India: Project Finance Comparative Guide

1 Legal framework

1.1 Beyond general commercial and contract laws, what other specific laws and regulations govern project finance transactions in your jurisdiction?

Project finance in India is not regulated by a single codified statute. Instead, a number of laws and regulations apply to various aspects of project finance transactions, depending on the nature of financing and that of the project. All rupee-denominated lending for projects are governed by:

• the Banking Regulation Act 1949; and
• the Reserve Bank of India (RBI) Act 1934 and guidelines, along with the master directions, notifications and circulars issued by the RBI from time to time.

For projects that are funded by non-residents by way of equity or quasi-equity instruments, such investments are governed by:

• the Master Direction on External Commercial Borrowings, Trade Credit, Borrowing and Structured Obligations ('ECB Master Direction');
• the Foreign Direct Investment (FDI) Policy issued from time to time by the Department of Industrial Policy and Promotion; and
• the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000 of the RBI.

Cross-border debt transactions must comply with either:

• the External Commercial Borrowing (ECB) Guidelines issued by the RBI; or
• the Foreign Portfolio Investor Framework of the RBI.

ECBs are governed by:

• the Foreign Exchange Management Act 1999;
• the Master Direction on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency;
• the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations 2000; and
• the Foreign Exchange Management (Borrowing or Lending in Rupees) Regulations 2000.

Apart from the aforementioned statutes and regulations, there are a number of other laws that have an implication on project finance transactions:

• Contract Act, 1872: This law governs contracts, including loan agreements and security documents.
• Companies Act, 2013: This regulates:
• • the registration of charges on company assets;
  • the conversion of debt into equity; and
  • other requirements related to the receipt of loans and the creation of security over company's assets.
• Transfer of Property Act, 1882: This statute deals with the creation and enforcement of security over immovable assets.
• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ('SARFAESI Act'): This act regulates the enforceability of security to recover debts. The benefits under the SARFAESI Act are not available to foreign creditors, with the exception of the Asian Development Bank and the International Finance Corporation.
• Insolvency and Bankruptcy Code 2016 (IBC): This is a comprehensive statute dealing with the insolvency and bankruptcy of companies.
• Code of Civil Procedure 1908 (CPC): This is a procedural statute that governs the procedure for civil litigation in India, which applies to the recovery and enforcement proceedings of security. The CPC is also applicable to dispute resolution proceedings under any contracts.

Project finance is primarily used in the context of infrastructure projects. In the absence of a single agency as an umbrella regulator, sector-specific regulators govern projects in a given sector. Hence, the regulations applicable to projects in a particular sector will have direct implications for the project financing transaction. Examples of such regulators in India include:

• the National Highway Authority of India;
• the Directorate General of Hydrocarbons;
• the Central Electricity Regulatory Commission;
• the Airport Authority of India;
• the Maritime Boards of the respective states, port trusts and the Port Tariff Authority; and
• any other authority that may be constituted by the state in which the project is based

1.2 Do any bilateral and/or multilateral international instruments have particular relevance for project finance transactions in your jurisdiction?

Under Section 90 of the Income Tax Act, India has concluded 94 comprehensive double tax avoidance agreements (DTAAs) and eight limited DTAAs. DTAAs are generally relieving in nature and do not impose tax. They are comprehensive agreements based on a mutual understanding between two sovereign states and are well defined. In case of ambiguity regarding their provisions, the interpretation that is most harmonious with the provisions of the Income Tax Act will prevail. A DTAA between India and other countries cover only residents of India and residents of the negotiating country. Non-resident or foreign companies operating in India are subject to withholding tax on their income pertaining to dividends, interest, royalties and fees for technical services, as set out under the Income Tax Act. However, foreign companies which are tax resident in countries with which India has a DTAA can claim the most beneficial provisions and rates set out in either the Income Tax Act and the DTAA.

1.3 Beyond normal governmental institutions, are there regulatory bodies that play a particular role in project finance in your jurisdiction? What powers do they have?

Just as there is no overarching legislation that governs project finance in India, there is no dedicated government institution or regulator which is exclusively empowered with regulating project financing activities in India.

The RBI is India's central bank and the key regulatory body, under the aegis of the Ministry of Finance. It is responsible for regulating the Indian banking system and is tasked with the issue and supply of the Indian rupee. The RBI regulates the financial sector and governs the financing ecosystem through its rules, directions and master circulars. It plays a central role in regulating both offshore and onshore financial transactions in the country. Procedurally, any company creating a security interest over its assets has to register the charge with the relevant registrar of companies (ROC). If a charge is created but not registered with the ROC, the claim will not be recognised by the liquidator or other charge holders of the borrower company.

Lenders must register a charge created over movable/immovable with:

• the Central Registry of Securitisation Asset Reconstruction and Security Interest of India; and
• the National e-Governance Services Limited.

For all public-private partnership (PPP) projects, the concession agreements specify that:

• all financing documents and amendments must be submitted to the authority before execution; and
• any changes required by the authority must be incorporated into the project documents.

Each infrastructure sector in India is regulated by one or more authorities/regulators with jurisdiction over that particular sector. These authorities include the following:

• The National Highways Authority of India and the Ministry of Roads are responsible for maintaining roads and highways in the country;
• The respective state electricity regulatory commissions are the regulatory bodies for the power sector;
• The Airports Authority of India governs the country's airports; and
• The maritime boards of the respective states, the port trusts and the Port Tariff Authority regulate the ports sector.

Many other similar authorities may be constituted from time to time to regulate and formulate rules for a given sector.

1.4 What is the government's general approach to project finance in your jurisdiction? Is PFI/PPP a preferred model in your jurisdiction?

The Seventh Schedule of the Indian Constitution has granted legislative and executive powers to the central and state governments over various sectors. Every category of the infrastructure sector is governed by the applicable statute enacted by the relevant legislature vested with the jurisdiction over the particular sector.

With a view to facilitating PPP initiatives, various guidelines have been issued by the government from time to time to boost private investment, such as:

• sector-specific model concession agreements;
• the updated Harmonised List of Infrastructure Sectors;
• guidelines for the formulation, appraisal and approval of PPP projects;
• the Viability Gap Funding Scheme; and
• the India Infrastructure Project Development Funding Scheme.

Certain sector-specific laws have also been passed over time with the aim of promoting private sector participation in the power, highways and airport sectors, such as:

• the Electricity Act 2003;
• the National Highways Act 1956;
• the Airports Authority of India Act 1994;
• the Metro Railways (Operation and Maintenance) Act, 2002;
• the Railway Act 1989.

With the opening up of the infrastructure sector to private investment, a huge pool of private capital in the form of sponsor equity and bank lending was unlocked, prompting an exponential boom in the sector. However, given the inherent risks and long gestation periods involved in typical infrastructure projects, over time lenders noticed the number of non-performing assets beginning to mount and banks being stretched to capacity. For projects that are vital but financially unviable, the government's Viability Gap Funding Scheme is one example of an institutional mechanism that provides financial support to infrastructure PPPs.

The last two decades have seen rapid infrastructure development in sectors such as:

• roads and highways;
• airports in both metro areas and non-metro areas;
• power;
• telecommunications;
• transportation;
• urban mobility;
• water supply;
• sanitation; and
• renewable energy.

India has experimented with the PPP model on a large scale – although with mixed results, as is the case with any asset financing model. However, over the years, the PPP models have been refined, reworked and renewed in order to encourage long-term capital investment by the private sector.

The Cabinet Committee on Economic Affairs approved the procedure for the approval of PPP projects in 2005 with the aim of developing the power sector, the transport sector, certain utilities (greenfield airports and urban rail infrastructure), the telecommunications sector and the ports sector.

The Public-Private Partnership Appraisal Committee was set up in 2006 to:

• ensure the speedy appraisal of projects;
• eliminate delays;
• adopt international best practices; and
• ensure uniformity in project appraisal mechanisms and guidelines.

Certain sector-specific laws have also been passed over time with the aim of promoting private sector participation in the power, highways and airport sectors, such as:

• the Electricity Act 2003;
• the National Highways Act 1956;
• the Airports Authority of India Act 1994; and
• the Metro Railways (Operation and Maintenance) Act, 2002.

Both the central and state governments have worked tirelessly to attract private investment in infrastructure development. Such projects were traditionally government sponsored, but this model suffered from delays, inefficient deployment of capital, systemic inefficiencies and chronic time overruns. With the opening up of the infrastructure sector to private investment, a huge pool of private capital by way of sponsor equity and bank lending was unlocked, prompting an exponential boom in the sector. However, given the inherent risks and long gestation periods involved in typical infrastructure projects, over time lenders noticed the number of non-performing assets, beginning to mount and banks being stretched to capacity. For projects that are vital, but financially unviable, the government's Viability Gap Funding Scheme is one example of an institutional mechanism that provides financial support to infrastructure PPPs.

The last two decades have seen rapid infrastructure development in sectors such as:

• roads and highways;
• airports in both metro areas and non-metro areas;
• power;
• telecommunications;
• transportation;
• urban mobility;
• water supply;
• sanitation; and
• renewable energy.

