement.
Movable Property (Other Than Shares)
The security interest created pursuant to a deed of hypothecation can be enforced either by appointing a receiver and selling the secured property or by approaching the court for sale of the property.
Bank accounts constitute a special category of assets with respect to enforcement from a practical perspective. This is particularly the case where there is an accounts agreement with an account bank. In such a circumstance, the lenders or their agent will usually have the contractual ability to apply the proceeds standing to the credit of the account towards the repayment of debt without reference to the borrower or otherwise enforcing security over the bank account.
Pledge over Shares
A pledgee can enforce its security over the pledged shares through a right of private sale, without having to approach the Indian courts, provided that the pledgee has given reasonable notice to the pledgor prior to such sale. Dematerialised shares are relatively easy to enforce requiring the lenders or the security trustee to file a form to freeze the account representing the dematerialised shares, following which the lenders or the security trustee can require that the shares are transferred to the pledgee's own securities account. Shares transferred using this method are required to be sold within a specific period. Enforcement of security over shares in physical form is less easy than over dematerialised shares and involves the completion of a stock transfer form using the power of attorney issued at the time of creation of the share pledge.
Where recourse to courts is otherwise required in order to enforce security, Indian banks, certain notified financial institutions and debenture trustees for listed non-convertible debentures have additional powers to enforce security under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI) which permits secured creditors to enforce security without having to take recourse to court process.
Restrictions under the Bankruptcy and Insolvency Code
Please refer to 6 Bankruptcy and Insolvency for restrictions under the Bankruptcy and Insolvency Code.
Intercreditor and Security Sharing Agreements
It is common to enter into an intercreditor agreement or security sharing agreement between various sets of lenders to the project which sets out the manner and order of sharing of proceeds upon enforcement. The project company/sponsors may not be party to the intercreditor agreement in all cases as this is seen as an arrangement concerning only the lenders.
Indian law will generally give effect to a choice of foreign law in a contract but may not give effect thereto if (i) the contracting parties are comprised solely of Indian entities, or (ii) that results in a derogation from mandatory Indian law or conflicts with public policy. In addition, a choice of foreign jurisdiction for the settlement of disputes will be respected but there have been instances where an Indian court has assumed jurisdiction in exceptional circumstances.
Indian law allows for the execution of foreign decrees in India as if they are decrees of an Indian court if they have been passed by a "superior court" of a reciprocating territory. Examples of reciprocating territories include the UK, Singapore and Hong Kong. In the case of a non-reciprocating territory, the judgment or decree can only be enforced by filing a suit in an Indian court based on the foreign judgment or decree, which will have evidentiary value in the proceedings, although the general rule is that the judgment will be conclusive evidence as to its subject matter. For both types of enforcements, there are threshold requirements that may prevent enforcement such as lack of jurisdiction of the foreign court and fraud.
India is a party to the Geneva Convention on the Execution of Foreign Arbitral Awards 1927 and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. As per Section 44 of the Arbitration and Conciliation Act 1996 (the Arbitration Act), Indian courts apply the New York Convention only to awards made in the territory of an Indian state that the Indian government has formally designated as a territory to which the New York Convention applies. While there are procedural grounds for refusing the enforcement of foreign awards, there are two key substantive grounds: if the subject matter of the dispute is not capable of settlement by arbitration under the law of India or if the enforcement of the award would be contrary to the public policy of India.
Minimum average maturity requirements apply to any payment of amounts by a borrower to a foreign lender irrespective of whether the payment is a result of legal proceedings (other than security enforcement) or other prepayment. However, these restrictions do not apply to the enforcement of security.
Borrowing from overseas lenders is subject to a complex system of regulation. In general, an Indian entity borrowing from overseas lenders either requires compliance with the external commercial borrower (ECB), guidelines issued by the Reserve Bank of India (RBI) or the foreign portfolio investor (FPI) framework of the RBI.
The ECB framework includes the following eligibility criteria for a foreign lender to lend to an Indian borrower:
Subject to compliance with the above and other than the requirements of the ECB framework – which include matters such as the maximum amount of debt, eligible borrowers, regulation of interest rates and minimum tenor – a foreign lender is not required to obtain any licence or approval to lend to an eligible Indian borrower.
The FPI framework, on the other hand, requires that the relevant lender acquire a licence from the securities and exchange board of India (SEBI) as a foreign portfolio investor. FPIs are permitted to subscribe to or acquire certain debt securities, such as debentures or bonds, but not make loans. There are several conditions that apply to the subscription or acquisition. For example, some of these require FPIs to adopt a portfolio of investments (avoiding concentration) and to invest in debt securities having a certain minimum residual maturity. In addition, there are restrictions as to the purpose for which the proceeds of unlisted debt securities may be used.
Permission is required to be obtained by the borrower from an authorised dealer bank for creating security and issuing guarantees. Permission does not involve unbounded discretion and is usually granted where the authorised dealer bank is satisfied that:
Security over shares must be enforced in a manner consistent with capital control rules regarding ownership and other foreign exchange regulations. Security over land may only be enforced by way of sale to an Indian entity (capital controls do not permit a non-resident to own land) with the proceeds being applied to repay the debt.
Security granted by offshore entities over onshore shares is only permitted under specified circumstances and in favour of specified categories of lenders.
Security is usually granted in favour of a debenture trustee resident in India and therefore the creation of security in favour of FPIs does not require any consents, although restrictions regarding security enforcement that apply to ECB lending still apply.
India maintains a complex system of capital controls for the purpose of foreign investment. This is partly because of piecemeal changes and relaxations over time without an overall reconciliation of regulation. The overarching piece of legislation that relates to capital controls is the Foreign Exchange Management Act 1999 (FEMA). There are various rules and regulations that have been framed by way of subordinate legislation thereunder.
Under the FEMA, the RBI is authorised to establish capital controls with respect to the transfer or acquisition of capital or debt instruments. In addition, the FEMA also authorises the RBI to establish capital controls with respect to overseas lending into India, any lending in a currency other than rupees and the issue of guarantees to a non-resident.
The principle ways in which capital or debt instruments may be acquired by an offshore entity are by way of:
There are varying degrees of restrictions in relation to each of the above, although the tendency over time has been to relax such restrictions.
In addition, overseas lenders may lend to Indian borrowers under the ECB framework referred to above.
If any investment is to be made outside of the general permissions (known as the "automatic route") given by the RBI as set out above, specific approval of the government of India or the RBI (as applicable) is required. For example, where a foreign investor wishes to hold an equity interest with a percentage value that is greater than what is permitted under the general permission. This is known as the "approval route". Most infrastructure sectors permit foreign investment under the automatic route although there are specific exclusions such as nuclear energy.
In general, where investments are made in accordance with capital control regulations, payments abroad or repatriation of capital is permitted unless there are specific prohibitions. Certain specific prohibitions are imposed with respect to:
An Indian resident company or individual is not permitted to maintain offshore foreign currency accounts unless specified exemptions apply. In general, these exemptions are not relevant to a project company executing a project in India. The exemptions focus on genuine overseas business requirements of Indian residents, such as exporters and foreign branch offices, rather than structuring considerations for foreign lenders.
Registration, filing and other formalities with respect to security documents are set out in 2.3 Registering Collateral Security Interests. Any loans provided through the ECB framework are required to have a loan registration number assigned by the RBI.
As a general matter, project agreements are not required to be filed for the purposes of ensuring their validity or enforceability, although certain government bodies may require copies of project agreements to ensure that they comply with the terms of the concession agreement granted to the project company.
All offshore natural resources are owned by the government of India. As to onshore natural resources, the general position (with some small exceptions) is that either the government of India or the government of a state is the owner.
