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Creating collateral security packages

Types of collateral

What types of collateral and security interests are available?

Indian laws generally recognise creation of security interests in respect of various kinds of property, including the following.

  • Immovable property such as land, mortgageable interest on land such as leasehold rights, buildings, some forms of plant and machinery that fall within the meaning of ‘immovable property’, etc. Security interest over immovable property is created under a mortgage. The most commonly used forms of mortgages in India are English mortgage under a registered deed and equitable mortgage, which is done by deposit of title deeds. However, creation of mortgage upfront on immovable property that is acquired subsequently is restricted.
  • Movable property both present and future, tangible and intangible, such as movable fixed assets, movable plant and machinery, bank accounts, receivables, cash flows including sale proceeds, contractual rights, permits, licences, proceeds of insurance policies, current assets, intellectual property and goodwill. Movable property is usually secured in favour of lenders by way of a charge under a deed of hypothecation. Security interest over movable property can also be clubbed with mortgage of land under a registered mortgage deed. However, for the creation of a legal assignment on contractual rights or licences, or a deed of assignment or mortgage (along with immovable property in case of a mortgage) is required to be executed.
  • Shares or securities of a company (usually the borrowing company), by way of a pledge of such shares or securities in favour of the lenders, under a pledge agreement. New shares issued after, will require specific delivery.

Restrictions or approval requirements for creation or enforcement of security interest, depending on factors such as the nature of the property, offshore ownership or location of assets, are provided for in different legislations, regulations and policies and are subject to existing contracts or permits applicable to the security provider. For instance, the creation of security interest on Indian assets in favour of offshore lenders may require prior approval of the Reserve Bank of India (RBI) or an authorised dealer in India.

Additionally, while not in the nature of a security interest, lenders may also require corporate or personal guarantees under deeds of guarantee, from various entities to secure the loans.

Collateral perfecting

How is a security interest in each type of collateral perfected and how is its priority established? Are any fees, taxes or other charges payable to perfect a security interest and, if so, are there lawful techniques to minimise them? May a corporate entity, in the capacity of agent or trustee, hold collateral on behalf of the project lenders as the secured party? Is it necessary for the security agent and trustee to hold any licences to hold or enforce such security?

See question 1 for the usual deeds and documents executed for creation of security interests.

With reference to the perfection of security interests:

  • Security interests created under all forms of security documentation including mortgage, hypothecation as well as a pledge are required to be registered with the Registrar of Companies of the state in which the registered office of the security provider is located, in the event the security provider is a company. The order of filing of the security interest with the Registrar of Companies determines the priority of the security interest as regards the present and future holders of security (with the charge created prior in time and registered as such having being a priority charge), in the absence of specific security ranking provisions in the security documents.
  • Creation of security interests over immovable property in case of an English mortgage will have to be registered with the relevant sub-registrar of assurances of the jurisdiction within which the mortgaged land is situated, along with payment of state-specific registration fees, as applicable in the state of registration of such document. Equitable mortgages in some notified states are also required to be registered with the relevant sub-registrar of assurances.
  • Further, security interests (other than pledges) are also required to be registered by the holder of security, with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India, along with the prescribed registration fees. However, this filing is for record purposes only and does not impact the priority of security interests.

Having stated the above, in most cases, priority of security as between various lenders having the benefit of common security, irrespective of whether their security interest has been filed prior or later in time, is agreed under intercreditor or security sharing arrangements among the lenders for ceding of pari passu security interest.

Typically, all contractual (such as third-party consents), regulatory (such as approvals from the RBI, authorised dealer, government authorities where prescribed) and corporate authorisations (such as board and shareholder resolutions) required for the creation of security are to be obtained prior to execution of the security documents.

Documents executed in India are subject to payment of stamp duty, which is prescribed by each state and is applicable depending on the state in which the documents are executed. Documents that are unstamped or inadequately stamped are rendered inadmissible in evidence, thereby impacting enforcement of such documents without payment of heavy penalties.

A pledge of shares or securities requires physical delivery, which is effected by way of physical delivery in case of physical shares or securities and by way of appropriate instructions to the depository where the shares or securities are in dematerialised form.