India has experimented with the PPP model on a large scale – although with mixed results, as is the case with any asset financing model. However, over the years, the PPP models have been refined, reworked and renewed in order to encourage long-term capital investment by the private sector.

2 Project finance market

2.1 How mature is the project finance market in your jurisdiction?

The project finance market in India is fairly mature, with both domestic and cross-border equity and debt structures permitted. Clear and unambiguous guidelines govern such transactions, creating a conducive atmosphere for investing, borrowing and lending in the infrastructure sector. While financing for projects may come from a variety of sources, the main sources remain equity, debt and government grants.

Lenders of debt capital have a senior claim on the income and assets of the project. Generally, debt finance makes up the major share of investment needs (usually about 70% to 90%) in public-private partnership (PPP) projects.

The government has recently announced a slew of measures to improve the availability of long-term finance, such as the following:

• The government has approved the Framework for Sovereign Green Bonds as announced in the Union Budget 2022-23. On 25 January 2023, India issued the first tranche of its first sovereign green bond worth INR 80 billion. On 9 February 2023, the government announced the issuance of another INR 80 billion in sovereign green bonds.
• Financing has also been obtained by infrastructure companies issuing rupee-denominated bonds (popularly known as 'masala bonds').
• Infrastructure debt funds (IDFs): These are special vehicles for investing in infrastructure projects. IDFs offer long-term financing to PPP infrastructure projects which have successfully completed one year of commercial operations. As they are still at an early stage, they have a long way to go before they can be considered a popular financing mechanism.
• Credit Enhancement Scheme: The Reserve Bank of India (RBI) allows banks to offer partial credit enhancements to corporate bonds issued by private entities for financing infrastructure projects. Similarly, India Infrastructure Finance Company Limited – an institution set up by the government to fund infrastructure projects in India – also provides a partial credit guarantee to enhance the credit rating of bonds issued by infrastructure companies to a rating of AA or higher for the refinancing of existing loans.
• Infrastructure investment trust (InvIT): Similar to mutual funds, an InvIT is a collective investment scheme which enables individual and institutional investors to invest directly in infrastructure projects. To date, 12 InvITs have been registered with the Securities and Exchange Board of India.
• Relaxation of external commercial borrowing (ECB) policy: ECB norms have been relaxed on many occasions to attract borrowing from foreign lenders.

2.2 On what types of project and in which industries is project finance typically utilised?

Project finance in India has traditionally focused mainly on infrastructure development. According to the RBI, a credit facility is treated as 'infrastructure lending' to a borrower company which is engaged in the development, operation and/or maintenance of:

• any infrastructure facility in specific sectors; or
• any infrastructure facility of a similar nature.

The newly notified Harmonised Master List of Infrastructure Sub-sectors provides an updated list of sectors and sub-sectors that fall within the definition of 'infrastructure'. The infrastructure sectors have been divided into broad categories which are further sub-categorised. The categories include:

• transport and logistics;
• energy;
• water and sanitation;
• communication;
• social infrastructure; and
• commercial infrastructure.

India has seen a surge in financing for renewable energy projects. Funding is also available to the Indian renewable energy sector through institutional investors including state-owned non-bank financial corporations, bilateral and multilateral institutions and development banks, such as:

• the Indian Renewable Energy Development Agency Ltd;
• the Industrial Finance Corporation of India;
• the Small Industries Development Board of India Power Finance Corporation Ltd; and
• REC Ltd.

2.3 What significant project financings have commenced or concluded in your jurisdiction over the last 12 months?

An investment of $250 million by Blackstone for distributed and sustainable energy infrastructure assets in the renewable energy sector has been approved.

Earlier in 2023, eight international foreign banks – including MUFG and DBS – for the first time provided funds amounting to $1.5 billion to finance transmission projects promoted by Adani Transmission Limited in Gujarat and Maharashtra.

Another significant and ground-breaking deal in India was the $1.35 billion green loan to project companies promoted by Adani Green Energy Limited to finance the construction of a 1.69 gigawatt hybrid wind and solar project, the largest renewable syndicated project financing in India, setting a new record as the largest green-certified hybrid project loan.

High-yield US-dollar bonds remain significant. Major deals in this space included JSW Hydro Energy Limited issuing $707 million green bonds for the refinancing of the Karcham-Wangtoo Project.

In another notable development Adani Electricity Mumbai (AEML), an integrated utilities arm of Adani Transmission has set up a $2-billion global medium-term notes programme (GMTN). GMTN programme and the sustainability-linked bond issuance is the next step in its capital management plan.

3 Finance structures

3.1 What project financing structures are most commonly used in your jurisdiction?

Infrastructure projects are predominantly financed through equity and debt. Domestic and cross-border equity instruments are variously governed by:

• the Securities and Exchange Board of India (SEBI) regulations;
• the Companies Act 1953; and
• the Reserve Bank of India (RBI) guidelines.

Foreign direct investment (FDI) in India:

• falls under the purview of:
• • the Department for Promotion of Industry and International Trade; and
  • the Ministry of Commerce and Industry; and
• is regulated by the RBI.

Modifications take the form of revisions to FDI policies through press releases issued by the RBI. The statutes that govern FDI in India are:

• the Foreign Contribution (Regulation) Act, 2010, which repealed the Foreign Contribution (Regulation) Act, 1976;
• the Foreign Contribution (Regulation) Rules, 2011; and
• other notification/orders issued thereunder from time to time.

Foreign institutional investors are governed by:

• SEBI, through the SEBI (Foreign Institutional Investors) Regulations, 1995; and
• the RBI, through Regulation 5(2) of the Foreign Exchange Management Act, 1999.

Debt: The common forms of debt are as follows:

• Commercial loans: These are funds loaned by commercial banks and other financial institutions and are usually the main source of debt financing.
• Bridge finance: This is a short-term financing arrangement (eg, for the construction period or for an initial period) which is generally used until a long-term financing arrangement can be implemented.
• Bonds and other debt instruments (for borrowing from the capital markets): These are long-term, interest-bearing debt instruments purchased either through the capital markets or through private placement
• Subordinate loans: These are similar to commercial loans, but they are secondary or subordinate to commercial loans in their claim on income and assets of the project.
• Institutional investors (eg, investment funds, insurance companies, mutual funds and pension funds): These typically have large sums available for long-term investment and represent an important source of funding for infrastructure projects, either through private placement or through bond purchases.

3.2 What are the advantages and disadvantages of these different types of structures?

The standard debt-equity ratio for a project remains 70:30. The Indian project finance market traditionally consisted of Indian corporate houses and groups; but given the evolving project landscape and new investment-friendly policies, international corporate sponsors have been testing the waters in the renewables and roads and highway asset spaces.

Equity financing: Equity financing is the process of raising capital through the sale of shares in a business. The advantages of equity financing include the following:

• There are no regular repayments due to the absence of a loan; and
• It enhances the fundraising capacity of companies with poor creditworthiness.

The downsides include:

• division of profits;
• dilution of control; and
• potential conflicts arising from shared ownership.

Domestic lending: This refers to loans and credits made available to companies by domestic banks and financial institutions. The advantages include the following:

• There is no dilution of ownership in the business;
• Bank loans attract tax benefits; and
• Bank loans are dependent on creditworthiness and thus help to create a positive image of the business and build business credit.

The downsides include the following:

• Bank loans result in financial repayment obligations and the creation of collateral against the loan; and
• Multiple loans reduce a company's credit rating.

The RBI has introduced long-term refinancing schemes to address this issue, given that banks are stretched to capacity. However, its implementation is linked to the commencement of commercial operations of the project and thus this option is unavailable for projects where construction is delayed for various reasons, including delays in receiving government approvals.

Project financing is traditionally considered a limited recourse or off-balance sheet financing where all debt is raised by a special purpose vehicle (SPV) formed for project execution. The main advantage of this is that the project sponsor can insulate its mainline balance sheet from the risks associated with the project and debt servicing obligations. On the downside, a pure vanilla off-balance sheet financing is difficult to achieve, as the parent company of the SPV more often than not needs to provide corporate guarantees and personal guarantees as part of the lending terms, for lenders' comfort. With cross-collateralisation and cross-leveraging across a variety of assets being seen, the perception of project financing as being limited recourse financing is gradually changing.

3.3 What other factors should parties bear in mind when deciding on a project financing structure?

A typical public-private partnership project structure involves a concession granted by a government authority to a project company or the SPV to build, own and operate a facility, which is usually handed back to the government at the end of the concession period. Efforts should be made to achieve SPV-led financing in order to hedge the project risks and liabilities of the sponsor company. Broadly, the project financing structure is one where:

• risk is minimised;
• the cost of capital is low; and
• control over the company is not lost.

Other factors – such as lending policies, fiscal policies, monetary policies, capital markets regulations and tax deductibility – have a strong impact on the capital structure.

4 Industry players and ownership requirements

4.1 Who are the key players in project financings in your jurisdiction? Do any restrictions apply in this regard (eg, foreign ownership)?

The key players in project financing in India are:

• lenders;
• project sponsors;
• concessionaires;
• government authorities;
• security trustees; and
• trust and retention account banks.