The method of permitting exploitation of natural resources is therefore a licence – or in the case of oil and gas, a production sharing contract – and each such licence or production sharing contract is issued by the relevant governmental department or ministry. Offshore entities are not permitted to directly own land in India.
Although licences are not issued directly to foreign entities, licences can be issued to Indian subsidiaries subject to capital control regulations permitting or prohibiting equity investments in certain sectors in India.
The concepts of agency and trust are both recognised in India. For certain types of debt transactions a trustee is mandatory – for example, the issuance of debentures. Common market practice is that the agent and the trustee are appointed by way of separate agreements. The scope of the agent in domestic transactions is limited to an administrative agent role rather than also a paying and calculation agent.
Security created prior in time to a subsequently created security will, in the absence of agreements to the contrary, rank ahead of security created thereafter.
Both contractual subordination and structural subordination are common in the Indian market although the effect of contractual subordination in the event that insolvency proceedings are commenced against the borrower under the Insolvency and Bankruptcy Code 2016 is not clear at this stage.
Almost all project procurement executed by governmental authorities require that the project company be incorporated in India.
The typical legal form adopted is a private limited company which is incorporated specially for the purposes of executing the project.
Indian company legislation provides a statutory framework for corporate re-organisation outside of insolvency, such as compromises, arrangements and amalgamations. Each of these can be implemented through a court (tribunal) approved scheme.
A scheme of arrangement may be entered into: (i) between a company and its creditors or any class of them; or (ii) between a company and its members or any class of them. As in other common law jurisdictions, a scheme of arrangement must be approved by a specified threshold of each class of creditors and members.
The principal legislation relating to company insolvency in India is the Bankruptcy and Insolvency Code 2016. The Bankruptcy and Insolvency Code permits the reorganisation of a company in insolvency through a court (tribunal) approved resolution plan accepted by a specified threshold of financial creditors. Some of the techniques that may be used for the purposes of reorganisation may include statutory schemes referred to above but the principle benefits are a moratorium on proceedings against the company and an easier financial creditor driven “cram-down” across the capital structure of the company.
Out of court restructurings and reorganisations driven both by lenders or management are not uncommon and the RBI has been pushing entities within its regulatory perimeter to implement out-of-court resolution plans for distressed borrowers.
If an application for insolvency is admitted, a moratorium is imposed on all enforcement and recovery proceedings against the company in question and its assets. As such, a creditor may not take legal proceedings to enforce its debt claim before a court. In addition, no enforcement of security interests granted by the company are permitted. The moratorium does not however apply to third-party security providers or guarantors.
The liquidation waterfall in respect of a company is set out below:
A liquidation of a company is required if the resolution plan with respect to it is not approved within a particular period.
As to a resolution plan itself, there is no specific priority of payment, except that (i) operational creditors cannot be treated less favourably in terms of payment than their position if the company were to be liquidated or, if better, if resolution plan recoveries were to be paid out in accordance with the liquidation waterfall; and (ii) financial creditors who do not vote in favour of resolution plan cannot be treated less favourably in terms of payment than their position if the company were to be liquidated.
A moratorium in respect of a company prevents a lender from seeking to enforce its debts and security against that company. The lender instead is required to participate as a financial creditor in the insolvency resolution process by becoming a member of the "committee of creditors". The ability to influence the decision making of the committee of creditors depends on the value of the debt that a lender holds.
In addition, whether or not a lender is secured or unsecured is not relevant for the purposes of determining a lenders' voting power on the committee of creditors. Given the broad powers of the committee of creditors to approve a resolution plan, the security of a secured creditor may be varied by the committee of creditors.
Financial service providers such as banks and non-banking financial companies were originally excluded from the resolution process under the Insolvency and Bankruptcy Code and to a certain extent remain excluded at present.
However, following a number of regulated lenders turning insolvent, the Indian government has recently amended the Insolvency and Bankruptcy Code to extend its provisions (with modifications) to certain financial service providers that are notified by the government. The relevant piece of subordinate legislation is the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019.
