PROJECT FINANCING

Emerging Trends

STRICTLY PRIVATE – NOT FOR CIRCULATION

ENERGY CFO’S SUMMIT
14 TH DECEMBER 2012
LALIT INT ERCONT INENTA L, MUMBAI

Deepto Roy
Partner
PXV Law Partners
INTRODUCTION

• Indian Project Finance

• Project Finance- Evaluating Challenges
• Recent Regulatory Developments
• Trends
• What we will See

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INTRODUCTION

• Massive and Sustained Investment necessary in Indian Infrastructure

• Sources of Funds
• Government Expenditure- budgetary allowance, gap and viability funding
• Domestic Rupee Borrowing
• Multilateral Agency Funding
• Equity Funding
• Funding was becoming more “asset based” than “security based”
• Expenditure in infrastructure

2010-2011 (in Rs 2011-2012 (in Rs Eleventh Plan (in Rs

Crore) Crore) Crore)
Private Investment 1,69,227 2,08,413 7,42,912
Public Investment 2,90,832 3,19,904 13,11,293
Total 4,60,059 5,28,316 20,50,0205

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INTRODUCTION
• Infrastructure funding gaps Rs 1,27,570 Crores in 2011-2012
• Ability of commercial banks to provide long term funds is limited
• Significant liquidity issues resulting from international credit crisis for domestic and
international banks
• Over-leveraged borrower groups- presents a commercial risk for banks
• Banks are running out of headroom in financing borrower groups and sectors
• High cost of funds
• Specialized NBFCs fund infrastructure but are restrained by lack of access to funds
• Decreased pipeline of “bankable” projects
• Project risks

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PROJECT FINANCE- EVALUATING CHALLENGES
PROJECT FINANCE- EVALUATING
CHALLENGES
• Political risk and uncertainty of Government actions
• Uncertainty of tariff flows
• Bankability of Project Documents- “pre-cooked”
documents leave little room for commercial negotiation
and risk mitigation
• Competitive Bidding and related risks
• Land
• Management of the acquisition process
• Local and political issues
• New land acquisition rules
• Environment
• Management of the environmental impact assessment
process
• Increased vigilance by local and environmental groups
• Multiple state and central government agencies involved
• Multiple levels of approvals required
• Litigation risk

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PROJECT FINANCE- EVALUATING
CHALLENGES
• Fuel Supply
• Uncertainty in relation to allotted coal blocks
• Coal India Limited significantly behind targets in terms of extraction of coal (creating a
supply shortfall)
• Model coal supply agreement- guarantees only 60% supply
• Indonesian coal regulation- affected projects with long-term fixed price power supply
agreements
• No pass-through of coal costs in bidding projects
• “Many a slip between cup and lip”- sanction v. disbursement
• Realistic appraisal of conditions precedent
• Developer’s preparedness

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PROJECT FINANCE- EVALUATING
CHALLENGES
• Different treatment of domestic and international lenders
• International lenders are not protected under specific security enforcement legislation such as the
SARFAESI Act and the DRT Act
• No ability to access the CDR mechanism
• Inter-creditor issues in relation to domestic and international lenders, in particular with respect to
enforcement of security
• Stamp duty risk
• Maharashtra, ad-valorem stamp duty on loan and security arrangements
• Registration and syndication related stamp duty issues in Gujarat
• Bringing agreements for the purpose of filing forms makes the document subject to stamp duty
• Cost implication for fronting and participation structures and syndication
• Additional issues with security
• Mortgage cannot be created over forest land- permission from forest department to allow lender’s
nominee to use forest land- time consuming process
• Enforcement of mortgage over SEZ land- lender’s nominee must be approved by SEZ developer/
user
• Financing cross- country pipelines- no security can be created over the rights of way
• Enfor

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REGULATORY DEVELOPMENTS
MEASURES TO ENHANCE INFRASTRUCTURE
FUNDING
• Use of foreign exchange reserves for Infrastructure Development through IIFC (UK) Ltd.
• RBI invests in fully government guaranteed foreign currency denominated bonds in
IIFCL for on-lending to Indian companies implementing infrastructure projects
• Exposure norms in relation to borrowers and groups in the infrastructure sector has
been enhanced – From 15% to 20% in case of individual investors and from 40% to
50% in case of borrower groups
• Banks have been permitted to extend finance to funding promoter’s equity in cases of
investment in companies operating infrastructure projects
• Promoter’s shares in an infrastructure projects pledged to a lending bank have been
excluded from the bank’s capital market exposure
• Introduction of credit-default swaps to allow the banks to manage their exposure in a
better manner
• Measures to enhance the corporate debt markets
• FIIs permitted to invest in unlisted infrastructure binds

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REGULATORY CHANGES… ECBS
• Recent Changes in Regulations related to
External Commercial Borrowings (ECBs)
• Liberalization of the security creation process-
for security over immovable properties,
corporate guarantees and pledge of shares
• Increase in ceiling on ECBs to US $ 750
million in a year
• ECB can be used to repay short term bridge
finance for infrastructure projects under the
approval route
• ECB can be used to fund interest during
construction (IDC)
• Credit Enhancement
• Rupee Loans with Non-resident guarantees
not considered as ECB
• Infrastructure Companies and
Infrastructure Finance Companies can
obtain “credit enhancement” for domestic
debt raised through issue of capital market
instruments such as debentures and bonds
• Direct foreign equity holders can now
provide credit enhancement for domestic
capital market dent
• Guarantee fee cannot exceed 2%
• All in costs applicable once the credit
enhancement is invoked