Foreign ownership of project companies in India is subject to regulations and restrictions under the Foreign Exchange Management Act, 1999 and the rules and regulation made thereunder. The Reserve Bank of India (RBI) is empowered to prohibit, restrict and regulate the transfer and issue of securities by persons outside India. The RBI is empowered under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017. These impose certain restrictions on foreign ownership in certain sectors, such as:

• real estate;
• agriculture;
• nuclear power; and
• railways.

The regulations:

• restrict foreign investment in each sector and prevent specified limits from being exceeded; and
• provide routes for foreign investment in various sectors.

4.2 What role does the state play in project financings in your jurisdiction?

Due to the nature of infrastructure projects, they are unlikely to generate revenue until they have commenced commercial operations. It is thus crucial for lenders and other investors that:

• the revenue stream be predictable; and
• the revenues projections be accurate.

There are no laws mandating state ownership or government interest in a project. However, the government may acquire private property and restrict private party participation in certain activities under specific laws (eg, the Right to Fair Compensation and Transparency in Land Acquisition and the Rehabilitation and Resettlement Act, 2013) that grant the government the right to acquire land for public purposes.

Reasonably accurate demand forecasts, estimated project costs and regulatory certainty in the sector will be important for private sector investors in considering the revenue prospects of the project. The state plays a crucial role here, as it is the principal driver of policy, regulations and the terms of the concession agreement. Moreover, the state has sole responsibility for project preparation – that is, assessing the technical and financial viability of the project before it is offered to the private sector for bidding. To protect lenders, the state will establish a number of practical control mechanisms of the project company, such as:

• limitations on what the project company can do without the lenders' approval;
• the ability to step into the management of the project company if:
• • one of the parties to the project wants to terminate the contract; or
  • there has been an incurable default by the project company; and
• the ability to take security over project assets.

The step‑in regime is part of the agreements between the lenders, the state and the project company. It may involve three various levels of lender intervention in the project:

• cure rights;
• step‑in rights; and
• substitution or novation.

Lenders' confidence in a project can be further fostered through:

• clauses such as change in law and political force majeure clauses; and
• the provision of:
• • a state support agreement;
  • a letter of comfort; and
  • in critical sectors, sovereign guarantees.

However, the value of any kind of comfort from the state will depend entirely on its enforceability as a guarantee.

4.3 Does your jurisdiction have nationalisation or expropriation laws in place? If so, what are the implications in the project finance context?

The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 facilitates the acquisition of land for the purpose of:

• industrialisation;
• urbanisation; and
• the development of essential infrastructure facilities.

Article 300A of the Constitution enshrines the right of an individual to property as a constitutional right, although this no longer is a fundamental right. However, the Constitution does state that individuals can be deprived of this right only in accordance with the procedures established by law. The Constitution allows for the procurement of land upon payment of compensation. This legislation is of paramount importance in the context of project finance, as infrastructure projects require large tracts of land and the law simplifies and accelerates the process of land acquisition. In the present scenario, cases of outright nationalisation are rare. When they do occur, the legal implications are sufficiently well settled that the question of the existence of an expropriation is generally not in dispute.

5 Regulatory and documentary requirements

5.1 What regulatory approvals are typically required for project financings in your jurisdiction? How are these typically obtained and what fees are payable?

Every financing structure is subject to restrictions and is governed by specific rules and regulations.

Foreign direct investment (FDI) is governed and regulated in India under:

• the Foreign Contribution (Regulation) Act, 2010, which repealed the Foreign Contribution (Regulation) Act, 1976;
• the Foreign Contribution (Regulation) Rules, 2011; and
• other notification/orders issued thereunder from time to time.

FDI is also subject to the sectoral laws and regulations of the relevant industry regulator. Under the direct route, FDI does not require prior approval from the government or the Reserve Bank of India (RBI) where it is targeted at certain activities or sectors as specified in the consolidated FDI policy issued by the government. However, FDI in activities that are not covered under the automatic route requires the prior approval of the government. Such applications are considered by the Foreign Investment Promotion Board, which is part of the Department of Economic Affairs within the Ministry of Finance. Applications should be made on Form FC-IL.

Foreign institutional investors (FIIs) are governed by:

• the Securities and Exchange Board of India (SEBI), through the SEBI (Foreign Institutional Investors) Regulations, 1995; and
• the RBI, through Regulation 5(2) of the Foreign Exchange Management Act, 1999.

The ceiling for overall investment by FIIs is:

• 24% of the paid-up capital of an Indian company, or 10% for non-resident Indians (NRIs)/persons of Indian origin (PIOs); and
• 20% of the paid-up capital in the case of public sector banks, including the State Bank of India.

The 24% ceiling can be increased up to the applicable sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to this effect. Likewise, the 10% ceiling for NRIs/PIOs can be increased to 24% subject to the approval of the general body of the company passing a resolution to that effect.

Domestic lending by banks and financial institutions is governed by the Reserve Bank of India (RBI), which is the regulatory body of the banking sector. External commercial borrowings are regulated under the following RBI regulations:

• its Master Direction – External Commercial Borrowings;
• the Trade Credits and Structured Obligations Master Direction; and
• the Foreign Exchange Management Act, 1999.

5.2 What licences are typically required for project financings in your jurisdiction? How are these typically obtained and what fees are payable?

India has no dedicated legislation or regulatory body pertaining to project finance. The RBI and SEBI are two of the main regulatory organisations in India that govern financing and the security markets in India. Cross-border funding must conform with the external commercial borrowing guidelines established by the RBI.

Depending on the nature of the project, clearances or confirmation of no objection must be obtained from sector-specific regulatory bodies. Even in the absence of a single regulatory body, each infrastructure sector has sector-specific organisations that govern the relevant sector. No specific licensing requirements apply to project finance; but clearances, permits and confirmations of no objection from various regulatory bodies may be required.

5.3 What documentation is typically involved in a project financing in your jurisdiction?

Project financing transactions are voluminous and complex. The documents can be broadly categorised into:

• project documents;
• financing documents; and
• security documents.

Project documents: These include documentations pertaining to the project, such as the concession agreement – the most important document, through which rights are vested in the project company by the government authority. Ancillary agreements can take the form of:

• a deed, lease or easement by which rights in the property are vested in the project company;
• an operation and maintenance contract, through which the operation and maintenance of the project are outsourced to experienced operators in a cost-effective manner;
• a supply contract – a contractual agreement pertaining to the supply of raw materials where the project is dependent on the uninterrupted supply of raw materials. The contract contains various details such as price, quantity and so on; and
• an offtaker agreement – a contractual document which points out the purchase of the outputs of the project.

Financing and security documents: These include:

• a loan agreement; and
• security documents, such as:
• • mortgage documents;
  • deed of hypothecation;
  • share pledge agreement; and
  • sponsor guarantees.

Other security documents: These may include:

• a trust and retention account agreement;
• an intercreditor agreement (in the case of consortium lending);
• direct agreements;
• a security trustee agreement; and
• a facility agent agreement.

5.4 What registration or filing requirements apply for project financing documents to be valid and enforceable?

Certain registrations are required in order to validate and enforce project finance-related documents. These include the payment of stamp duties, including on the mortgage documents, as per the applicable laws of the respective state. A mortgage of immovable property other than an equitable mortgage must be registered within four months of execution of the deed under the Registration Act 1908, failing which the mortgage is deemed to be invalid. However, in certain states, registration of an equitable mortgage is also compulsory. Filing with the registrar of companies is essential in order to create a security interest (including a mortgage) and obtain a certificate of charge. Registration with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India must be effected by the party in whose favour the security interest has been created. If the security interest is not registered with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India, the provisions of the Securities and Reconstruction of Financial Assets and Enforcement of Securities Interest Act can prevent enforcement of the security interest.

In addition:

• the prior approval of the Income Tax Department is required in order to create a charge on immovable assets; and
• the consent of the lessor is required for the creation of a mortgage if the immovable property is leased from government or regulatory bodies.

5.5 Is force majeure understood as a legal concept in your jurisdiction?

Yes, force majeure is a well-recognised legal concept under Indian law and project agreements include provisions to cover the consequences of a force majeure event during the lifecycle of the project. Section 32 of the Contract Act, 1872 envisages that if a contract is contingent on the happening of an event which subsequently becomes impossible, the contract becomes void. Section 56 of the act states that an agreement to do an impossible act in itself is void.

In case of force majeure, the parties typically identify, prior to execution of a contract, an exhaustive list of events which will trigger the force majeure clause. The lenders will want to review the force majeure and change in law provisions in the project documents to ensure that they are back to back with the concession agreement.

6 Security/guarantees

6.1 What types of security interests and guarantees are available in your jurisdiction? Which are most commonly used and which are recommended (if different)? In particular, is the concept of a security trustee recognised (and if not, how are guarantees or security taken for multiple lenders)?

Various forms of security interests and guarantees are available in India, which are classified on the basis of the nature of the goods being taken as security. These include:

• security over immovable property;
• security over movable property;
• security over instruments; and
• security over receivables.

The concept of security trustee is well recognised. The rights and obligations of the trustee are set out in the security trustee agreement. The security trustee has the right to:

• sue cumulatively on behalf of all lenders in order to enforce the security; and
• add the proceeds to the claims of the lenders.

