WORLD BANK INSTITUE LEGAL LEGAL ISSUES IN

Transcription

1 WORLD BANK INSTITUE INFRASTRUCTURE FINANCING Mohit hits Saraf Senior Partner Luthra & Luthra Luthra & Luthra Law Offices

2 2 A VIEW OF THE INDIAN INFRASTRUCTURE SPACE THROUGH A PARADIGM SHIFT Growth of the Indian economy (8% +) GOING Key bottleneck in the growth story in slow growth of Infrastructure Development in India DEMAND CONTINUES TO OUTPACE SUPPLY IN ALMOST ALL SECTORS OF INFRASTRUCTURE Government development targets have not been met

3 3 A VIEW OF THE INDIAN INFRASTRUCTURE SPACE Power generation short of planned targets EASY AVAILABILITY OF CREDIT Need for banks to deploy large amounts of funds Small commercial banks ready to participate Foreign banks willing to provide credit LOAN TENOR INCREASING

4 4 A VIEW OF THE INDIAN INFRASTRUCTURE SPACE MARKET RELATED RISK: Limited Recource Project Finance: Telecom and LNG. UTILITY RISK: If not creditworthy: th Demand-supply mismatch vendor finance, corporate finance, but not project tfi finance.

5 5 SHIFT OF NEGOTIATION BALANCE TOWARDS DEVELOPER: Dilution of lender s discretion» Insistence to place reasonability tests Limited conditions precedent» No-predefined dfi d time for grant of environmental clearances, change in land use requirements, regulatory approval, etc.

6 6 RELAXED COVENANTS» Push back on cross defaults» Demand for deletion or cross acceleration TIME FOR SECURITY CREATION» Security creation as a CP sought to be waived because of requirement of license or approval

7 7 PRESENCE OF FOREIGN LENDERS: SECURITY CREATION BECOMES DIFFICULT» RBI s permission under FEMA required to create interest on immoveable property and shares» RBI s permission required for sponsor to guarantee foreign loans» Need to identify exotic structures Ndu; Shortfall undertaking; Indemnity» Increases enforceability & regulatory risk

8 8 FOREIGN LENDERS Benefit of SARFAESI not available DRT is not available as a forum Creating challenge inter-creditor mechanism remains» Domestic lenders should continue to enjoy their rights while foreign lenders do not get dis-advantaged» Such ICA not tested for enforceability a

9 9 FOREIGN LENDERS DIFFERENT GOVERNING FORUMS(DHABOL)» Loan agreement English Law and» Security Documents: India Law LAWS Inter-creditor»In a default, this creates multiple suits AND agreement:

10 10 SECURITY CREATION Cost of security creation continues to behigh Process for security creation remains lengthy» Need for licensor s/lessor s permission» Permissions remain discretionary with no objective standards

11 11 BROWNFIELD CONCESSIONS Only revenue available as security Certain cases only surplus cash flow available as security»cause for concern since allows the sponsor to divert revenues»since no security over revenues, third party gets clean title»lenders have protection only through contractual covenants which are not relevant for non bona-fide transferees

12 12 LICENSOR INFLEXIBILITY Important contractual agreements like Escrow Agreement, TRA & Substitution Agreement are licensor driven Take-it-or-leave-it drafts are provided Create conflicting issues: licensor s stipulations lender s rights &

13 13 NHAI PROJECTS Project documents for toll based road projects provides that security may be created over the cash flow in favor of the escrow agent for the benefit of the lenders Not customary in syndicated lending Security normally is in favor of a trustee holding for the benefit of the lenders Legal fiction that the escrow agent being the agent of the trustee

14 14 NHAI PROJECTS SUBSTITUTION AGREEMENT IS LOOSELY WORDED: WITH NO TIME OR CRITERION BOUND DETERMINATION SPECIFIED

15 15 SUBORDINATE DEBT Vs EQUITY CONTRIBUTION Need to define subordination principles There has to be direct agreement with the subordinate lender and senior lenders to restrict ability to accelerate, seek repayment py & prepayment Subordination is only through contract and not under law (like equity investment)

16 16 DELHI AIRPORT Brownfield projects do not provide for security oer over any of the transfer assets even een lease/license rights cannot be mortgaged for the duration of the lease/license Enforcement of pledge over shares of the project company where the licensor is also participating may be difficult

17 Thank you Luthra & Luthra Law Offices Mumbai. New Delhi. Bangalore Tel: +(91) Fax: +(91) Website: