WORLD BANK INSTITUTE WORLD BANK INSTITUTE PROJECT SECURITY PACKAGE ANDPROJECT SECURITY PACKAGE ANDPROJECT SECURITY PACKAGE AND PROJECT SECURITY PACKAGE AND

CONTRACT DOCUMENTATIONCONTRACT DOCUMENTATION-- LEGAL LEGAL PERSPECTIVEPERSPECTIVEPERSPECTIVE PERSPECTIVE

Mohit SarafMohit SarafSenior PartnerSenior PartnerSenior PartnerSenior Partner

Luthra & LuthraLuthra & LuthraLaw Offices

PRESENTATION FLOWPRESENTATION FLOWPRESENTATION FLOWPRESENTATION FLOW

PROJECTPROJECT FINANCEFINANCE AA BRIEFBRIEFPROJECTPROJECT FINANCEFINANCE –– AA BRIEFBRIEFOVERVIEWOVERVIEWTYPICALTYPICAL PROJECTPROJECT FINANCINGFINANCINGTYPICALTYPICAL PROJECTPROJECT FINANCINGFINANCINGCONTRACTCONTRACT DOCUMENTATIONDOCUMENTATIONPROJECTPROJECT SECURITYSECURITYPAYMENTPAYMENT SECURITYSECURITY

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PROJECT FINANCEPROJECT FINANCE –– A BRIEFA BRIEFPROJECT FINANCE PROJECT FINANCE A BRIEF A BRIEF OVERVIEWOVERVIEW

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PROJECT FINANCE PROJECT FINANCE –– A BRIEF A BRIEF OVERVIEWOVERVIEWOVERVIEWOVERVIEW

•• ProjectProject FinanceFinance:: financingfinancing && developmentdevelopment techniquetechniquej tifi dj tifi d thth t tht th ff f tf t j t dj t d iijustifiedjustified onon thethe strengthstrength ofof futurefuture projectedprojected earningsearnings

•• PastPast tracktrack recordrecord,, otherother business(es)business(es) ofof thethe SponsorSponsorandand existingexisting cashcash flowflow streamstream providesprovides limitedlimitedandand existingexisting cashcash flowflow streamstream providesprovides limitedlimitedcomfortcomfort

•• NonNon (or(or atat bestbest veryvery limited)limited) recourserecourse toto thethe assetsassets ororNonNon (or(or atat bestbest veryvery limited)limited) recourserecourse toto thethe assetsassets ororcashcash flowflow ofof thethe SponsorSponsor

•• InvolvementInvolvement inin thethe projectproject byby eacheach ofof thethe participantparticipantisis onon thethe analysisanalysis ofof thethe risksrisks inin thethe projectproject andand thetheabilityability ofof thethe personperson toto whomwhom thethe riskrisk hashas beenbeenallocated,allocated, toto managemanage itit

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PROJECT FINANCE PROJECT FINANCE –– A BRIEF A BRIEF OVERVIEWOVERVIEWOVERVIEWOVERVIEW

•• LendersLenders andand ifif itit isis aa projectproject involvinginvolving developmentdevelopment ofofaa publicpublic utility,utility, thenthen thethe government,government, interestedinterested ininpp y,y, g ,g ,takingtaking controlcontrol ofof thethe ProjectProject andand thethe assetsassets inin aadefaultdefault scenarioscenario

AA i l di l d h i lh i l dd ll i hi h•• AssetsAssets includeinclude physicalphysical assetsassets andand contractualcontractual rightsrightsandand privilegesprivileges

ContractualContractual frameworkframework forfor thethe developmentdevelopment andand•• ContractualContractual frameworkframework forfor thethe developmentdevelopment andandfinancingfinancing isis designeddesigned toto ensureensure nono possibilitypossibility ofofleakageleakage ofof assetsassets andand cashcash

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PROJECT FINANCE PROJECT FINANCE –– A BRIEF A BRIEF OVERVIEWOVERVIEW

•• ControlControl overover assetsassets isis ensured,ensured, interaliainteralia,, throughthrough,, ,, ggcreationcreation ofof securitysecurity interestinterest overover themthem