Banking companies may be wound up under the Banking Regulation Act, 1949 and other financial service providers not subject to the new rules referred to above remain subject to the relevant insolvency provisions of the Companies Act, 2013.
Most projects in India will benefit from comprehensive insurance policies. The placement of such insurance policies is a typical requirement of lenders operating in the project finance market. Further to recent regulatory developments, only insurance companies registered with the Insurance Regulatory and Development Authority of India (IRDAI) are permitted to offer insurance in India – this includes onshore and offshore insurers. However, there are few overseas insurers who are so registered and the preference is to operate through local JVs. As such, typical insurance policies for projects are locally underwritten.
Goods and service tax (plus applicable surcharge and cess) will be applicable on premia paid for insurance policies, based on type and amount of risk cover.
Typically, in project finance transactions in India, the lender or its agent is named as the beneficiary (co-insured and/or loss payee) of the insurance policy. The proceeds of an insurance claim under such an insurance policy may be applied towards the repayment of the loan.
There is no specific restriction on the payment of insurance proceeds to foreign creditors, subject to the prior approval of the authorised dealer bank required at the time of the creation of security over the relevant insurance policies. However, the general restrictions regarding minimum average maturity of debt will still apply and may impede the prepayment of loans by applying insurance proceeds.
The payments of interest to resident or domestic lenders attracts withholding tax at the rate of 10%.
The payment of interest to non-resident lenders depends on the type of lender, the type of debt instrument, the purposes of the borrowing and the currency of the borrowing. At present, withholding rates range from 5% to 40%. However, the applicable rate of withholding tax for payments of interest is subject to tax treaties which provide a preferential tax rate. There are also specific exemptions for Indian branches of foreign lenders.
Other than the stamp duty and taxation requirements set out in 2.3 Registering Collateral Security Interests and 8.1 Withholding Tax, goods and services tax at the rate of 18% would be levied on any services provided by the lender such as processing fees, commitment fees, documentation charges, service charges, collection charges, inspection charges, repossession charges, foreclosure or prepayment charges and would be recovered by the lender from the borrower at the applicable rate.
In general, while there is no rule that imposes a ceiling on the amount of interest that may be charged by financial institutions, the RBI retains the power to do so in respect of those entities that fall within its regulatory perimeter. At present, the RBI does not impose a ceiling, although there are guidelines that apply to Indian banks and financial institutions with respect to determining rates of interest. Separately, certain states in India have laws which regulate usury but these laws are not applicable in the context of project finance or other commercial financings.
Capital control regulations limit the interest that may be charged by certain categories of non-resident lenders. The external commercial borrowings framework of the RBI imposes an "all-in cost ceiling". This is a yield restriction for overseas lenders linked to LIBOR (for international currencies) and Indian gilts (for rupees). This does not, however, apply to those overseas lenders which are subject to capital markets regulations – ie, as an alternative investment fund (AIF) or an FPI .
Where the counterparty to a contract is an Indian entity, the governing law of that contract will be Indian law. It is a legal requirement that contracts between two Indian parties are subject to Indian law.
Project contracts that are entered into with overseas entities may be governed by foreign law and this depends on the bargaining power between parties.
In certain instances, split EPC structures are adopted for tax reasons, with an onshore and offshore element. The offshore element will usually be governed by foreign law.
The governing law of the principal lending document will be determined by the lenders' preference. Certain offshore lenders and DFIs prefer that their loan agreements are documented under foreign law. Indian lenders will always use Indian law loan agreements.
Security documents relating to Indian assets will be governed by Indian law.
The governing law of intercreditor arrangements usually depends on the identities of the lenders, whether there is any foreign law governed hedging in place and whether additional lenders are expected to share in the security (eg, working capital lenders). There may be foreign law governed intercreditor agreements between offshore term lenders and hedging counterparties, overlaid with Indian law security sharing letters/arrangements with local working capital lenders.
