Takeout financing as a tool for funding Infra projects

Prime Minister Manmohan Singh in his inaugural address on September 12, 2011 at the Conference on Public-Private Partnership in National Highways dwelt on concerns regarding constraints faced by infrastructure projects in availing long-term debt. Representatives of the Planning Commission, Ministry of Economic Affairs and IIFCL discussed takeout financing as a key measure to address such constraints.   

With the government's ambitious plan to spend over $1 trillion during the 12th Five-Year Plan (2012-17) on building new and upgrading existing infrastructure, the participants at the Conference emphasised the need of taking more initiative and favourable measures to promote the takeout finance mechanism, in order to enable financial institutions to avoid hitting the limit of group and single-sector exposure, asset-liability mismatch and to free up capital to finance more infrastructure projects. Under the proposed scheme, IIFCL and LIC are expected to acquire 40% of a lender's loan, with each taking an exposure of 20%. IIFCL, with its modified takeout finance Scheme, has already sanctioned seven infrastructure projects of over Rs 1,500 crore.

The takeout finance scheme has been designed to enable lenders to address the concern of the hitting the sectoral limit, asset-liability mismatch and liquidity issues that may arise by the long-term debt financing to core projects. Under the scheme, banks and lenders can enter in an arrangement with financial institutions for transferring the loan outstanding in their books to those of the financial institution which is taking out long-term debt.

The salient features of the IIFCL's Takeout Finance Scheme:

1. Takeout financing from individual lenders up to 100% of the residual amount of the loan and, in the case of lead bank, to the extent of 75% of the residual amount of the loan on the schedule commercial date of occurrence of takeout.
2. Takeout term-loan debt by entering a tripartite agreement with identified lenders and borrowers any time after the project achieves its commercial operation date (COD).
3. The tenor of the takeout up to 15 years.
4. Takeout fee of 0.3% from lenders, which they may recover from the borrower.
5. Reduction in rate of interest, subject to revised risk profile of the project. The rate of interest will be minimum 0.75% and maximum 2% lower than the rate being charged by lenders.
6. Refund of 50% of the fee paid by the lenders in case of non-occurrence of takeout on the schedule date of occurrence.
7. Sectors eligible:

• Road and bridges, railways, seaports, airports, inland waterways and other transportation projects;
• Power;
• Urban transport, water supply, sewage, solid waste management and other physical infrastructure in urban areas;
• Gas pipelines;
• Infrastructure projects in Special Economic Zones; and
• International convention centers and other tourism infrastructure projects.

Considering the growing need of Takeout finance in infrastructure sector, the Reserve Bank of India vide its circular no. RBI/2010-11/124 date July 22, 2010, under section 10(4) and 11(1) of the Foreign Exchange Management Act, 1911 (42 of 1999), already created opportunities for overseas banks to lend to Indian projects without taking the project completion risk by way of Takeout financing.

The Key features/condition of the foreign currency takeout finance policy termed as "External Commercial Borrowing (ECB) Policy – Takeout Finance" are as follows:

1. Takeout finance arrangement through ECB under the approval route;
2. In the Sea Port, Airport, Roads including bridges and Sector;
3. Tripartite Agreement amongst borrower, domestic lender(s) and overseas recognize lender(s) for either a conditional or unconditional takeout of the loan within three years of COD;
4. Minimum average maturity period of seven years;
5. Complying the extant prudential norms by the domestic bank, financing the infrastructure project;
6. Fee payable (if any) to the overseas lenders until the takeout shall not exceed 100 bps per annum;
7. Loan to be considered as ECB upon take out by overseas lenders and the loan to be designated in convertible foreign currency and all extant norms of the ECB such as limit of $500 million per company per year to be complied;
8. Not to guarantee the Takeout finance by domestic banks/financial institution;
9. Domestic banks/financial institution not to carry out any obligation on their balance sheet after takeout finance; and
10. Reporting arrangement as under ECB policy.

However, jurisdiction of Indian courts in case of overseas lender and foreign court in case of domestic lenders and borrower due to tripartite agreement, takeout limit of 3 year of COD, cap on commitment fee, applicability to new projects only, are the practical concerns, which requires to be addressed before ECB Takeout finance gains momentum to rescue the domestic lender(s) for financing more infrastructure project(s).  

In view of the fact that only 5 States exceeded 11th five year plan growth targets, Government need to take more initiatives and favorable measure to encourage Takeout finance by domestic financial institutions as well as overseas lender(s) so as the ambitious target to spend over $1 trillion during the 12th Five-Year Plan (2012-17) on building new and upgrading the existing infrastructure can be achieved.

Nilesh Chandra is Principal Associate and Shailendra Sharma is Associate at MV Kini & Co., A Mumbai-based law firm with offices in Delhi, Bangalore, Pune, Hyderabad, Allahabad, Lucknow, Pune, and Kolkata.