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REGULATORY CHANGES… ECBS

• Take out financing under the approval route

• Tripartite arrangement between the domestic bank and overseas recognized
lender to facilitate the take-out finance within 3 years
• Fees payable to the foreign financier should not exceed 1% per annum
• Prior approval of the Reserve Bank of India is required
• Permission to obtain ECBs in Renminbi
• For infrastructure companies, 25% of ECB amounts can be raised to re-finance
existing rupee loans
• 75% of the ECB must be used for capital expenditure
• The purpose of the refinanced rupee loan should have been capital expenditure
• Not available to companies in the power sector.
• Indian companies can obtain ECBs from foreign equity holders designated in Indian
rupees
• Increase in all-in-cost ceiling for trade credits for imports into India

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REGULATORY CHANGES…
INFRASTRUCTURE DEBT FUNDS
• Initiative by the Government of India to bridge the asset liability mismatch – idea floated
in the Union Budget 2011-12
• November 2011- RBI and SEBI notified detailed guidelines for setting up infrastructure
funds which can be either NBFCs or (IDF-NBFCs) or Trusts regulated by the SEBi
Mutual Funds Regulations (IDF-MF)
• Scheduled Commercial Banks are allowed to act as sponsors to the IDFs with the prior
approval of the RBI
• IDF NBFCs can raise funds through issue of rupee or dollar denominated bonds
• Funds can be used to take-out loans in projects which have already reached COD and
completed one year of operations
• IDF NBFCs can fund only PPP projects whereas IDF MFs can funds non-PPP projects
as well
• Model tripartite agreement for NBFC-IDFs has been approved

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TRENDS
INCREASED DUE DILIGENCE EMPHASIS
• Lenders have become significantly more
cautious on projects risks
• Issues in relation to potential litigation with
respect to regulatory approvals and
allotment
• Risk of cancellation of licenses- due
diligence to cover not just the issue of the
license but also the license allotment
process
• Involvement of forest land increases project
risk significantly

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EVOLVING NATURE OF SPONSOR
SUPPORT
• Traditional sponsor support-limited to cost overrun, shareholding and completion
undertakings
• Growing emphasis on sponsor credentials and commitment to support the Project
• Evolving Nature of Sponsor Support
• Capped and upcapped Cost overrun support
• Technical support undertakings
• Raw material, Feedstock Supply Arrangements, Transmission Support,
Transportation Support
• Offtake undertakings
• Marketing assistance for sale of products
• Tariff/ revenue gap funding
• Termination payment gap funding- to fund termination payments in case of shortfalls
under Concession Agreement
• Project Management Support
• Hedging Support

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MULTILATERAL DEVELOPMENT BODIES/
ECA FUNDED FINANCINGS
• IFC, ADB and OPIC are making significant
debt and equity investments in India
• With banks suffering from lack of liquidity,
ECAs/ Multilateral Development Bodies
have become a significant source of funding
• Projects involving high capital expenditure
• ECAs will fund “pre-approved” projects by
allotting funds to a commercial bank
• On-lending through a commercial bank
• Cheap and long term funding
• Independent agency verification
• Higher up-front equity
• Increased compliance requirements
including environmental compliance (e.g.
Equator Principles) and more stringent due
diligence and documentation requirements

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SUB-LIMIT FINANCING AND PHASE WISE
PROJECT EXPANSIONS
• Sub-limit financing
• Facilities provided under umbrella commitments by banks
• Facility may be limited to a component or part of the project
• Development of Projects in several phases (large projects- power plants, refineries)
• Several sets of lenders
• Ring fenced security arrangements and separate cash waterfalls
• Common facilities may be shared between different phases and should be available for
use in case of enforcement of rights by lenders
• Complicated inter-creditor and trustee arrangements

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FINANCING RENEWABLE ENERGY
• Indian financiers still not comfortable with financing renewable projects
• Most projects funded on a balance sheet rather than project finance basis
• Despite significant emphasis from the Government, regulatory gaps and uncertainties
continue to exist
• Problems with renewable projects
• Regulatory risks
• Technologies are at a nascent stage
• Inexperienced developers
• Price bids submitted without sufficient risk analysis
• Power Purchase Agreements not bankable
• Rapid devaluation of assets
• Intellectual property intensive- risk of infringement litigation
• Evacuation and interconnection risks
• Possible Solutions
• Payment security mechanism with budgetary allocation set up by the Government of
India
• Long-term tax free bonds by banks to fund renewable prjects
• Credit guarantees from the Indian Renewable Energy Development Authority (IREDA)

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WHAT WE WILL SEE
• Innovative Financing Structures
• Increase access to Bonds and Debt markets to replace expensive rupee loans
• Issuance of long term infrastructure funds- tax free status to ease raising of funds
• Multilateral and development institution funding
• Bringing in new classes of institutional investors (pension funds, insurance companies,
provident funds)
• ECA Backed Funds
• Replacement of Rupee with ECB
• NBFC Funding- NBFCs with focus on infrastructure permitted to avail ECBs upto 50% of
their net owned funds for on-lending to the infrastructure sector
• Issuance of municipal bonds by local governmental authorities to fund urban
infrastructure projects and viability gap funding

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THANK YOU

Deepto Roy
deepto.roy@pxvlaw.com
+919654400716