It is permissible and quite usual in India for a security trustee or agent, being a corporate entity, to be appointed under a trust deed or agency document to hold collateral on behalf of secured lenders in order to neutralise the impact of the composition of the secured parties over time. It is even mandatory in some cases of debenture issuance for a debenture trustee to be appointed to act on behalf of debenture holders. Other than the registration requirements prescribed for debenture trustees under regulations issued by the Securities and Exchange Board of India, no other specific licence has been prescribed for a corporate entity to act as a security trustee or agent. The appointment of a security trustee under a trust deed is usually preferred over an agency structure in order for the secured assets to be remote from the bankruptcy of the security trustee, given that a trust structure has legal recognition in India.

Assuring absence of liens

How can a creditor assure itself as to the absence of liens with priority to the creditor’s lien?

While not conclusive as to the existence of prior charges or liens on property, since absence of registration does not invalidate an existing security interest, a creditor (by appointing appropriate consultants) would usually undertake physical searches of the revenue records at the office of the relevant sub-registrar in whose jurisdiction the proposed mortgage-property is located, online searches of the charges recorded in respect of the security providers with the Registrar of Companies of each state where the registered office of each security provider is located, and searches of the Central Registry of Securitisation Asset Reconstruction and Security Interest of India records in respect of each security provider. Separately, existing creditors would usually also require appropriate representations and warranties from the security providers in the loan documents as to absence of previous liens or undisclosed security interest on the secured property.

Enforcing collateral rights

Outside the context of a bankruptcy proceeding, what steps should a project lender take to enforce its rights as a secured party over the collateral?

Outside the context of bankruptcy proceedings, the secured creditors can approach the Debt Recovery Tribunal established under the Recovery of Debts due to Bank and Financial Institutions Act 1993 for enforcement of their security or file an ordinary suit under the Code of Civil Procedure 1908. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act 2002 (SARFAESI) further provides special self-help remedies to secured creditors (only Indian banks, Indian branches of foreign banks, notified financial institutions and certain class of government-owned financial institutions in India). Powers of obtaining possession, taking over the management of the borrowing company and other enforcement action are typically set out in the contract between the parties.

An English mortgage may be enforced through a private sale of property. The mortgage deed would usually confer an express a power of sale without the intervention of the court on the mortgagee. However, intervention of the court would usually be required for enforcement of an equitable mortgage and/or hypothecation.

In case of a pledge, court intervention is not required for the sale of pledged shares and the creditor may sell the pledged shares after giving reasonable notice to the pledgor. However, right of foreclosure is not available in respect of a pledge.

In case of offshore lenders, any sale pursuant to enforcement and repatriation of proceeds would be subject to extant RBI and foreign exchange regulations. However, offshore lenders usually secure their right to be entitled to proceeds recovered by Indian lenders (including through avenues such as SARFAESI that are not available to foreign lenders) on a pari passu basis, by way of appropriate intercreditor arrangements.

Enforcing collateral rights following bankruptcy

How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the collateral? Are there any preference periods, clawback rights or other preferential creditors’ rights (eg, tax debts, employees’ claims) with respect to the collateral? What entities are excluded from bankruptcy proceedings and what legislation applies to them? What processes other than court proceedings are available to seize the assets of the project company in an enforcement?

Insolvency laws in India have been consolidated under a single unified code, the Insolvency and Bankruptcy Code 2016 (the Code). The Code enables speedy insolvency process for companies, limited liability partnerships, partnership firms and individuals, and is intended to apply to both financial and operational creditors, whether domestic or international. The Code implements a process that identifies financial distress early and, at first, encourages resolution of such distress by way of a corporate insolvency resolution process. Such resolution process is taken to commence from the date an application is admitted by the National Company Law Tribunal, and generally required to be concluded within 180 days of the date of its admission. Once the resolution process is initiated, the Code requires a moratorium on all proceedings against the relevant debtor till the completion of such resolution process. In the eventuality the resolution process fails, the debtor’s liquidation is kick-started. Upon initiation of the liquidation process, a secured creditor may choose to relinquish its collateral and receive proceeds from the sale of the debtor’s assets or realise its security interest over specific assets.

In terms of liquidation waterfall, after payment of liquidation costs and expenses, the Code requires the satisfaction of outstanding labour dues and outstanding debt payable to secured creditors who have relinquished their secured assets. This is followed by payment of wages to employees (other than labour) and then financial debt owed to unsecured creditors. After clearing these dues, the crown debt of the debtor is satisfied, with payments (if any) to other secured creditors who did not relinquish their specific secured assets. The remaining estate is then distributed among the preference shareholders and equity shareholders or partners of the debtor. Agreements contrary to the liquidation waterfall may be disregarded by the liquidator.

Preference transactions effected within one year of the initiation of the insolvency proceedings for an unrelated party and within two years for a related party of the debtor may be reversed by a liquidator. Similarly, any extortionate credit transactions undertaken within two years of preceding insolvency proceedings may also be reversed. With a view to bringing within its ambit the offshore assets of the debtor, the Code puts in place a mechanism whereby the government may enter into agreements with other countries for enforcement of the provision of the Indian Insolvency Code.

Generally, there are no entities that are excluded from bankruptcy proceedings. The availability of certain processes to seek remedy or initiate recovery proceedings may depend on the sector of operation of the project company and the nature of the borrower and the creditor. As discussed above, this includes the SARFAESI Act, whereunder Indian banks and certain financial institutions can institute enforcement proceedings as a statutory right without recourse to courts.

Foreign exchange and withholding tax issues

Restrictions, controls, fees and taxes

What are the restrictions, controls, fees, taxes or other charges on foreign currency exchange?

Foreign exchange transactions are strictly controlled in India and are required to be routed through prescribed banking channels. The Foreign Exchange (Management) Act 1999 (FEMA) and the extant regulations under it constitute the relevant legal framework regulating the same, while RBI is the primary regulator in this regard. Most foreign exchange transactions are required to either be approved by or reported to the regulator or its delegates, as prescribed.

While current account transactions are generally permitted and specially prohibited under the FEMA regulations for current account transactions, capital account transactions are generally restricted and specially exempted under the FEMA regulations for capital account transactions.

Investment returns

What are the restrictions, controls, fees and taxes on remittances of investment returns or payments of principal, interest or premiums on loans or bonds to parties in other jurisdictions?

Inward foreign investments in India are regulated on a sector-specific basis. Remittance of proceeds of investment made by offshore entities in various sectors is generally permissible, unless specifically prohibited under the FEMA or by RBI. Foreign investments are usually therefore made after checking the restrictions applicable in respect of the sector in which such investment is proposed. However, returns on such investments, including in the form of dividends or interest are subject to Indian income tax provisions and applicable deductions and withholding taxes as may be reduced or exempted under tax treaties amongst the relevant countries.

As regards borrowing from offshore lenders, the Master Direction on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers dated 1 January 2016, as amended from time to time, prescribes specific caps, restrictions and approval requirements for the maximum principal, interest, costs, fees, in respect of external commercial borrowings as well as the minimum average maturity for such loans, nature of security that may be offered and other aspects relating to availment of such loans.


Foreign earnings

Must project companies repatriate foreign earnings? If so, must they be converted to local currency and what further restrictions exist over their use?

The FEMA regulations provide that, barring specific exemptions, where any amount of foreign exchange is due or has accrued to any person resident in India (including project companies), such person shall take all reasonable steps to realise and repatriate to India such foreign exchange within the period prescribed by the RBI. Foreign exchange earnings would usually be required to be converted to local currency or be used for discharge of a debt or liability denominated in foreign exchange, to the extent and in the manner specified by the RBI.

May project companies establish and maintain foreign currency accounts in other jurisdictions and locally?

Locally, project companies are permitted to establish specified forms of foreign currency accounts as per Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations 2015 for limited purposes and specifically permitted debits and credits only. For example, an Indian company receiving foreign investment under the foreign direct investment route may open and maintain a foreign currency account with an authorised dealer if such company has impending foreign currency expenditure. The account has to be closed immediately after the requirements are met and at most within six months.

Project offices of foreign companies may open non-interest bearing foreign currency accounts in India for the project to be executed in India, and such accounts have to be closed at completion of the project, and will be subject to the prescribed rules on credits and debits.

An Indian company may open foreign currency accounts outside India in the name of its foreign office or branch or its representative posted outside India for usual business purposes of such foreign office or branch, subject to RBI stipulations and stipulations of such offshore jurisdiction.

Foreign investment issues

Investment restrictions

What restrictions, fees and taxes exist on foreign investment in or ownership of a project and related companies? Do the restrictions also apply to foreign investors or creditors in the event of foreclosure on the project and related companies? Are there any bilateral investment treaties with key nation states or other international treaties that may afford relief from such restrictions? Would such activities require registration with any government authority?

Foreign investment in the infrastructure sector is under the automatic route in most cases and therefore does not require prior approval of the Indian government. As a general rule, any foreign investment in India is required to comply with relevant sectoral caps and applicable conditions of investment, if any. Further, certain sectors are still restricted and any investment proposal beyond the permissible limit requires the prior approval of the relevant ministry. For instance, foreign investment in nuclear and atomic energy projects is restricted, and investment in the defence sector requires security clearance from the Ministry of Defence. As of now, there are no bilateral arrangements that may provide exemption to investments routed through a particular jurisdiction from sectoral caps applicable to sectors. However, it may be noted that India has signed bilateral investment protection treaties with around 83 countries. While no specific registration requirements are prescribed (other than where a foreign investment is made through avenues other than the foreign direct investment route, such as foreign portfolio investor, foreign venture capital investor), each investment proposal or any proposed transfer of share capital of the investee company is required to be reported by way of appropriate forms to the government.


Insurance restrictions

What restrictions, fees and taxes exist on insurance policies over project assets provided or guaranteed by foreign insurance companies? May such policies be payable to foreign secured creditors?

Typically, assets situated in India cannot be insured by an insurer whose principal place of business is outside India, without permission of the Insurance Regulatory and Development Authority (IRDA). Further, reinsurance arrangements also have to be approved by the respective insurance company’s boards in consultation with IRDA. Any remittance of any claim under any insurance cover by a creditor would be subject to exchange control regulations as prescribed by the RBI from time to time.

Foreign investment in the insurance sector is regulated, and any investment above 49 per cent of the equity capital of an insurance company requires prior approval of the government.

Worker restrictions

What restrictions exist on bringing in foreign workers, technicians or executives to work on a project?

Foreign workers, technicians or executives are permitted to be employed by a foreign company engaged for execution of a project in India subject to certain conditions for obtaining an employment visa as issued by the Ministry of Home Affairs from time to time. A foreign national being sponsored for an employment visa may be required to draw a minimum annual salary in excess of US$25,000 per annum (including salary and other allowances). Long-term visa recipients are required to register themselves with the concerned appropriate government authority within 14 days of their arrival.

The recipients of e-visas are protected under employment welfare laws as applicable to their Indian counterparts. From a taxation perspective, foreign employees are subject to Indian tax laws and if taken to be resident in India are required to pay appropriate taxes.

Equipment restrictions

What restrictions exist on the importation of project equipment?

Import transactions are regulated by the Directorate General of Foreign Trade under the Ministry of Commerce and Industry, Department of Commerce. Banks are permitted to provide credit facilities and allow remittances for import of goods unless the import of such goods is specifically restricted by the import policy in force.

In terms of applicable taxes, import of project equipment is subject to applicable customs and import duties and goods and services tax under the new GST regime in India. Further, an anti-dumping duty may be levied if the government determines a good is being imported at below fair market price.

Nationalisation laws

What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected?

The Constitution of India enables the government to enact laws to acquire or appropriate any property or assets. All natural resources like airwaves, minerals or oil, are considered to be the property of the state and may be leased or licensed to private parties according to extant policies. For instance, the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act 2013 specifies certain end uses for which land and property may be acquired by the government.

There are no specific protections for foreign investment from the government’s ability to acquire or nationalise assets, except for judicial review of such acquisition in light of prevailing laws in India. However, certain bilateral investment treaties entered into by India extend protection to relevant foreign investors in the event of expropriation or nationalisation. These treaties clearly reiterate that any appropriation of investments from a contracting country will not be made except in accordance with applicable law on a non-discriminatory basis coupled with reward of fair and equitable compensation.

While India is not a signatory to the International Centre for Settlement of Investment Disputes (ICSID), the bilateral agreements occasionally provide for reference of disputes to ICSID, for example, the Comprehensive Economic Partnership Agreement between India and Korea.

Fiscal treatment of foreign investment


What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration?

