Legal Aspects of Project Finance – Key Agreements & Compliance

Project finance involves 20-30 legal agreements creating a complex web of rights and obligations. Understanding these is critical.

Key Project Agreements

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1. Concession Agreement

Parties: SPV (Concessionaire) and Government (Grantor)

Key Terms:

• Concession Period: 20-30 years
• Scope of Work: What must be built/operated
• Revenue Rights: Toll collection, tariff
• Land: Government provides land
• Force Majeure: Events beyond control
• Termination: Conditions and compensation

Example Clause - Termination Payment:

• If government terminates: Pay debt outstanding + equity with 15% return
• If SPV defaults: Government takes over, pays only debt

2. EPC Contract (Engineering, Procurement, Construction)

Parties: SPV and EPC Contractor

Key Provisions:

• Fixed Price Lump Sum: ₹500 crore (contractor bears cost overrun)
• Completion Date: 24 months
• Liquidated Damages: 0.5% per week delay (max 10%)
• Performance Guarantee: 10% bank guarantee
• Defects Liability: 12-24 months post-completion

3. Loan Agreement

Parties: SPV and Lenders

Key Terms:

• Loan Amount: ₹700 crore
• Interest: MCLR + 2.5%
• Repayment: 15 years
• Security: First charge on all assets
• Covenants: Financial and operational restrictions (covered in next chapter)

4. Power Purchase Agreement (PPA) / Off-take Agreement

Parties: SPV and Buyer (DISCOM for power, NHAI for toll roads)

Key Terms:

• Tenure: 25 years
• Tariff: Fixed or formula-based
• Capacity/Volume: Committed offtake
• Payment Terms: Within 30 days of billing

"Take or Pay" clause: Buyer must pay even if doesn't take supply

5. Direct Agreements

Lenders' Step-In Rights:

• Lenders sign direct agreements with EPC contractor, O&M contractor, government
• Purpose: If SPV defaults, lenders can step in and appoint new management

Regulatory Compliance

Approvals Required

1. Incorporation (ROC - Registrar of Companies)
2. Environmental Clearance (Ministry of Environment)
3. Forest Clearance (if forest land involved)
4. Water/Pollution NOCs
5. FIPB approval (if foreign investment)
6. SEBI (if issuing bonds)
7. RBI (if ECB)

Dispute Resolution

Hierarchy

1. Negotiation (30-60 days) 2. Mediation (facilitated settlement) 3. Arbitration (binding decision by arbitrator) 4. Litigation (courts - avoid if possible!)

Arbitration is Preferred:

• Faster (12-24 months vs 5-10 years for courts)
• Confidential
• Expert arbitrators
• Enforceable globally (New York Convention)

Arbitration Clause Example:

• Seat: Singapore/London
• Rules: SIAC/LCIA
• Language: English
• Number of Arbitrators: 3

Summary

• Projects have 20-30 agreements (Concession, EPC, Loan, PPA, etc.)
• Concession Agreement defines overall project rights
• EPC Contract allocates construction risk
• Loan Agreement has security and covenants
• Direct Agreements give lenders step-in rights
• Arbitration preferred over litigation

Quiz Time! 🎯

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