6.2 What are the formal, documentary and procedural requirements for perfecting these different types of security interests?

Immovable property: Security over immovable property is created by way of a mortgage. The creation of mortgage is governed by the Transfer of Property Act, 1882.

The two common forms of mortgage used in India are:

• the registered mortgage, also known as the English mortgage, whereby the mortgaged property is transferred absolutely to the mortgagee with a condition that the mortgaged property be transferred back to the mortgagor upon discharge of the debt; and
• the equitable mortgage, created by depositing the title deeds with the mortgagee with an intention to create security for repayment of debt.

Under the Transfer of Property Act, a mortgage apart from an equitable mortgage for repayment of more than INR 100 must be executed by way of an indenture of mortgage which is a registered instrument. The indenture of mortgage must be:

• signed by the mortgagor;
• attested to by two witnesses; and
• registered with the relevant land registry where the mortgaged immovable property is situated.

In an equitable mortgage, the mortgagor records the creation of an equitable mortgage by providing a declaration at the time of deposit of the title deeds. This deposit of title deeds is also recorded by the mortgagee by way of a memorandum of entry. Apart from the above, the other formalities are:

• payment of applicable stamp duty (rates vary from state to state);
• registration – any mortgage of immovable property, apart from an equitable mortgage, must be compulsorily registered under the Registration Act, 1908 within four months of execution of the mortgage deed, failing which the mortgage is rendered invalid;
• filing of a form before the relevant registrar of companies recording the creation of the security interest (including mortgage) and the issue by the registrar of a certificate of charge;
• in the case of certain security instruments, registration with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI). This registration must be done by the party in whose favour the security interest has been created. Further to a notification dated 26 December 2019, some provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ('SARFAESI Act') have been implemented, which restrict a secured creditor from exercising enforcement rights on the security interest if that security interest is not registered with the CERSAI; and
• approvals/consents from other authorities (eg, government, regulatory bodies or income tax authorities), where applicable.

Movable property: Common forms of security on movable property in India include the following:

• Mortgage: Sometimes an English mortgage is created on both immovable property and tangible movable property. A security over ships and other vessels is created by way of a statutory mortgage.
• Hypothecation: Under Indian law, 'hypothecation' usually means a charge – whether fixed or floating – on any tangible movable property, existing or future, created by a security provider in favour of a lender without the delivery of possession of the tangible movable property to that lender.

In each case, other formalities – such as payment of stamp duty and filing with the registrar of companies and with CERSAI – must also be fulfilled as applicable.

Instruments: These include shares, debentures and bonds, government securities and so on. Security over instruments is created by way of a pledge. A pledge agreement is entered into between the parties to execute and record the pledge. A power of attorney is also issued by the pledgor in favour of the pledgee to appropriately deal with the financial instruments upon the occurrence of a default. One of the essential components of a pledge is the delivery (actual or constructive) of the relevant financial instruments to the pledgee. A pledge is the most common form of security on financial instruments. Section 172 of the Contract Act, 1872 provides for a pledge over tangible movable assets as a bailment of goods as security for payment of any outstanding debt. The formalities are as follows:

• payment of stamp duty;
• filing with the registrar of companies and with CERSAI, as applicable;
• filing with the depository to mark a pledge on the relevant financial instruments where the instruments are in dematerialised form; and
• certain statutory disclosures to the relevant stock exchange, where the shares under pledge are those of a listed company.

Receivables: Please see question 6.4

6.3 Can security be taken over property, plant and equipment in your jurisdiction? If so, how?

Yes, security can be taken over property, plant and equipment. Please see question 6.2 with respect to the creation of security over immovable and tangible movable assets.

A charge over immovable assets in favour of the overseas lender acts as security for securing external commercial borrowings, for which a confirmation of no objection must be obtained from the authorised dealer bank under the Foreign Exchange Management Act, 1999. The creation and enforcement of a charge over immovable assets are respectively subject to:

• Regulation 8 of the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000; and
• Regulation 3 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations.

6.4 Can security be taken over cash (including bank accounts generally) and receivables in your jurisdiction? If so, how? In particular what types of notice and control (if any) are required?

Yes, security can be taken over:

• trade receivables;
• cash flows;
• cash deposits (including bank deposits);
• insurance proceeds; and
• rights under a contract.

A security interest is created in a financing contract over project-specific bank accounts. This is created either through hypothecation or through registration of mortgage. A notice of such a charge is given to the bank.

Security can also be taken over receivables. This can be done without the consent of the debtor. However, a charge over receivables materialises into a fixed charge only on default. The common forms of security over receivables are:

• mortgage;
• hypothecation; and
• assignment, subject to any restrictions stipulated in the underlying contract. In India, the assignment of receivables by way of security is an equitable assignment and is executed under a deed of hypothecation.

6.5 Is it possible to take security over major licences (particularly in the extractive industry sector)?

Various fees, charges and taxes arise when perfecting a security interest or taking a guarantee. These include stamp duty, which is payable at rates prescribed by the relevant revenue authorities. Stamp duty must be paid on loan agreements, guarantee deeds and security documents. Stamp duty is a form of documentary tax. Similarly, registration fees are payable to register securities against immovable property. Documents such as power of attorney, declarations and undertakings must be notarised by paying a notarisation charge.

6.6 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a security interest or the taking of a guarantee?

Various fees, charges and taxes arise when perfecting a security interest or taking a guarantee. These include stamp duty, which is payable at rates prescribed by the relevant revenue authorities. Stamp duty must be paid on:

• loan agreements;
• guarantee deeds; and
• security documents.

Stamp duty is a form of documentary tax. Similarly, registration fees are payable to register securities against immovable property. Documents such as power of attorney, declarations and undertakings must be notarised by paying a notarisation charge.

Stamp duty must be paid in accordance with the rate prescribed by every state as value of stamp duty payable varies from state to state.

Registration fees are paid at the time of registration of security documents involving immovable property.

Notarisation charges are the charges that are paid for the notarisation of documents such as:

• the power of attorney;
• declarations; and
• undertakings.

6.7 What are the respective obligations and liabilities of the parties under security documents?

The obligations in security documents are similar to those arising from a loan-cum-security agreement. Further, the financing agreement in a project financing transaction agreement is similar to a loan-cum-security contract. A loan-cum-security agreement involves two parties, much like other types of contracts. In a loan-cum-security agreement, these parties are called the 'borrower' and the 'lender'. Both parties have obligations under the agreement.

The obligations of the borrower under a loan-cum-security agreement include the following:

• to repay the principal loan amount;
• to pay interest on the loan amount; and
• in certain cases:
• • to use the loan for a particular purpose only; and
  • to provide information about its financial affairs on a continuing basis.

The obligations of the lender under a loan-cum security agreement include the following:

• to fully disclose the total amount of loan sanctioned together with the interest rate;
• to include in the loan agreement information on when repayment of loan will begin and the maximum repayment period; and
• to elaborate on what constitutes default and the relevant consequences of the same.

6.8 In the event of default, what options are available to enforce a security interest or guarantee? Is self-help available in your jurisdiction in connection with the enforcement of security or must enforcement action be pursued through the courts?

Lenders can enforce a security interest or guarantee upon the occurrence of an event of default as set out in the relevant financing document. Usually, the loan agreement will outline the lender's rights in the event of a default, which usually include:

• enforcing the security interest;
• pursuing legal action; or
• accelerating the facility.

In case of an English mortgage, the mortgagee can sell the mortgaged property without the intervention of the court, subject to certain requirements. In the case of an equitable mortgage, the mortgagor must apply to the court for a decree to dispose of the mortgaged property for recovery of the debt. Lenders may directly enforce the mortgage under the SARFAESI Act without the courts' intervention. To do so, they must comply with the procedure set out under the SARFAESI Act.

In case of security over immovable property, the rights and the recourse available to a hypothecatee are regulated by the terms of the deed of hypothecation. A deed of hypothecation can be enforced either by:

• causing the delivery of the movable property; or
• selling or obtaining a decree for sale of the movable property, as provided for in the deed.

Typically, under a deed of hypothecation, a lender usually appoints a receiver to take possession of and sell the hypothecated assets. Lenders may also enforce hypothecation directly under the SARFAESI Act without the court's intervention.

A pledge can be enforced by giving notice to the pledgor. The pledgee need not obtain a court order to sell the pledged assets because the pledged assets are already in the possession of the pledgee and it can directly dispose of the pledged assets.

Security interests and guarantees are created in order to protect the financer from pecuniary losses in the event of default by the project company. In the event of default, the various ways in which the security interest or guarantee can be enforced are as follows:

• Debt Recovery Tribunal (DRT): The DRT was constituted under the Recovery of Debts Due to Banks and Financial Institutions Act 1993 and aims to facilitate the swift recovery of debts of banks and financial institutions. The DRT follow a summary procedure, which is more efficient than a full trial in the civil courts.
• Securitisation: The SARFAESI Act was enacted to allow banks and financial institutions to enforce their security for recovery of their debts without court intervention. It was a response to:
• • the large volumes of cases before the civil courts; and
  • the lengthy duration of proceedings in regular courts.
• Insolvency proceedings: The Insolvency and Bankruptcy Code was enacted in order to consolidate insolvency proceedings in the country. The insolvency resolution process can be initiated by a financial creditor, an operational creditor or a corporate debtor for non-payment of an amount of INR 100 million or more. The insolvency process is initiated by filing a relevant application to the National Company Law Tribunal.