While no specific tax incentives are provided to foreign investors, in certain cases, depending upon the nature of the investment and the constitution of the investment vehicle, tax saving benefits may apply. For instance, real estate investment trusts and infrastructure investment trusts are exempt from payment of dividend distribution tax. As a general rule, taxation laws are applicable to entities that are determined to be resident in India.

India has signed double taxation avoidance treaties with about 80 countries, and foreign creditors belonging to any contracting party may avoid double taxation and may avail appropriate benefits in accordance with terms of such treaties. Other applicable taxes and fees are addressed in question 2.

Government authorities

Relevant authorities

What are the relevant government agencies or departments with authority over projects in the typical project sectors? What is the nature and extent of their authority? What is the history of state ownership in these sectors?

Most sectors falling within the larger umbrella of the infrastructure sector have a separate ministry and government agency overlooking the activities being undertaken in such sector, including by way of rules, policies and regulations that are binding on projects within such sector. The relevant ministries and governmental agencies are statutorily empowered to formulate, delegate and implement governmental policy in each of the sectors. Typically, regulatory authorities have a presence at both at the state and Centre level. For instance:

  • power: the Ministry of Power, Ministry of New and Renewable Energy, and the Central and State Electricity Regulatory Commissions;
  • telecom: the Ministry of Communication, Department of Telecom;
  • ports: the Ministry of Shipping, Road Transport and Highways, Tariff Authority for Major Ports (soon to be abolished), State level maritime boards;
  • minerals: inter alia, the Ministry of Mines, Ministry of Coal and the Indian Bureau of Mines;
  • transportation Sector: the Ministry of Shipping, Road Transport and Highways, the National Highways Authority of India and the National Shipping Board;
  • oil and Gas Sector: the Ministry of Petroleum and Natural Gas and the Petroleum and Natural Gas Regulatory Board;
  • chemicals: the Ministry of Chemicals and Fertilisers and the Department of Chemicals and Petrochemicals; and
  • water treatment: inter alia, the Ministry of Environment and Forests, Ministry of Water Resources, River Development and Ganga Rejuvenation and the Central Pollution Control Board, and State Pollution Control Board.

Regulation of natural resources


Who has title to natural resources? What rights may private parties acquire to these resources and what obligations does the holder have? May foreign parties acquire such rights?

In India, all natural resources are vested with the government of India. While surface rights over land and limited rights over water bodies are granted to private parties, a rich body of court-made jurisprudence confirms that natural resources (including oil and gas, minerals and coal) are held by the government in trust on behalf of the people, and therefore the government has the right to exploit the same or lay down laws that regulate the exploitation of natural resources by private parties.

Private parties can extract natural resources only with the appropriate government consents and approvals, usually in the form of a licence or concession. Foreign entities are generally restricted from directly acquiring land in India. Nor can such foreign entities directly undertake business operations in India except in cases where the same is permitted as per the applicable foreign direct investment policy. However, if permitted under applicable laws, such as resident parties, foreign parties may also obtain consent of the government to acquire such rights. Sector, area and land specific approvals or compliances may additionally be required, such as if any mining activity is carried out in tribal areas, then companies are required to set aside certain amount of their revenues for the welfare of tribal people.

Royalties and taxes

What royalties and taxes are payable on the extraction of natural resources, and are they revenue- or profit-based?

Royalties, cess and licence fees may be payable for extraction of natural resources in accordance with the terms of the relevant licence granted, or concession entered into, with the government as per applicable law. Taxes on the income generated from the extracted natural resource, end produce and sale of such assets may be payable based on the prevailing income tax laws.

Export restrictions

What restrictions, fees or taxes exist on the export of natural resources?

Generally, goods and natural resources are freely exportable subject to sector-specific restrictions. However, the export of certain resources may be specifically restricted or prohibited, such, atomic energy minerals and petroleum resources.

Legal issues of general application

Government permission

What government approvals are required for typical project finance transactions? What fees and other charges apply?

Typically, domestic lending for, or investment in a project finance transaction in India does not specifically require any government approvals apart from project or concession specific approvals or consents. However, foreign investments in equity instruments are by way of loans in the form of external commercial borrowings are regulated by the RBI and FEMA rules and regulations. RBI approval may be required if the project finance proposed exceeds the limits or caps prescribed under the regulations or otherwise fall within restrictions as to end use, tenor, etc. Other than stamp duties, registration fees and filing fees as applicable, there is no other specific transaction fee that is payable to the government for a project finance transaction per se.

