Project Finance

Types of projects

Project financing in India is used for both greenfield and brownfield projects in sectors such as:

Public infrastructure (roads, airports, metro rail, and ports, among others).

Energy (power generation (solar, thermal, wind, hydro), power transmission and so on).


Manufacturing (cement).





What regulatory framework governs project finance in your jurisdiction?


Regulatory framework:


There is no umbrella legislation governing project finance transactions in India. Different sets of law will apply, depending on the nature of project financing transaction.


The following legislation primarily governs rupee denominated project lending by local lenders to borrowers:

The Banking Regulation Act of 1949.

The Reserve Bank of India Act 1934.


The guidelines, master directions, notifications and circulars issued by the Reserve Bank of India (RBI) (as a regulator to lenders and lending business in India).

Loans availed from a non-resident lender, that is, external commercial borrowings (ECB), are governed by the Foreign Exchange Management Act 1999 read with the:

Foreign Exchange Management (Borrowing or Lending in Rupees) Regulations 2000.

Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations 2000.

Master Direction on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency (ECB Master Direction).

Project funding by way of equity or quasi-equity instruments by non-residents are primarily governed by the:

Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations 2000 of the RBI.

The foreign direct investment (FDI) policy issued from time to time by the Department of Industrial Policy and Promotion (DIPP).

In addition, if the borrower is a company, provisions of the Companies Act 2013 and the rules provided under it also apply.

Regulatory authorities

No single government agency regulates project finance in India. There are government departments, authorities and regulatory commissions that govern different types of projects, depending on its sector. These authorities include the:

National Highways Authority of India (NHAI) along with Ministry of Roads.

Transport and Highways for road projects.

Respective electricity regulatory commissions.

Airports Authority of India.

Maritime Boards of the respective states, port trust and the Port Tariff Authority along with any other authority that may be constituted by the state where the project is based.

Material laws

Outside the general regulatory framework, there are a number of laws that must be taken into consideration in relation to project finance transactions, including the:

Indian Contract Act of 1872. This is the basic Indian legalization that governs contracts, including loan agreements and security documents.

Companies Act of 2013. This regulates, among other matters, registration of a charge on the company's assets, conversion of debt into equity and procedural compliances in relation to availing of loans and creation of security by companies.

Transfer of Property Act 1882. This regulates creation and procedure for enforceability of security over immovable property.

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI). This regulates enforceability of security to recover debts. The benefits under SARFAESI are not available to foreign creditors, with the exception of the Asian Development Bank and the International Finance Corporation.

Insolvency and Bankruptcy Code 2016. This is the comprehensive insolvency and bankruptcy legislation in India that covers companies, partnerships as well as individuals.

Code of Civil Procedure 1908 (CPC). This is the principal Indian legislation governing the procedure for civil court proceedings in India, which can be used by the creditors for recovery proceedings and enforcement of security. This can also be used for dispute resolution under any other contractual proceedings.

International treaties

India has signed certain international treaties that may impact cross-border project financing transactions. Bilateral investment protection agreements aim to protect foreign investors, such as:

Free Trade Agreements.

Comprehensive Economic Partnership Agreements.

Comprehensive Economic Co-operation Agreements.

Preferential Trade Agreements.

Further, India has signed tax treaties with various countries for the avoidance of double taxation.

Regulatory considerations

Are government approvals required before financing a project? Are fees typically paid for such approval?


Depending on the nature of financing, prior governmental approval may be required.

External commercial borrowings (ECBs) may be raised under the automatic route (without the Reserve Bank of India's (RBI) approval) or under the approval route (with RBI's prior approval), depending on whether or not the eligibility criteria and thresholds prescribed by the RBI under ECB Master Directions are met or breached. For the infrastructure sector, ECBs up to an amount of US$750 million or its equivalent may be raised by eligible borrowers under the automatic route.

Similarly, depending on the sector in which the project entity falls, foreign direct investment (FDI) may be made under the automatic route (without the concerned Ministry's/relevant Indian Government Department's approval) or the government route (with concerned Ministry's/ relevant Indian Government Department's prior approval). FDI in certain specified sectors is prohibited (such as atomic energy, lottery, betting, and gambling). Infrastructure sector usually falls under the 100% automatic route.


Is there any requirement to file or register project documents with a regulatory authority or other government bodies?



There are no laws requiring mandatory state ownership of or interest in a project or a project company. However, the government may acquire private property and restrict private party participation in certain activities (pursuant to specific legislation passed by the legislature). For example, the Right to Fair Compensation and Transparency in Land Acquisition and the Rehabilitation and Resettlement Act 2013 (Land Acquisition Act) grants the government the right to acquire land for public purpose.

In terms of the Atomic Energy Act 1962, the Union Government has the power to control the production, use and disposal of atomic energy, which it may do, either by itself or through a government corporation (that is, a company in which a minimum of 51% of the paid-up equity share capital is held by the Union Government). Therefore, nuclear power generation or disposal activities cannot be undertaken by an entity that is privately controlled.

State repatriation of assets

The Land Acquisition Act grants power to the government to acquire private land for specified purposes (see above).

Under PPP projects, all rights on the infrastructure project under development are transferred to the state at the end of the concession period.

Structuring the financing

Main parties


Who are the main parties in a project finance transaction?


The main parties in a project finance transaction are the:


Project developer.


Governmental authority.

Material project participants.

Security trustee (on a case by case basis).

Facility agent (on a case by case basis).

Escrow or Trust and Retention Account Bank.

Types of financing


How are projects financed? What sources of funding are typically available?

The projects are typically financed by way of:


External commercial borrowings (ECBs).

Domestic term and working capital lending.

FDI into the special purpose vehicle (SPV) developing the project.

Financing may also be obtained through debt instruments, such as debentures, and availing of credit from the Export-Import Bank of India. In the recent past, financing has also been obtained by infrastructure companies by way of issuance of rupee-denominated bonds (popularly known as "masala bonds" and "green bonds").

Specific requirements may apply, depending on the nature of the entity proposing to finance the project. For example, foreign portfolio investors may subscribe to unlisted non-convertible debentures only if the issuing company is in the infrastructure sector.

What are the advantages and disadvantages of using project financing to structure a construction or infrastructure project?


Since the special purpose vehicle (SPV) is a separate legal entity, while the sponsor retains ownership over the project company and the corporate assets, the sponsor is independent and segregated from the project risks except where it has given a corporate or personal guarantee.


One disadvantage is the limited recourse against the sponsors. However, it should be noted that in India, a completely non-recourse to sponsor-based financing until the project completion is achieved is not very usual and generally, the sponsors are required to give a corporate or personal guarantee as part of the commercial requirements of the lenders. While this in some ways protects lenders and provides recourse to the sponsor/owner, in practice it has been very difficult for lenders to expeditiously enforce such contracts to recover their dues in an event of default.

Additionally, project lending in India is usually for a term of eight to ten years whereas the time required to complete the project and recoup investments/make earnings from the project is usually longer. This often results in a mismatch in the cash flows required to service the debt resulting in stress and defaults by the borrower. While the Reserve Bank of India provided long-term refinancing schemes to address this issue, its implementation is linked to the achievement of commercial operation of the project, which makes it very difficult to use this option in several projects where the construction is delayed for various reasons including for delays in receiving approvals from government.

Another disadvantage is the limited funding options available, as India still does not have a very deep bond market and the financing is usually provided by banks.