WORLD BANK INSTITUE
LEGAL ISSUES IN INFRASTRUCTURE
FINANCING
Mohit
M hit Saraf
S f
Senior Partner
Luthra & Luthra
Law Offices
A VIEW OF THE INDIAN
INFRASTRUCTURE SPACE
„
INFRASTRUCTURE FINANCING GOING
THROUGH A PARADIGM SHIFT
– Growth of the Indian economy (8% +)
– Key bottleneck in the growth story in slow growth of
Infrastructure Development in India
„
DEMAND CONTINUES TO OUTPACE
SUPPLY IN ALMOST ALL SECTORS OF
INFRASTRUCTURE
– Government development targets have not been met
2
A VIEW OF THE INDIAN
INFRASTRUCTURE SPACE
– Power ggeneration short of planned
p
targets
g
„
EASY AVAILABILITY OF CREDIT
– Need for banks to deploy large amounts of
funds
– Small commercial banks ready to participate
– Foreign banks willing to provide credit
„
LOAN TENOR INCREASING
3
A VIEW OF THE INDIAN
INFRASTRUCTURE SPACE
„
MARKET RELATED RISK
RISK:: Limited
Recource Project Finance:
Finance: Telecom and
LNG.
NG..
NG
LNG
„
UTILITY RISK
RISK:: If nott creditworthy
creditworthy:
dit
th :
Demand--supply mismatch – vendor finance,
Demand
corporate
t finance,
fi
but
b t nott project
j t finance
fi
finance.
.
4
LEGAL ISSUES IN
INFRASTRUCTURE FINANCING
„
SHIFT OF NEGOTIATION BALANCE
– TOWARDS DEVELOPER:
DEVELOPER:
– Dilution of lender’s discretion
» Insistence to place reasonability tests
– Limited conditions precedent
» No
N -predefined
Nod fi d time
i
f
for
grant off environmental
i
l
clearances, change in land use requirements,
regulatory approval, etc.
etc.
5
LEGAL ISSUES IN
INFRASTRUCTURE FINANCING
– RELAXED COVENANTS
» Push back on cross defaults
» Demand for deletion or cross acceleration
– TIME FOR SECURITY CREATION
» Security creation as a CP sought to be waived
because of requirement of license or approval
6
LEGAL ISSUES IN
INFRASTRUCTURE FINANCING
„
PRESENCE OF FOREIGN LENDERS:
LENDERS: SECURITY
CREATION BECOMES DIFFICULT
» RBI
RBI’ss permission under FEMA required to create
interest on immoveable property and shares
» RBI’s permission required for sponsor to guarantee
foreign loans
» Need to identify exotic structures
„ Ndu
Ndu;; Shortfall undertaking
undertaking;; Indemnity
» Increases enforceability & regulatory risk
7
LEGAL ISSUES IN
INFRASTRUCTURE FINANCING
FOREIGN LENDERS
– Benefit of SARFAESI not available
– DRT is not available as a forum
– Creating inter
inter--creditor mechanism remains a
challenge
» Domestic lenders should continue to enjoy their rights
while foreign lenders do not get dis
dis--advantaged
» Such ICA not tested for enforceability
8
LEGAL ISSUES IN
INFRASTRUCTURE FINANCING
FOREIGN LENDERS
– DIFFERENT GOVERNING LAWS AND
FORUMS(DHABOL)
» Loan agreement and InterInter-creditor agreement:
agreement:
English Law
» Security Documents:
Documents: India Law
» In a default, this creates multiple suits
9
LEGAL ISSUES IN
INFRASTRUCTURE FINANCING
SECURITY CREATION
– Cost of securityy creation continues to be high
g
– Process for security creation remains lengthy
» Need for licensor’s/lessor’s permission
» Permissions remain discretionary with no objective
standards
10
LEGAL ISSUES IN
INFRASTRUCTURE FINANCING
BROWNFIELD CONCESSIONS
– Only revenue available as security
– Certain cases only surplus cash flow available as
security
» Cause for concern since allows the sponsor to divert
revenues
» Since no security over revenues, third party gets
clean title
» Lenders have protection only through contractual
covenants which are not relevant for non bona
bona--fide
transferees
11
LEGAL ISSUES IN
INFRASTRUCTURE FINANCING
LICENSOR INFLEXIBILITY
– Important
p
contractual agreements
g
like Escrow
Agreement, TRA & Substitution Agreement are
licensor driven
– “Take
Take--it
it--oror-leave
leave--it
it”” drafts are provided
– Create conflicting issues
issues:: lender’s rights &
licensor’s stipulations
12
LEGAL ISSUES IN
INFRASTRUCTURE FINANCING
NHAI PROJECTS
– Project documents for toll based road projects
provides that security may be created over the cash
fl in
flow
i favor
f
off the
h escrow agent for
f the
h benefit
b fi off
the lenders
– Not customary in syndicated lending
– Security normally is in favor of a trustee holding
for the benefit of the lenders
– Legal fiction that the escrow agent being the agent
of the trustee
13
LEGAL ISSUES IN
INFRASTRUCTURE FINANCING
NHAI PROJECTS
SUBSTITUTION AGREEMENT IS LOOSELY
WORDED:: WITH NO TIME OR CRITERION
WORDED
BOUND DETERMINATION SPECIFIED
14
LEGAL ISSUES IN
INFRASTRUCTURE FINANCING
SUBORDINATE DEBT Vs EQUITY CONTRIBUTION
– Need to define subordination principles
– There has to be direct agreement with the
subordinate lender and senior lenders to
restrict abilityy to accelerate, seek repayment
p y
&
prepayment
– Subordination is only through contract and not
under law (like equity investment)
15
LEGAL ISSUES IN
INFRASTRUCTURE FINANCING
DELHI AIRPORT
– Brownfield projects do not provide for security
o er any
over
an of the transfer
t
f
assets
t – even
e en
lease/license rights cannot be mortgaged for the
duration of the lease/license
– Enforcement of pledge over shares of the
project company where the licensor is also
participating may be difficult
16
Thank you
y
Luthra & Luthra
Law Offices
M b i New
Mumbai.
N D
Delhi.
lhi Bangalore
B
l
Tel: +(91) 22 6630 3600
Fax: +(91) 22 6630 3700
E-mail:
il msaraf@luthra.com
f@l th
Website: www.luthra.com