Downstream investments by foreign-owned and controlled domestic companies are subject to similar restrictions and compliances as a foreign company, as per foreign direct investment norms.

Registration of financing

Must any of the financing or project documents be registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable?

See question 2 for filing or registration requirements. These registration or filing requirements, however, are less from a validity and enforceability perspective and more from a public notice perspective in order to establish priority and maintain a public record.

Additionally, loans availed in the form of external commercial borrowings are required to be assigned a specific loan registration number by the RBI for which an application is to be made prior to disbursement of the loan.

In India, notarisation of documents is used to verify and attest the execution of documents. In respect of foreign documents, since India is a signatory to the Hague Convention Abolishing the Requirement of Legalisation for Foreign Public Documents, the issue of an apostille certificate is usually sufficient to create a presumption under law that the party to the document has signed the document.

Arbitration awards

How are international arbitration contractual provisions and awards recognised by local courts? Is the jurisdiction a member of the ICSID Convention or other prominent dispute resolution conventions? Are any types of disputes not arbitrable? Are any types of disputes subject to automatic domestic arbitration?

The Arbitration and Conciliation Act 1996 (Arbitration Act) along with applicable procedural laws, governs dispute resolution by way of arbitration in India. Indian law recognises the right of parties to contractually submit their disputes to international arbitration. India is not a member of the ICSID Convention. However, India is a member of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 as well the Geneva Convention on the Execution of Foreign Arbitral Awards 1927. Therefore, international arbitral awards passed in any of the convention member states are recognised by local courts in India. Such foreign awards are enforced as a decree of court, but remain subject to certain conditions enumerated in the Arbitration Act. For instance, the subject matter of the dispute must be arbitrable in India and must not be contrary to public policy of India. For awards that are passed in non-convention states, a fresh civil suit is required to be instituted in India.

Though Indian law does not specifically exclude any specific nature of disputes from arbitration, certain kinds of disputes have been excluded by the courts in India, such as suits for enforcement of a mortgage, criminal offences, insolvency, guardianship, antitrust or matrimonial disputes. Similarly, the Arbitration Act does not specifically set out any disputes that are mandatorily required to be arbitrated. Specific statues and policies applicable to certain sectors may require or encourage resolution of disputes by way of arbitration. For instance, the Micro, Small and Medium Enterprises Development Act 2006 provides for automatic conciliation and arbitration of disputes.

Law governing agreements

Which jurisdiction’s law typically governs project agreements? Which jurisdiction’s law typically governs financing agreements? Which matters are governed by domestic law?

Where the project is located in India, generally project agreements are governed by Indian law since the functioning of the project and compliances are subject to Indian laws and further this makes it convenient to institute suits and seek necessary reliefs, including interim reliefs where required. Where there are non-resident parties to the agreement, and the transaction has a nexus with another jurisdiction, it is possible that the parties may opt for foreign laws as the governing laws for such agreements.

Project finance documentation for loans to fund project costs, where such loans are rupee denominated, are typically Indian law governed. However, it is not unusual for certain contractual comforts (such as sponsor support documentation or guarantees) to be governed by foreign laws, if the provider of such comfort is a non-resident entity. In the case of offshore financing transactions, it is usual for the facility agreement for external commercial borrowings to be made subject to foreign laws, usually a neutral law such as English law or Singapore law, which are very often laws of jurisdictions where the lender has a presence. Security documents for Indian projects are usually governed by Indian laws due to location of secured assets and for ease of enforcement and interim reliefs and given the wider range of remedies available to Indian lenders under Indian regulations for enforcement.

Submission to foreign jurisdiction

Is a submission to a foreign jurisdiction and a waiver of immunity effective and enforceable?

Parties can contractually choose to submit to the jurisdiction of foreign courts and Indian courts will usually honour the same. Despite being courts of natural jurisdiction, Indian courts do not normally grant relief on matters where the parties have submitted to the jurisdiction of foreign courts. If approached, however, Indian courts may exercise their inherent jurisdiction, based on the cause of action having arisen within their territorial jurisdiction, or to prevent injustice where such a choice of jurisdiction is oppressive, unfair or inequitable and does not bear any real or substantial connection to the subject matter of the dispute in reliance on the doctrine of forum non conveniens. Once a foreign jurisdiction has been chosen, the burden of establishing that the forum of choice of the parties is a forum non conveniens or proceedings therein are vexatious is on the party so contending.