Please see 9.1 Project Agreements and 9.2 Financing Agreements.
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The promotion of infrastructure remains a key focus of the Indian government as the country suffers from chronic under-investment in this respect. The Indian government has therefore sought to increase budgetary allocations towards the development of infrastructure and also to promote private participation in its development. The privatisation of parts of the Indian railways, once considered untouchable, is now seemingly a reality. To this end, the Indian government has set out its plans in a roadmap entitled the "National Infrastructure Pipeline" (NIP) for 2019 to 2025, which consists of over 6,500 projects across sectors and represents a major commitment from the Indian government to promote the growth of economic and social infrastructure.
Some of the major developments and change in trends which impact the infrastructure space over the last 12 months have been highlighted below – including those attributable to COVID-19.
A number of measures have been taken by the Indian government to mitigate the impact of the economic shock as well as the practical difficulties faced by commercial counterparties.
In India, restructuring the debt of a borrower by a financial institution subject to the supervision of the Reserve Bank of India attracts regulatory asset classification downgrades for that debt, which in turn increases the capital provisioning requirements for that financial institution. This is meant to discourage banks and non-banking financial companies from "evergreening" non-performing debt.
However, following COVID-19, the Reserve Bank of India has permitted regulated financial institutions to restructure certain eligible debt without triggering this asset classification downgrade. This relaxation has been provided for a limited period only, and in respect of borrowers under stress "on account of the COVID-19 pandemic", whose debt accounts were otherwise classified as "standard" as at 1 March 2020. Financial institutions are required to implement a "Resolution Plan" which does not dislodge existing management (which may otherwise have been required).
Force majeure events and other relaxations
The country-wide lockdown imposed following the emergence of COVID-19 has also had a practical impact on the performance of contractual obligations. While frustration and impossibility are recognised in statute as exceptions to performance, many contracts have negotiated force majeure provisions. In this context, several government departments that have entered into contracts with private parties in relation to the procurement of goods and services have taken policy decisions to permit the invocation of force majeure provisions in these contracts by counterparties.
For example, the Ministry of New and Renewable Energy released a memorandum which would allow extensions of time with regard to scheduled commissioning dates of renewable energy projects, where evidence is delivered by the project developer that commissioning deadlines could not be met due to the disruption of supply chains. Requests have also been issued to state government departments to provide similar dispensations. In another example, the Ministry of Road Transport and Highways recommended an extension of time for contractors under the force majeure clauses due to COVID-19.
Several other measures were announced by the Ministry of Road Transport and Highways with respect to easing liquidity for contractors. These include more relaxed conditions for the release of retention monies and the waiving of penalties for any delay in providing bank guarantees and other performance security for contracts entered into for a certain period after the emergence of COVID-19.
Insolvency and Bankruptcy Code amendments
Various measures have also been taken with respect to the Insolvency and Bankruptcy Code 2016 (IBC). The period of lockdown that was imposed by the Indian government is excluded from the calculation of time periods for the completion of the corporate insolvency resolution process under the IBC.
In addition, the IBC has been amended so that:
As at the time of writing, the period has been extended until 25 December 2020.
Financial Sector Stress
The Indian financial sector continues to suffer from considerable balance sheet stress following a large increase in non-performing loans. This has meant that certain traditional bank financiers of infrastructure and other projects providing long-term debt have shifted their focus from project finance, or have otherwise become more cautious as to project finance lending. Notably, one of India's largest banks, ICICI – which was started as an infrastructure sector lender – announced that it would shut down its dedicated project finance business vertical in November 2019 and has since significantly reduced its exposure to the sector.
In addition, two major non-bank lenders – including IL&FS, India's largest non-banking financial company, which was primarily an infrastructure sector lender – have gone insolvent in the last couple of years. As a result, non-banking financial companies that had sought in the past to fill the gap created by stressed bank lenders have sought to reduce their exposure to infrastructure lending. Combined with other project-related issues, this has led to more conservative debt sizing and credit markets remaining difficult for all but the most robust credits.
