LEGAL AND REGULATORY ASPECT OF

PROJECT FINANCE

A Project Management Assignment

Submitted to

Dr. Asif Akhtar

Department of Business Administration

FMSR

Aligarh Muslim University

Aligarh

2013-2014

Submitted by

Gagan Varshney

12MBA-08

Section 1: Introduction

Every project finance is a subject to some law & regulations, so that

1. Decisions can be taken unanimously.

2. Plan can be made accordingly.

3. Helps in making different provisions so that possible actions can be taken on time

according to the situations.

4. Every party get to know their duties. Hence proper allocation of work.

Section 2: Current Trends

Today, Project finance rules has been made more strong in order to bring the certainty &

stability and clearing any confusions regarding the rules so that important decisions can be

taken in no time. Rules are being made in such a way that no one can take the benefit of any

hole in the laws.

Section 3: Working Model

3.1 Typical Project Configuration

Projects are typically implemented in a special Purpose Vehicle (SPV), which is a distinct

corporate entity incorporated with the objective of implementing & operating the project.

Project sponsors take an equity stake in the SPV.

The SPV enters into contractual arrangements with project parties.

3.2 Key Project Parties

Project Sponsors: Responsible for converting a concept into a project, setting up a project

vehicle, recruiting right managerial talent, and subscribing a significant proportion of

equity.

Project Vehicle: Appoints contractors, negotiates & executes the contracts, raises the

financing.

Project Leaders: Provides debt. Typically a consortium of project lenders, led by a ”Lead

Bank”.

EPC Contractor: Designs the project, procures all the engineering skills & equipment to

construct the project.

O&M Contractors: Responsible for operating & maintaining the plant in line with

industry best practices.

Government: It is a key project party. It provides a Concession to the SPV to set up the

project and ensure that a proper legislative & regulatory framework exists that allows the

concerned SPV to compete on a “level playing field”.

3.3 Project Contracts

Some of the fundamental provisions of key project contracts are given below:

Shareholders Agreement

An aggrement between all of SPV’s shareholders, including Project Sponsors that establishes:

1. Shareholding pattern

2. Shareholder’s representation in management

3. Minority protection rights

4. Decision making process in certain reserved matters

5. Proposed pattern of cash calls and remedies available against Funding Defaults by one

shareholder

6. Shareholder’s Exit Process

EPC Contract

An agreement between the SPV and the EPC contractor that establishes:

1. The EPC contractor’s sole responsibility in designing plant/facility according to

specifications laid down in the contract

2. Guaranteed & Minimum Performance parameters.

3. Responsibility of the contractors to rectify the plant if it fails to meet Guaranteed

performance parameters.

Project Form Agreements

An agreement between the SPV & the project lenders that establishes:

1. Certain Conditions Precedent on fulfilment of which an approve loan is drawable by

SPV.

2. Amount of loan approved.

3. Loan tenor, repayment obligations, interest rates

4. Security & credit enhancements

O&M Contracts

An agreement between the SPV & O&M contractor that establishes:

1. To ensure the project’s availability

2. Maintenance obligations

3. Bonus payments to the O&M contractors

Section 4: Future Trends

In future, most of the laws & regulations will be affected by information technology.

Moreover , new techniques of completing the projects will lead to more rules toward the use

& finance for those technologies. Thereby process will be the mixture of Human resource

Management and Modern Techniques.

Copyright © 2014 Gagan Varshney