Environmental, health and safety laws

Applicable regulations

What laws or regulations apply to typical project sectors? What regulatory bodies administer those laws?

Most infrastructure projects such as power generation, transmission, oil refineries, road projects, water projects require environmental clearance from the Ministry of Environment and Forests. Depending upon the location of the project, forest clearance and coastal regulation zone clearance, are required to be obtained prior to the construction of the project. Under the pollution control laws, projects are required to obtain ‘consent to establish’ and ‘consent to operate’ from the relevant state pollution control board. Further, no-objection certificates from the Ministry of Defence, Airport Authority of India and the local land development authority may be required to be obtained depending on location and impact of the project. If the project special purpose vehicle employs labour and employees, then compliance with industrial and labour legislations is to be ensured, and appropriate statutory licences may be required to be obtained from the government authorities. Typically, the list of approvals and consents across India is similar, however, certain additional statutory clearances may be required to be obtained under state-specific legislation.

Project companies

Principal business structures

What are the principal business structures of project companies? What are the principal sources of financing available to project companies?

Usually, project companies are constituted as special purpose vehicles. A considerable source of finance is supplied by the banks and financial institutions in the form of debt. Both onshore and offshore funds are available to project finance companies. For domestic lenders, rupee loans and rupee dominated bonds remain the popular funding structures. For offshore funds, external commercial borrowing route remains the primary source in project companies. Some part of the funding requirement is met by way of plain equity or structured investments from the sponsors, domestic funds and international market participants.

Public-private partnership legislation

Applicable legislation

Has PPP-enabling legislation been enacted and, if so, at what level of government and is the legislation industry-specific?

The government has implemented various policies to regulate the PPP model, and constituted committees at multiple levels to review the functioning of the PPP model depending on the value of the underlying project. The regulatory framework, however, is rather fragmented and sector-specific. There is no legislation that specifically deals with PPP. Having said that, the guidelines and policies relating to PPP are broad and generic and are generally aimed at ensuring competitiveness and providing transparency in the bidding process.

PPP - limitations

Legal limitations

What, if any, are the practical and legal limitations on PPP transactions?

Being a model that has largely been introduced in the infrastructure sector, India’s experience with PPP model has a strong linkage with the commercial dynamics that govern the infrastructure sector. The legal regime needs to be modelled to ensure minimisation of transaction costs and encourage optimal project risk allocation. The ‘one size fits all’ approach for project concession agreements is counter-productive as it does not factor in project specific risks. Further, a multi-disciplinary experts led dispute resolution mechanism is the need of the hour to kick-start various stalled projects, and ensure that underlying systemic problems are taken into consideration in dispute adjudication.

Land acquisition related complications, lack of a single window clearance mechanism from the government and fragmented legal framework usually result in project delays and consequently increase in project costs. Further, since concession contracts seek to encourage exercise of substitution rights by the lenders, and not the liquidation or transfer of assets, lenders are tied into projects. For power projects especially those awarded on a competitive bid basis, the issue of project delays owing to government actions, external factors such as a rise in the cost of imported fuel resulting in increased costs and unviability of the project remain a cause of concern.

PPP - transactions

Significant transactions

What have been the most significant PPP transactions completed to date in your jurisdiction?

The Indian government has implemented the PPP model in various sectors including power, ports, roads or airports. It is estimated that the government has approved a total of 1,575 projects amounting to US$173 billion. Over the years, India has emerged as highly significant in large-scale PPP financing deals. With continued investments in the road and transport sector, and focus of the government on power generation, recent times have seen multiple large-scale PPP projects, such as the coal-based Sassan ultra mega power project with a capacity of 3,960MW with a project cost of close to US$4 billion, the 165-kilometre Yamuna Expressway carried a cost of US$2.1 billion, and the modernisation of Mumbai and Delhi Airport, which were carried out at close to US$2 billion each. In ports, the Gopalpur Port in Orissa was developed at a cost of US$1 billion. In roads, National Highways Authority of India (NHAI) awarded a 30-year concession in relation to existing and operating highways on a toll-operate-transfer basis for an upfront payment of 96.8 billion rupees.