6.9 What other considerations should be borne in mind when perfecting a security interest or taking the benefit of a guarantee in your jurisdiction?

Guarantees are commonly used in financing transactions. A guarantee is created by execution of a guarantee deed by the guarantor in favour of the beneficiary and is governed by the Contract Act.

The validity of a loan or guarantee of security is contingent on:

• the applicable corporate authorisations as per the Companies Act;
• the payment of stamp duty; and
• the registration of documents.

6.10 What other protections are available to a lender to safeguard its position in connection with security or guarantees?

Please see question 6.8.

Financiers also enjoy contractual protection. Most concession agreements recognise the rights of lenders in case of default on the part of a special purpose vehicle.

6.11 Are direct agreements with contractual counterparties well understood in your jurisdiction?

No answer submitted for this question.

7 Bankruptcy

7.1 How (if at all) do bankruptcy proceedings impact on the enforcement of security by a creditor?

The Insolvency and Bankruptcy Code 2016 regulates insolvency proceedings in India. Upon the initiation of a corporate insolvency resolution process in accordance with the Insolvency and Bankruptcy Code, a moratorium is initiated. The moratorium generally lasts for 180 days but may be extended for a further period of 90 days. During this period, the following actions are prohibited:

• the commencement or continuation of proceedings against the bankrupt entity; and
• the enforcement or foreclosure of any security interest of the project company.

The moratorium lasts until completion of the corporate insolvency resolution process, during which time the lender loses all rights to enforce any security interest over the company. Secured creditors will have their collateral returned to them. If the value of the collateral is not sufficient to repay them in full, they will be grouped with other unsecured creditors for the rest of their claim

Senior debt is often secured. Secured debt is debt that is backed by a company's assets or other collateral, such as liens and claims on specific assets. The issuers of senior debt, such as bondholders or banks that have secured revolving lines of credit, have the greatest chance of being repaid when a corporation declares bankruptcy. When it comes to subordinated debt, it is possible that a corporation may be unable to repay this if it uses whatever money becomes available during liquidation to pay senior debt holders. As a result, a claim on a company's senior debt is always more valuable for a lender than a claim on subordinated debt.

In the event of the liquidation of a company under the Insolvency and Bankruptcy Code, the assets of the company under liquidation or corporate debtor will be sold and the proceeds from such sale of assets will be distributed among the creditors in the following order of priority:

• the costs of the insolvency resolution process and liquidation;
• the claims of secured creditors (ie, those that choose to relinquish their security enforcement rights) and workmen's dues relating to the 24-month period preceding the liquidation commencement date;
• the wages and unpaid dues of employees (excluding workmen) relating to the 12-month period preceding the liquidation commencement date;
• financial debts owed to unsecured creditors;
• statutory dues owed to the Consolidated Fund of India or the consolidated fund of a state (relating to the two-year period preceding the liquidation commencement date) and claims of secured creditors (that remain unpaid after the enforcement of security);
• all remaining claims and dues;
• dues of preference shareholders; and
• dues of equity shareholders or partners (if applicable).

7.2 In what circumstances can antecedent transactions be unwound for preference? What other similar measures apply in this regard?

No answer submitted for this question.

8 Project contracts

8.1 Are project contracts in your jurisdiction typically governed by local law?

Please see question 12.2.

8.2 What remedies are available to a project company for breach of the project contract?

Project contracts are contracts within the meaning of Section 10 of the Contract Act. Any breach of such contract will attract similar remedies to that of any other contract.

A breach of contract can be anticipatory or present. The rights of the aggrieved party are infringed as a result of a breach of contract. The primary purpose of remedies in a contract is to enable the aggrieved party to obtain monetary compensation. Monetary damages can be:

• compensatory;
• consequential;
• nominal; or
• liquidated.

Equitable remedies are also available to the aggrieved party where damages are not an adequate remedy. Equitable remedies include:

• rescission;
• restitution;
• specific performance;
• injunction;
• quantum meruit; and
• Anton Piller orders.

Sections 73-75 of the Contract Act deal with remedies and damages for breach of contract.

Equitable remedies are also available to the aggrieved party where damages are not an adequate remedy. Equitable remedies include rescission, restitution, specific performance, injunction, quantum meruit, Anton Piller orders and so on. Sections 73–75 of the Contract Act deal with remedies and damages for breach of contract.

8.3 Are liquidated damages provisions in project contracts enforceable?

Liquidated damages provisions are standard in construction contracts, to protect the owner or contractor from financial losses if a project is postponed past the contract's completion date. Both public and private building contracts include these clauses. Section 74 of the Contract Act, 1872 lays down the law governing liquidated damages. It states that, at the time of entering into a contract, the parties may agree and mention an amount in the agreement which will become payable upon the breach of contract by the defaulting party in favour of the other party.

Liquidated damages clauses are generally enforceable, but most courts will not enforce a liquidated damages provision if:

• it constitutes a penalty as opposed to a reasonable estimate of the actual damages likely to be incurred due to delay; or
• the party benefiting from the liquidated damages clause is responsible for a portion of the delay to completion of the project and the contract does not provide for the apportionment of damages in case of mutual delays.

8.4 Are there any public policy considerations which need to be taken into account when assessing the enforceability of project contracts?

The doctrine of public policy is based on the maxim 'ex turpi causa non oritur actio', which means that agreement against public policy will be void. However, there is no exhaustive definition of the term 'public policy' per se. As a result, the concept of public policy is inconsistent and will depend on the discretion of the court. In general, an act is considered to be against public policy if it is against the common welfare of society. Under the contract act, an agreement cannot be enforced if it:

• is against the public good; or
• violates the general policy of the law.

The apex court has held that the term 'public policy' is open to modification and expansion.

Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996 states that an arbitral award may be set aside by the court if it conflicts with the public policy of India. As with the Contract Act, 'public policy' is not defined per se under this act. However, in the broader view, the doctrine of 'public policy' is equivalent to the 'policy of law': anything that leads to the obstruction of justice or the violation of a statute, or that is against good morals when made the object of contract, will be against the public policy of India and will thus be void or not susceptible to enforcement.

An agreement will be considered to be against public policy if it falls under any of the following categories of agreement:

• trade with an enemy;
• champerty and maintenance;
• frustration of prosecution;
• interference in the course of justice;
• sale or transfer of public offices and titles;
• restraint of parental rights;
• restraint of personal liberty; or
• corruption of public life.

However, agreements such as the following are not against public policy:

• valid agreements of lease between landlords and tenants;
• considerations and objects that are unlawful in part; and
• copyright agreements.

9 Project risk

9.1 What risks typically arise in project financings in your jurisdiction and how are these best mitigated?

The various risks involved in a project finance transaction are aligned with the risks of the project. The typical risks in a project are as follows.

Construction risk: Ensuring the proper and timely construction of the project is a fundamental consideration for all parties. Other related concerns include the following:

• Can the project be completed and operated according to the agreed standards and specifications?
• Can the project be completed on budget?
• Can the project be completed on schedule?
• Which party should assume the risk of and liability for construction delays, costs overruns and performance shortfalls?

Operational risk: After construction, the project must be operational in order to ensure that it operates at the level required to generate the revenues forecasted and needed to repay the loans. Project participants must, among other things:

• engage a competent project operator;
• obtain insurance; and
• agree to extensive reporting and inspection obligations.

Supply risk: A lot of projects require the continuous and uninterrupted supply of raw materials such as coal, oil and gas. The prices of these commodities can be volatile and their availability for the life of the project is not assured. The project participants can mitigate these risks by:

• executing a long-term supply agreement; and
• selecting a qualified supplier.

Offtake risk: One of the biggest risks and contingencies in financing a project is whether the project will generate the expected return on investment. To ensure that the project generates the level of revenues that participants have forecast for the success of the project, they may:

• execute a secure offtake agreement;
• select a creditworthy off-taker or marketer;
• enter into hedge agreements; and
• fund reserve accounts.

Repayment risk: One of the biggest worries of the lender is non-repayment of the credit amount. This may occur due to:

• insufficient revenue generation from the project;
• subsisting obligations to third parties; or
• some other reason that prevents payment to the financer.

These risks may be avoided by:

• setting up a debt service reserve account;
• applying ratio tests;
• limiting the size of the debt;
• obtaining appropriate insurance coverage;
• limiting the project company's obligations to third parties; and
• ensuring that tax obligations and other payments that may have priority over the lenders are paid.

Political risk: See question 9.2

Currency risk: If the project output agreement is in a different currency from the loan, the project participants must also consider currency devaluations and currency inconvertibility. The primary risk involved concerns interference in the ability to convert the local currency into foreign currency and repatriation of the foreign currency out of the country.

Authorisation risk: In some cases, government approvals, permits or licences are required to construct or operate the project. These may include:

• environmental permits;
• drilling permits; and
• in the case of a foreign investor:
• • permits to own property, employ expatriate labour or operate the project; and
  • approvals to import goods into the country or to transfer funds out of the country.

