J M Financials has structured a deal for investments in Dabhol Power Company (DPC) which is likely to be the standard document for equity exposure in any transnational unlimited liability comapny setting shop in the country. Most of the power transnationals and companies like Coca Cola fall under this category.
Though few Indian companies are incorporated as unlimited liability company, most US power companies prefer being incorporated in this category for getting tax benefits in their home country.
Under US tax laws, income earned abroad by an unlimited liability company enjoys an additional three per cent tax waiver. The deal has been structured by JM to route investments by the MSEB in DPC.
In order to limit its liability, MSEB has set up Maharashtra Power Development Corporation Ltd (MPDCL), a limited liability company incorporated under company law. MSEB is proposing to take 30 per cent stake in phase I of the project.
As a result of this, if DPC goes into liquidation for some reason, MSEBs liability would be limited to its investemnts in MPDCL and not to all its assets. Limited liability limits the liability of a share holder to the face value of the share. Unlimited liability extends to all the assets belonging to the company.
Special purpose vehicles have been set up by several state government public utilities in order to work around the provisions of the Article 293 (2) of the Constitution which forbids state governments from raising funds directly.
As a result, there has been a glut of SPVs raising funds on behalf of the state government for investments in power, roads, ports, water supply and other infrastructure sectors. Public utilities in Maharashtra, Tamil Nadu, Karnataka, Rajasthjan, Andhra and Gujarat in this category.
MSEB is proposing to borrow from the market to fund its equity exposure in DPC. However, the primary intent of the SPV is not to work around the Constitutional limitation but to limit liability of investors in Dabhol, sources said.
Significantly, the Central Board of Direct Taxes has accepted the basic rationale and has extended tax-free status to the Rs 150 crore bonds being floated by MSEB to meet part of its Rs 600 crore fund requirement for investing in Phase I of Dabhol.
Technically, only interest, dividend and capital gains from direct investments in companies engaged in developing, maintaining and operating infrastructure facilities are eligible for the tax-free status. Given the unlimited liability issue, the escrow mechanism for the MSEB bond isssue has also been structured with caution, and is likely to be replicated in all similar situations.
According to a structured payemnt mechanism evolved under a quadripartite agreement (between the government of Maharashtra, MSEB, MPDCL and the trustees), MSEB will not be able to divert any of the funds raised through the bond issue for any purpose other than for investing in MPDCL. MPDCL too is bound by the requirement that it cannot invest the funds raised through the bond issue for any other purpose other than investing in Phase I of Dabhol.
The sole exception is that pending investment in DPC, the surplus amount may be placed in specified government securities and PSU deposits.
Adequate care has also been taken to ensure that the interest earned by the investor from the bonds flows directly into the hands of the investors. The interest earning cannot be touched by MSEB or MPDCL, JM sources said. Significantly, care has also been take to see that the gaurantee stood by MSEB is backed by asset. Generally, government guarantees are paper guarantees. In this case, the gurantee is backed by a brand-new unit of MSEB, JM sources said.
