Project Finance in India - Part 3

Welcome to Part 3 of Project Finance in India, a series in which I will explain the legalities surrounding financing projects in this rapidly developing country. In this installment, I will cover the documents involved in project finance, the typical project risks, and dispute resolution.

In the previous installment, we covered the relevant regulatory authorities, regulatory requirements, as well as the relevant transactional structures involved in project finance in India.

However, undertaking project finance in this country involves much practical information. What are the documents required to make it happen? What are the risks associated with these types of projects? And perhaps most importantly, how does one resolve conflicts when they arise?

Documents involved

In the project finance transactions, the following documents are usually involved:

1. Project documents. These include the documents relevant to, and dependent on the nature of the project, for example, (a) the concession agreement which is the most important document since the government authority uses it to vest the interests in the project company; (b) an operation and maintenance contract; (c) a supply contract; (d) an offtaker agreement;
2. Loan agreement; and
3. Security documents, for instance, mortgage documents, deed of hypothecation, share pledge agreement; and sponsor guarantees, etc.;
4. Depending on whether there is a consortium of lenders, there may also be other documents such as a security trustee agreement and intercreditor agreement.?

Typical project risks

The numerous risks associated with a project financing transaction are linked to the project's risk. The following are some of the most common project risks:

(1) construction risks, which relate to the proper and timely construction of the project; (2) operation risks; (3) input or supply risks; (4) regulatory risks; (5) revenue risk; (6) foreign exchange risks (when foreign currency transactions are involved).

While it may not be feasible to mitigate all risks completely, project finance lenders make efforts to ensure that all risks are fairly allocated amongst the transaction parties to protect the lenders. In the Indian market, non-recourse financings are not very common; most project financings in India are using a limited recourse financial structure. These risks can be mitigated by:?

1. obtaining sponsor/contractor guarantees for the project, cost overruns, and completion risk;
2. obtaining appropriate insurance coverage and ensuring engagement of a competent project operator;
3. ensuring adequate rights of lenders linked to the project documents and operations and maintenance documents;
4. ensuring execution of a long-term supply contract and selection of a qualified supplier, or through adequate payment security mechanisms;
5. monitoring project cash flows using a trust and retention account structure and ensuring that such cash flows are used in line with the waterfall;?
6. adequate security arrangements related to the project; and
7. agreeing on extensive reporting and inspection obligations.

Dispute resolution

When it comes to the projects in which the parties are Indian residents, since the functioning of the project and compliances are subject to Indian laws and also for the convenience of instituting suits and seeking necessary reliefs, typically the project agreements are governed by Indian law. While if there are non-resident parties to the agreement, project agreements may in some cases be governed by foreign law.

Financing agreements are typically governed by Indian law where the loans to fund the project costs are rupee denominated. In contrast, offshore financing transactions, facility agreements for external commercial borrowings are typically subject to foreign laws, and usually English law or Singaporean law is preferred. In addition, security documents for Indian projects are normally subject to Indian laws because the assets are situated in India and for ease of the creation and enforcement of security interests.

In India, a foreign judgment can be enforced by domestic courts. According to Section 44A of the Code of Civil Procedure, a decree passed by a ‘superior court' in any country or territory outside India that has been declared as the ‘reciprocating territory' can be executed in India by filing a certified copy of the decree with the district court, which will then treat the decree as it would one of its own.

India is a member state to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (New York Convention) and the Geneva Convention on the Execution of Foreign Arbitral Awards, 1927 (Geneva Convention). Therefore, international arbitral awards passed in any of the convention member states are recognized by local courts in India.?

While the Arbitration and Conciliation Act 1996 states that there are certain conditions the foreign awards must fulfill in order to be enforceable, the main conditions are: the subject matter of the dispute must be arbitrable in India and must not be contrary to the public policy of India.?

Conclusion

Being aware of the practical aspects of project finance is always essential, perhaps more so in countries with whose markets we may not be too familiar.

When it comes to risk management, it may not be feasible to mitigate all risks completely.

However, project finance lenders make efforts to ensure that all risks are fairly allocated amongst the transaction parties to protect the lenders. In the Indian market, non-recourse financings are not very common; most project financings in India are using a limited recourse financial structure.?

In terms of conflict resolution, since the functioning of the project and compliances are subject to Indian laws and also for the convenience of instituting suits and seeking necessary reliefs, typically the project agreements are governed by Indian law.?

While if there are non-resident parties to the agreement, project agreements may in some cases be governed by foreign law.

This concludes Part 3 of my series on Project Finance in India. If this topic interests you and you’d like to learn more, please follow me as I will be publishing more content about this in the coming weeks.