The Reserve Bank of India has taken several measures to prop up credit markets, including by lowering interest rates and the recent directions to supervised banks and financial institutions to prioritise lending to the renewable energy sector and certain social infrastructure. Following COVID-19, the Reserve Bank of India has also announced that it will, through a special purpose vehicle, purchase short-term commercial paper issued by eligible non-banking financial companies and housing finance companies to address short-term liquidity issues.
In more positive news for the sector, until COVID-19 struck there was an increase in alternative sources of financing and funding for projects, including by way of the issuance of bonds (in particular, by the larger renewables players in India) and there continues to be a strong interest in platforms investing in infrastructure, particularly roads, as well as in infrastructure investment trusts (InvITs).
Power Sector Measures
It is well known that state-owned power distribution companies ("discoms") have suffered cashflow and balance sheet issues, mainly on account of over-leveraged balance sheets and material transmission and distribution losses. This has, in turn, led to significant payment delays to both state-owned and independent power producers – a key bankability issue for power projects. The Indian government has therefore announced that certain large state-owned power sectors lenders, Power Finance Corporation and Rural Electrification Corporation, will extend the equivalent of USD12 billion in debt to state-owned discoms. These loans will be guaranteed by state governments. This is expected to improve discom liquidity significantly and consequently reduce delays in payment to power producers.
Electricity Act amendments
In addition, the central government has also introduced a bill for making amendments to the Electricity Act 2003, which regulates the power sector in India. The changes are wide-ranging but key matters that will interest both equity and debt investors in the power sector are set out below.
First, a separate authority has been created for adjudicating tariff-related disputes – the Electricity Contract Enforcement Authority – as opposed to the electricity commissions which set such tariffs and which by their nature answer to a wider set of stakeholders.
Second, there is tighter language around tariffs reflecting the cost of supply of electricity, which should address to some extent the issue around the mismatch between a utility’s fixed cost liability to purchase power and the variable amounts collected by it through tariffs.
Finally, a national renewable energy policy is proposed, which will include minimum purchase obligations from renewable and hydro producers, which should bring further certainty to this market.
Extension of imposition of safeguard duties
Solar power plants use a large number of photovoltaic cells (commonly called PV or solar cells) to convert sunlight into electricity. In July 2018, the Indian government announced a safeguard duty on imported PV cells and modules at a rate of 25% with the purpose of promoting domestic manufacturing. The rate of the safeguard duty was to reduce by 5% every six months and was supposed to have been reduced to zero by July 2020.
Representations from Indian manufacturers have, however, led the Indian government to extend the safeguard duty by another year at a rate of 14.9% until January 2021 and then at a rate of 14.5% until July 2021. This has impacted the estimated overall project cost of solar PV projects, which in certain cases will require developers to approach the electricity commissions for adjusting tariffs on account of a change in law. This will be a key bankability issue for solar projects currently procuring debt and which will be importing their PV cells between now and July 2021.
The form of power purchase agreements in India continues to evolve and show improvement in terms of bankability. Recent experience with bidding guidelines and power purchase agreements, particularly those entered into with the Solar Energy Corporation of India (a state-owned power purchaser), suggests that the overall bankability of power purchase agreements is increasing, particularly in relation to the payment of termination compensation for total debt due, lender substitution rights, payment security and deemed generation provisions.
Herbert Smith Freehills LLP
London EC2A 2EG, United Kingdom
Peninsula Business Park
17th Floor, Tower B, Ganpat Rao Kadam Marg
Lower Parel (West)
Mumbai 400 013, India
+44 20 7374 8000 / +91 22 4079 1000
+44 20 7374 0888Dhananjaya.email@example.com; Ameya.Khandge@trilegal.com www.herbertsmithfreehills.com; www.trilegal.com