The grant of such permissions is not guaranteed and the efficacy of the project may be hampered due to unwarranted delays. The risks associated with these types of government supervision may be mitigated in part by requiring:

• the host government to agree to the inclusion of a stabilisation clause in the documents;
• the delivery of appropriate legal opinions;
• appropriate representations and warranties on the part of the project company; and
• the delivery of approvals and licences.

A large portion of the above risks are assumed by the developers. However, in the case of public-private partnership (PPP) projects, the government might assume certain risks in order to:

• increase the bankability of projects; and
• sweeten the deal by incentivising the developer.

For instance, in most PPP projects, the government:

• is responsible for providing the land; and
• shares the risk of procuring the necessary approvals from authorities.

These risks are generally non-insurable in nature.

Both non-recourse and limited recourse structures are common in the Indian project finance sector. Project lenders usually have no or minimal rights against project sponsors for defaults by the project developers under financing documents, unless provided otherwise. This increases their dependence on:

• project cash flows;
• security over project assets; and
• share pledges.

Risk mitigation by hedging is often seen in foreign currency loans. Indian regulations require certain categories of borrowers to hedge their foreign currency exposure, such as holding companies raising finance for SPVs involved in the infrastructure sector. Additionally, a board approved hedging policy is required to mitigate foreign exchange risk.

9.2 How significant is political risk in project financings in your jurisdiction? How is this best mitigated?

A substantial number of project financings take place in developing nations, due to the greater scope for growth and requirements of such jurisdictions. However, developing nations are often subject to political instability such as:

• wars;
• civil unrest;
• military coups;
• international embargoes;
• currency instability; and
• changes in the tax regime.

As a developing nation, India is also privy to various political instabilities and financing projects are at risk. There are several ways in which political risks may be mitigated, including the following.

Government assurances: These may take the form of comfort letters that show the government's support for the project. However, these are not obligations and commitments to the projects and subsequent governments might not abide by such assurances.

Stabilisation clauses: These are clauses that are incorporated in the international investment agreement. They take the form of assurances on the part of government to compensate for any loss caused to the project on account of any acts of the government.

Political risk insurance: This repays the lenders if the project is damaged or destroyed by, or as a result of, political events that impact the operation of a project.

Lender support: This takes the form of various support mechanisms that aim to protect the financial interests of the lenders in the event of political turmoil which has or might result in financial loss to the lenders. These mechanisms include export credit agencies and other international finance institutions which provide soft cover to the lenders and private sponsors from political risks.

10 Insurance

10.1 What types of insurance arrangements are typically put in place for project financings in your jurisdiction?

Insurance is an essential tool to address the risks involved in project finance. There are various types of insurance arrangements pertaining to specific risk factors. The insurance arrangements that are generally put in place in order to prevent substantive damages include the following:

• Insurance during transportation: This includes insurance coverage during the transit of raw materials, machinery and equipment that must be transported for construction and for the day-to-day activities of the project. It may include marine insurance, aviation insurance and so on.
• Insurance of project assets: This insures project assets such as machinery and equipment once they have been transported to the project site.
• Construction all risks policy: This covers all operations and assets on the site during the construction of the works. This policy generally excludes war risks.
• Professional indemnity: This covers design faults or other professional services provided by the construction contractor or its designers. Such insurance is generally carried by a designer as a part of its normal business.
• Operational damage: A major project will include insurance for operational damages which might arise from the operation of the project in the normal course.
• Third-party liability insurance: Liability insurance should be in place from the commencement of construction in case of any claim by third parties for the acts or omissions of the project company, or any contractor, subcontractor or other party for which it may be responsible, during the construction and operation of the project. This insurance protects the company from the negligence or acts of a third party.
• Consequential loss: Consequential losses include:
• • delayed start-up;
  • advance lost profits; and
  • business interruption.
• The amount of such insurance obtained will generally be calculated to compensate for the fixed costs of the project.
• Workers' compensation, employer's liability: The construction contractor and the operator will be obliged either to the host government or to its staff for some form of statutory compensation or other form of benefits or other liability, which should be covered by an insurance policy.

10.2 If local insurance is required, can local insurers assign offshore reinsurance contracts in your jurisdiction?

The Insurance Regulatory and Development Authority of India (IRDA) governs and regulates all insurance and reinsurance companies in India. Only companies that are registered with the IRDA are authorised to provide insurance facilities to assets in India. Companies that are registered with the IRDA must follow rules, regulations and guidelines on the provision of insurance coverage. There is nothing to prevent Indian companies from reinsuring their risks with either Indian or foreign reinsurance companies. However, such agreements are subject to conditions which must be fulfilled where an Indian company wishes to reinsure with a foreign reinsurance provider.

10.3 What other forms of insurance feature in the project finance market in your jurisdiction?

Please see question 10.1

11 Tax

11.1 What taxes, royalties and similar charges are levied in the project finance context in your jurisdiction?

A 10% withholding tax is payable on the payment of interest to domestic lenders. With respect to foreign lenders, the rate of withholding tax will depend on factors such as:

• whether the loan designated is in rupees or a foreign currency;
• the category of the lender; and
• the provisions of any applicable double tax avoidance agreement (DTAA).

The general rate of tax on interest ranges between4% to 40%, in addition to applicable surcharges and cess. A further 5% withholding tax may apply in the case of certain debt instruments, in addition to applicable surcharges and cess. This was initially limited to debt instruments issued before 30 June 2020; however, under the Finance Bill, this benefit has been extended to debt instruments issued before 30 June 2023.

A further charge at 5% will apply to payments made in foreign currency and interest within a specified limit. Interest received by foreign portfolio investors on investments made by them in rupee-denominated bonds are subject to lower withholding tax rates; again, this benefit has been extended until 30 June 2023 under the Finance Bill.

11.2 Are any exemptions or incentives available to encourage project finance in your jurisdiction?

There are no specific tax incentives for foreign investors and creditors. However, depending on the nature of the investment, certain tax-saving benefits may apply. Applicable DTAAs afford various benefits to foreign investors and creditors where a DTAA agreement has been concluded between India and the home nation of the investor. Certain benefits could be available to some sovereign-owned banks or financial institutions due to relevant notifications issued by the Central Board of Direct Taxes regarding their immunity from taxes, or as per the relevant DTAA. Additionally, a tax exemption is available on income from dividends, interest or long-term capital gains accruing to certain sovereign wealth funds investing in infrastructure facilities.

11.3 What strategies might parties consider to mitigate their tax liabilities in the project finance context?

Please see question 13.2.

12 Governing law and jurisdiction

12.1 What law typically governs project finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

If foreign entities are parties to a transaction which has an offshore element in another jurisdiction, the parties may choose a foreign law as the governing law of such transaction. In the event of a cross-border financing, the facility agreement for external commercial borrowings may be made subject to foreign law.

However, if a project is located in India, the project agreements are usually governed by Indian law, as projects and their compliance are subject to Indian law. This also makes it easy to take prompt legal action – such as seeking interim relief or injunctions, or instituting claims – as required.

The project finance documentation for rupee-denominated loans is usually governed by Indian law. In addition to the loan agreement, the security documents for Indian projects are also governed by Indian law, due to:

• the location of the underlying assets; and
• the convenience this offers for enforcement of interim relief in light of the numerous avenues of legal recourse at the disposal of Indian lenders under Indian enforcement law.

Please also see question 1.1

12.2 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application? Are submission to jurisdiction provisions that operate in favour of one party only enforceable?

There has been considerable debate over the years as to whether two Indian parties may choose a foreign law to govern arbitration proceedings and a foreign seat for the proceedings. The Delhi High Court in Dholi Spintex Pvt Ltd v Louis Dreyfus Corporation India Pvt Ltd (2020) answered this question in the affirmative, holding that two Indian parties can choose a foreign law as the law governing the arbitration. The Delhi High Court also reiterated the principle of limited court interference in international arbitration.

In GE Power Conversion Pvt Ltd v PASL Wind Solution Pvt Ltd (2021) the Gujarat High Court also recently issued a decision along similar lines, favouring the autonomy of two Indian parties to choose a foreign seat of arbitration and holding that such an agreement does not violate the public policy of India. The Gujarat High Court also held that the nationality of the parties is irrelevant when considering the enforceability of foreign awards. However, it is generally advisable that the Indian courts have jurisdiction in a financing transaction for an underlying project located in India, in order to avoid any legal impediment on grounds such as:

• forum non conveniens;
• the Civil Procedure Code; or
• public policy.

The apex court hearing this matter concurred with the Gujarat High Court and held that:

In deciding on the above matters, the courts relied upon previous judgments of the apex court on party autonomy in arbitration. A three-judge bench of the Supreme Court in Centrotrade Minerals and Metal Inc v Hindustan Copper Ltd (2017) emphasised the principle of party autonomy in arbitration and held that this is virtually the backbone which permits parties to adopt the foreign law as the proper law of arbitration. In Technip SA v SMS Holding Pvt Limited (2005), a three-judge bench of the Supreme Court, considering conflicts of law, held that the application of foreign law should be disregarded only where:

• this relates to basic principles of morality and justice; and
• the foreign law amounts to a flagrant or gross breach of such principles.