In the mining sector, pursuant to cancellation of existing coal allocations and reissuance of the same under the Coal Mining Special Provisions Act 2015, mining activity has been revived through appointment of mine operators and developers.

There have also been various PPP initiatives in the healthcare sector, redevelopment of railways stations, government-owned solar parks, including Bhadla solar park in Rajasthan (being one of the largest solar parks in India spread over about 10,000 acres of land), Ananthapur Ultra Mega Solar Park in Andhra Pradesh and Rewa Ultra Mega Solar Park in Madhya Pradesh.

In the ‘under construction’ stage there is the ongoing Navi Mumbai Airport Project estimated at a project cost of about US$1.47 billion and the 1,047-kilometre road upgrade (Greater Noida-Ballia) Project that is expected to cost US$4.3 billion, and the 3,097MW Etalin hydel power unit in Dibang Valley, which is proposed to be completed within a period of seven years and is estimated to cost around US$3.7 billion.

* Assisted by Meeta Kurpad (principal associate) and Harsha Rao (associate).


Update & Trends

Updates and trends

Some recent trends and hot topics related to project finance transactions in India include the following:

  • RBI Revised Framework: The RBI, by its circular dated 12 February 2018 (Revised Framework), has completely revamped the regulatory framework for resolution of stressed assets. It supersedes all existing restructuring frameworks including resolution under the joint lenders’ forum and strategic debt restructuring and provides for a unified framework for restructuring of stressed assets. The Revised Framework stipulates stricter and close monitoring of the borrower accounts and compulsory rating requirement in relation to the restructured accounts. Lenders are required to report to the Central Repository of Information on Large Credits about default in any account with aggregate exposure of 50 million rupees and above on weekly basis. Under the Revised Framework, as soon as there is a default in a borrower entity’s account with any lender, all lenders (either singly or jointly) shall be required to formulate a resolution plan (RP) that may involve any action or plan or reorganisation including change in ownership or restructuring or sale of exposure, etc. The RP will require unanimous approval of all lenders. For accounts where the aggregate exposure of the eligible lenders in such account is in excess of 20 billion rupees, the lenders are required to mandatorily initiate and implement an RP within the prescribed timelines, failing which the account is required to be mandatorily referred for resolution under the Code. A key impact of the Revised Framework is that it mandates a time-bound mechanism of resolution of the stressed assets outside the insolvency regime, failing which the mandatory referral to resolution under the Code is prescribed.
  • The Revised Framework has also impacted lenders looking to provide last-mile finance to stalled or stressed projects on a priority lending basis. While earlier it was being provided under the aegis of RBI regulations prescribed in respect of stressed assets and approval of joint lenders’ forum of creditors with prescribed majority, it may now be explored as an option for revival of the stressed companies under RBI Revised Framework.
  • High yields: We are also increasingly seeing offshore issuance of US dollar denominated notes or bonds by entities incorporated offshore, proceeds of which are being utilised to either subscribe to non-convertible debentures issued by the Indian borrower or to advance external commercial borrowings under the RBI framework.
  • Changes in FPI regime: The RBI has set out certain sectoral concentration limits and has clarified that limits for investments by foreign portfolio investors (FPI) shall be treated on an aggregate related party basis. Investments by an FPI must not exceed 50 per cent of any issue of corporate bonds and it must not, in any case, have an exposure of more than 20 per cent of its corporate bond portfolio to a single corporate (including exposure to entities related to the corporate).
  • TOT model: NHAI launched the toll-operate-transfer model to monetise existing highway networks by auctioning the rights to collect toll for a specified period against upfront payment to NHAI. The first such concession was awarded in relation to seven major highways in the states of Gujarat and Andhra Pradesh for an upfront payment of 96.8 billion rupees. The concessionaire is free to avail debt funding for the entire upfront concession fee to be paid to NHAI.
  • Interim finance: We are increasingly seeing non-banking finance companies providing ‘super priority interim financing’ to companies in respect of which insolvency proceedings have been initiated. These loans are typically smaller in size, and are provided to meet the costs of running the company during the period of the resolution under the Code.