A foreign law chosen by the parties should be found inapplicable only exceptionally and with great circumspection.

However, where a contract is executed between an Indian entity and a foreign entity, the parties to the contract are at liberty to choose the law of the jurisdiction that will govern the contract. These are known as cross-border transactions. Where the parties have expressly agreed that the contract will be governed by foreign law, and that any dispute will be resolved in accordance with a foreign dispute resolution regime, the Indian courts have upheld the validity of such contracts. The validity of such contracts will thus be recognised where:

• one of the parties is a foreign entity;
• the contract has been executed in India; and
• there has been express agreement by both parties, which must be bona fide and not against public policy.

However, the enforceability of a security document is conditional on the fact that such a document must be governed by Indian law.

Further, any contract entered into with government authorities and organisations will be governed by Indian law, without exception.

12.3 Are waivers of immunity enforceable in your jurisdiction?

Section 86 of the Civil Procedure Code governs foreign state immunity. The general rule under Section 86 states that no foreign state may be sued in any court without the prior consent of the central government. India lacks comprehensive legislation on foreign state sovereign immunity, such as exists in the United Kingdom and the United States. However, India is a signatory to the United Nations Convention on the Jurisdictional Immunities of the States and their Property.

Waiver of immunity clauses are incorporated in all contractual transactions in order to avoid ambiguity and are effective in India.

In India, no entity can claim immunity except the Indian government, a state government (exercising its sovereign functions) or a foreign state. However, the immunity enjoyed by a foreign state is not absolute: a foreign state enjoys immunity only as long as its acts qualify as government acts. If those acts do not qualify as government acts and are instead considered commercial in nature, there shall be no grant of immunity. Such acts are classified as 'non-sovereign' functions and do not fall under the ambit of sovereign immunity, as held in Kasturilal Ralia Ram Jain v The State of Uttar Pradesh, 1965 AIR 1039. On the other hand, acts of the state that constitute government acts are classified as sovereign functions and are subject to immunity. The current scenario is that a waiver of immunity clause is effective in India and appropriate waiver provisions are incorporated in all commercial contracts to avoid issues surrounding immunity

12.4 Will foreign judgments or arbitral awards be enforced in your jurisdiction? If so, how?

The law on the execution of decrees of foreign courts before the Indian courts and vice versa is enshrined in Section 44A of the Code of Civil Procedure. Section 44A provides that a decree passed by a 'superior court' in any '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. A 'reciprocating territory' is any country or territory outside India which the central government may, by notification, declare to be a reciprocating territory for the purposes of Section 44A. However, a decree from a non-reciprocating territory can be enforced only by filing a fresh suit before the Indian court of jurisdiction based on the same decree, which will then have evidentiary value in the proceedings. Section 44A of the Code of Civil Procedure provides that a decree from a reciprocating territory could be executed through a petition before a district court in India, and the judgment debtor could contest the execution petition if it is shown to be falling under exceptions set out under Section 13 of the Code of Civil Procedure. The time period for enforcement of a foreign decree by an Indian court is between six and 12 months.

India is a signatory to:

• the Geneva Convention on the Execution of Foreign Arbitral Awards 1927; and
• the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958.

Under Section 44 of the Arbitration and Conciliation Act, 1996, the Indian courts will apply the New York Convention only to awards made in the jurisdiction of those Indian states that the Indian government has formally designated as a territory to which the New York Convention will apply. Indian courts can pass interim orders in a foreign seated international commercial arbitration, provided parties have not excluded the applicability of Section 9 of the Arbitration and Conciliation Act, 1996, which deals with interim measures. Therefore, an injunction by an offshore court would not be enforceable in India under Section 44A.

Several technical grounds exist for refusing enforcement of foreign awards, but the two main grounds are as follows:

• The subject matter of the dispute is not capable of settlement by arbitration under Indian law; or
• Enforcement of the award would be contrary to the public policy of India.

13 Foreign investment

13.1 What taxes and other charges are levied on foreign investors in the project finance context in your jurisdiction?

The Reserve Bank of India's (RBI) external commercial borrowing guidelines must be followed with regard to the payment of principal, interest or premiums on loans or debt securities. Where such securities are held in other jurisdictions, they must be executed through an authorised dealer bank in compliance with the RBI's external commercial borrowing guidelines (eg. compliance with the minimum average maturity period). No additional taxes or fees are payable other than those applicable to domestic investors. However non-statutory charges may be applicable upon the imposition of agency fees and commitment charges and structuring fees by the authorised dealer bank.

Returns on foreign investments in India are repatriable, except for:

• foreign investments in specific sectors with minimum lock-in periods, such as defence; and
• investments made by non-resident Indians in specific non-repatriable schemes.

Further, where dividend payments are permitted through a designated authorised dealer bank, this is subject to payment of the dividend distribution tax.

13.2 Are any incentives available to encourage foreign investment in the project finance context?

Foreign investment has been encouraged since the liberalisation of the Indian economy in the early 1990s. The absence of government intervention encourages foreign investment in a country.

The infrastructure sector, with the exception of telecommunications, was 100% liberalised in order to stimulate private and foreign investment in these sectors. The Viability Gap Funding Scheme aims to reduce the capital cost of projects. This scheme was established by the Indian government in order to encourage private participation by making projects more economically viable and attractive.

Profit-linked incentives, such as a 10-year tax holiday on infrastructure undertakings, are available to both domestic and foreign investors in projects related to infrastructure. However, the government has introduced a deduction of 100% of the capital expenditure for projects that commence on or after 1 April 2017.

Various regional and state governments have also incentivised private participation through tax incentives such as:

• exemptions from electricity duty;
• rebates in tariffs for electricity, water or gas; and
• subsidised clean manufacturing technology and pollution control.

The Securities and Exchange Board of India regulates the security market in India. It allows foreign portfolio investors to invest in:

• real estate investment trusts;
• infrastructure investment trusts; and
• Category III alternative investment funds.

They can also invest in unlisted debt securities of companies engaged in the infrastructure sector.

13.3 What restrictions and requirements apply with regard to the remission of foreign exchange? Are local companies permitted to maintain offshore bank accounts?

Indian citizens are allowed to open, hold and maintain foreign currency accounts. However, this is subject to prior approval of the RBI and compliance with its regulations. A person can open an account with an authorised dealer bank for certain specified purposes as specified by the RBI.

Indian companies and bodies corporate registered or incorporated in India are also permitted to open, hold and maintain foreign currency accounts. Such an account for normal business purposes, in the name of the company's office or branch set up outside India or its representative stationed outside India, is also subject to compliance with the RBI's regulations.

13.4 What restrictions and requirements apply with regard to the import of plant and machinery?

Foreign trade policies are government policies such as tariffs, import quotas and export subsidies that aim to boost net exports by encouraging exports and limiting imports. According to the foreign trade policy of India, many goods can be freely imported. However, restrictions apply in the form of prohibitions or exclusive trading in accordance with the Indian Trade Classification of Imports and Exports through various state trading enterprises. Goods that are not freely importable are not barred from being imported, but are merely subject to certain prescribed procedures.

Imported goods can be protected against the payment of import duties upon the fulfilment of conditions stipulated in the Customs Act 1962 or any other statute or law in force. However, the Customs Act also includes provisions that prevent the import of certain commodities by the government. For restricted items, banks must obtain:

• an exchange control copy of the import licence issued by the Directorate General of Foreign Trade from the importer; and
• all supporting documents that show that all conditions of the licence have been met.

13.5 What restrictions and requirements apply with regard to foreign workers and experts?

Various regulations must be followed for foreign workers and experts to work in India. The statutes that regulate and govern the stay, work, entry and exit of foreign workers include the following:

• The Passport (Entry in India) Act 1920 requires that the authorisation of foreign nationals be included in their valid travel documents/passports to allow entry into the country;
• The Foreigners Act 1946 regulates the entry of foreigners into India, their presence therein and their departure; and
• The Registration of Foreigners Act 1939 and the Regulation of Foreigners Rules 1992 concerns certain categories of foreigners whose intended stay in India is longer than the specified period or as provided in their visa authorisation.

The visa requirements for foreign workers are as follows:

• All foreign nationals, including their family members, who intend to stay in India for more than 180 days or have a visa for more than 180 days must register with the Foreigners Regional Registration Office within two weeks of their initial arrival in India; and
• An employment visa can be obtained by submitting an application with the requisite documentation in the stipulated format.

13.6 Is your jurisdiction party to bilateral investment and withholding tax treaties which might facilitate foreign investment?

India has concluded double taxation avoidance agreements (DTAAs) with several nations. Double taxation is the phenomenon whereby a single item of income, asset or financial transaction is subject to multiple taxation, thus hindering free-flowing international trade practices. A tax treaty between two or more countries to avoid taxing the same income twice is known as a DTAA. Countries with DTAAs are attractive investment destinations, as there is no risk of double taxation. This helps to attract foreign investment and the subsequent development of a nation. The Income Tax Act 1961 also includes provisions that aim to prevent double taxation.

Bilateral investment promotion and protection agreements aim to incentivise investment opportunities by providing exclusive benefits in the form of tax incentives and investment protection. One of the leading examples of such an agreement is the India-Singapore Comprehensive Economic Cooperation Agreement, which aims to exempt investments in infrastructure from import duties and promote the safe cross-border movement of capital.

India is also a signatory to numerous bilateral and multilateral free trade agreements, comprehensive economic partnership agreements, comprehensive economic cooperation agreements and preferential trade agreements which aim to protect foreign investments in projects in India.

14 Environmental, social and ethical issues

14.1 What is the applicable environmental regime in your jurisdiction and what specific implications does this have for project financings?

Environmental impact assessments (EIAs) are an integral part of infrastructure projects in India. Sustainable growth is at the crux of this regime. The primary aim of EIAs is to protect the environment and ensure that clearances from government agencies are obtained regarding the environmental viability of a project. In recent times, several projects have been interrupted temporarily or permanently due to their harmful implications for the surrounding environment.

Project financings are subject to multiple risks relating to environmental contamination of air, water or land, harm to biodiversity and so on. Project companies and lenders generally appoint external environmental consultants to advise on environmental risks for a project. In order to prevent such incidents, India has enacted various stringent statutes and guidelines which aim to protect and preserve the environment; and various liability regimes – such as the polluter pays principle – have been enforced. Every project must comply with the applicable environmental regulations and guidelines, including the following:

• Environmental clearances and forest clearances must be obtained from the Ministry of Environment, Forest and Climate Change under the Environment Protection Act 1986;
• Under the Forest (Conservation) Act 1980, clearances and permissions must be obtained in order to engage in mining activities in forest areas;
• Under the Air (Prevention & Control of Pollution) Act 1981 and Water (Prevention & Control of Pollution) Act 1974, consent must be obtained from the respective state pollution control board and respective clearances must further be obtained; and
• Under the Hazardous Wastes (Management and Handling) Rules 1989, with regard to the handling and discharge of hazardous waste, clearance must be obtained from the state pollution control board.

14.2 What is the applicable health and safety regime in your jurisdiction and what specific implications does this have for project financings?

Infrastructure projects are generally labour intensive. Hence, in order to protect the interests of workers, various statutes are in force which protect the health and safety interest of workers. These include the following:

• The Building and Other Construction Workers Act and the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Central Rules 1998:
• • regulate the employment conditions of contract workers;
  • impose health and safety requirements for workers; and
  • provide for the establishment of welfare boards and welfare funds to help workers after accidents and with pensions.
• The Maternity Benefit Act 1961 regulates the employment of women in the periods before and after childbirth, and stipulates provisions for maternity benefits.
• The Mines Act 1952 ensures the safety of mine workers and includes provisions on the availability of drinking water, medical equipment and so on for workers.
• The Petroleum and Natural Gas (Safety in Offshore Operations) Rules 2008 set out various protective guidelines that must be followed in the petroleum industry for the safety of the workers.
• The Factories Act 1948 sets out safety guidelines for the proper functioning of factories and the protection of the health and safety of factory workers.
• The Dock Workers Act 1986 protects the safety, health and welfare of dock workers.

14.3 What social and ethical issues should be borne in mind in the project finance context?

Corruption is a scourge in many developing nations and India faces similar problems. India has been at the forefront in the fight against corruption as a signatory to the United Nations Convention against Corruption 2003. India has also enacted stringent state legislation in order to counter corrupt practices. These include:

• the Prevention of Corruption Act 1998, which was one of the first steps taken towards addressing corrupt practices;
• the Whistle Blowers Protection Act 2014;
• the Prevention of Money Laundering Act 2002;
• the Right to Information Act 2005; and
• the Foreign Contribution Regulation Act 2010, which aims to prevent unethical foreign investment.

Unethical trade practices through cartel formation and anti-competitive practices are addressed through the Competition Act 2002. Various incidents of black money and money laundering are addressed through:

• the Prevention of Money Laundering Act 2002;
• the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015; and
• the Right to Information Act 2005.

Human rights violations are some of the grimmest offences around the globe. In order to prevent human rights violations, India has enacted the Protection of Human Rights Act 1993 and has ratified the United Nations Declaration of Human Rights.

The Penal Code 1860, the Income Tax Act 1961 and the Companies Act 2013 also prescribe penal provisions for acts of corruption and fraudulent practices.

Various government agencies that have been created in order to create a system of checks and balances include:

• the Central Vigilance Commission and the state vigilance commissions; and
• the Office of the Comptroller and Auditor-General of India.

15 Trends and predictions

15.1 How would you describe the current project finance landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Infrastructure lending by commercial banks has been in full swing for the last two decades, However, the infrastructure sector has long grappled with problems such as:

• construction delays;
• slow regulatory clearances;
• cost overruns; and
• insufficient cash flow.

These have impacted the debt servicing ability of borrowers, leading to an increase in non-performing assets and bankruptcy proceedings under the Insolvency and Bankruptcy Code. As a result, there has been considerable hesitance and over-cautiousness with regard to the funding of new projects. In light of the mounting burden of non-performing assets, banks have become increasingly wary of financing infrastructure projects, due to the high risk and long gestation periods associated with such projects. As banks scramble to clean up their balance sheets before any fresh lending, the Reserve Bank of India's (RBI) guidelines on the early recognition of stressed assets have not helped matters. Lenders' sentiment towards lending to infrastructure projects remains conservative. Even the RBI is of the view that banks may no longer be the best sources of long-term funding for infrastructure, due to the risk of being saddled with non-performing assets.

In terms of new developments, the budgetary announcement of the National Investment and Infrastructure Fund and the promotion of the corporate bond market, the securitisation of stressed assets and user charges offer promise for the financing of infrastructure projects. In August 2023 the union cabinet is said to have approved the Draft Telecoms Bill 2022 to consolidate and amend the Telegraph Act 1885, the Wireless Telegraphy Act 1933 and the Telegraph Wires (Unlawful Protection) Act 1950) to substantially change the governance of the telecoms sector by granting the central government more powers. The bill was to be tabled in the Parliament in the recently concluded monsoon session of the Indian Parliament.

The 2021-22 budget announced the formation of a development finance institution (DFI) called the National Bank for Financing Infrastructure and Development. This institution will be set up with a capital base of INR 200 billion and will have a lending target of INR 5 trillion in three years. Further debt financing through the infrastructure investment trust and real estate investment trust routes will be enabled through necessary amendments to the rules. The bill on the creation of the DFI listed for the parliamentary session describes this institution as:

• "a provider, enabler and catalyst for infrastructure financing"; and
• "the principal financial institution and development bank for building and sustaining a supportive ecosystem across the life-cycle of infrastructure projects".

Capital expenditure creates employment, especially for the poor and unskilled, and has a high multiplier effect, enhancing the future productive capacity of the economy and resulting in a higher rate of economic growth. The government has announced that an additional amount of up to INR 150 billion will be allocated to states as interest-free 50-year loans for spending on capital projects. The Department of Expenditure has issued fresh guidelines in this regard for the 2021–22 financial year, according to an official statement released by the Ministry of Finance. The Electricity (Amendment) Bill, 2022 proposes to amend the Electricity Act, 2003, which regulates the electricity sector in India. At the time of its enactment, the Electricity Act revolutionised the paradigm for energy in India by delicensing generating companies and providing a framework for tariff regulation. The headline features of the proposed amendments are as follows.

• The Central Electricity Regulatory Commission will be able to grant licences for distribution companies or licensees/companies in multiple states.
• The central government will be empowered to mandate renewable power obligations on distribution companies.

To address lenders' common concerns regarding creditworthiness and defaults in payments from distribution companies, there is a provision for no electricity to be scheduled or despatched unless the distribution companies have provided adequate security of payment, as may be prescribed by the central government.

16 Tips and traps

16.1 What are your top tips for the smooth conclusion of a project financing in your jurisdiction and what potential sticking points would you highlight?

Although public-private partnership (PPPs) offer sufficient capital for infrastructure, projects are frequently delayed or are not completed as planned due to incorrect risk allocation, resulting in poor cash flows and significant debt burdens. Therefore, for a project financing transaction to commence and conclude smoothly, the following recommendations should be borne in mind.

The most important issues to consider when deciding to finance a project include how to invest in and fund the project. A number of different structures are used by project sponsors for this purpose. Once the structure has been chosen, the sponsors must undertake a thorough project feasibility study (ie, technical and financial feasibility) to ascertain the projected cash flows, which is the single biggest marker of how viable the project will turn out to be. Appropriate risk mitigation is fundamental to designing a limited recourse financing structure. At the centre of the structure lies the special purpose vehicle (SPV), into which the equity is subscribed and which raises the debt. This is a classic example of a limited recourse financing structure, where the banks will not have access to the sponsor balance sheet to seek repayment of loans. With so much riding on the SPV, it is imperative that the SPV does not shoulder any unallocated project risks, which will typically include risks such as:

• construction risk;
• operating risk; and
• offtake risk.

All of the aforementioned risks should lie with the party that is best suited to manage them – for instance:

• the construction risk should lie with the engineering, procurement and construction contractor;
• operation and maintenance (O&M) risk should lie with an experienced O&M contractor; and
• in the case of a power project, the power purchase agreement should be with a strong utility.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.