•• CashCash flowflow whichwhich isis crucialcrucial toto supplierssuppliers andand lenderslenders•• CashCash flowflow whichwhich isis crucialcrucial toto supplierssuppliers andand lenderslendersalikealike isis trappedtrapped inin wellwell defineddefined TRATRA mechanismsmechanisms•• whichwhich preventprevent leakageleakage byby evolvingevolving aa strictstrict cashcash flowflow

trappingtrapping andand waterfallwaterfall mechanismmechanismtrappingtrapping andand waterfallwaterfall mechanismmechanism

•• ControlControl overover projectsprojects isis ensuredensured throughthrough contractualcontractualtt ithith j tj t ti i tti i tagreementsagreements withwith projectproject participantsparticipants

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TYPICAL CONTRACT TYPICAL CONTRACT DOCUMENTATION FORDOCUMENTATION FORDOCUMENTATION FOR DOCUMENTATION FOR

PROJECT FINANCING AND PROJECT FINANCING AND DEVELOPMENTDEVELOPMENTDEVELOPMENTDEVELOPMENT

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CONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONPROJECT CONCESSION AGREEMENTPROJECT CONCESSION AGREEMENT

–– DevelopmentDevelopment ofof aa ProjectProject FacilityFacility isis usuallyusuallyprecededpreceded byby aa grantgrant ofof aa projectproject licenselicense ororconcessionconcession toto thethe ProjectProject SPVSPVjj

–– AlongAlong withwith thethe legislativelegislative framework,framework, thethe primaryprimarysourcesource ofof rightsrights && obligationsobligationsP idP id ff d li bld li bl ff thth P j tP j t–– ProvidesProvides forfor deliverablesdeliverables ofof thethe ProjectProject

–– ProvidesProvides forfor defineddefined andand enforceableenforceable licensorlicensoractions/supportactions/supportpppp

»» CanCan getget diluteddiluted toto Cooperation/Cooperation/ reasonablereasonableendeavors/endeavors/ bestbest effortsefforts

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CONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATION–– ProvidesProvides forfor penaltiespenalties andand incentivesincentives relatedrelated toto

ff D lD l && ffperformanceperformance:: DelayDelay && performanceperformance–– ProvidesProvides forfor terminationtermination ofof thethe concessionconcession onon

defaultsdefaults»» BuyBuy--outout paymentpayment

–– ParticipantsParticipants interestedinterested inin objectivityobjectivity inin actionactionL dL d ff i hti ht tt d f ltd f lt–– LendersLenders preferprefer aa rightright toto curecure defaultsdefaults

–– “Financial“Financial BalanceBalance Clause”Clause”:: PutPut thethe concessionconcessionholderholder inin thethe samesame positionpositionpp

–– BackBack toto BackBack RiskRisk

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CONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONjj fifi d id i ii d i dd i d llllProjectProject financefinance documentationdocumentation isis designeddesigned toto allocateallocate

risksrisks inin relationrelation toto thethe ProjectProject toto suchsuch personperson whowho isisbestbest ableable toto bearbear and/orand/or mitigatemitigate itit

Typically,Typically, aa projectproject financefinance proposalproposal wouldwould needneed tototaketake carecare ofof thethe followingfollowing risksrisks::

MM Ri kRi k–– ManagementManagement RisksRisks–– DevelopmentDevelopment andand ConstructionConstruction PhasePhase RisksRisks–– OperationsOperations PhasePhase RisksRisks–– MarketMarket RisksRisks–– RevenueRevenue RisksRisks–– EconomicEconomic EnvironmentEnvironment RisksRisks–– PoliticalPolitical ForceForce MajeureMajeure RisksRisks–– NonNon--PoliticalPolitical ForceForce MajeureMajeure RisksRisks–– FundingFunding RisksRisks

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FundingFunding RisksRisks

CONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONRi kRi k ii l til ti tt tt ddRisksRisks inin relationrelation toto managementmanagement andandoperationoperation isis reducedreduced byby engagingengaging reputedreputedandand financiallyfinancially strongstrong entitiesentities havinghavingandand financiallyfinancially strongstrong entitiesentities havinghavingexperienceexperience inin suchsuch mattersmatters

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CONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATION

TURNKEY FIXED PRICE TERM CONTRACTTURNKEY FIXED PRICE TERM CONTRACT-- Construction Contract Construction Contract StructuringStructuring

(i)(i) Onshore Supply ContractOnshore Supply Contract(ii)(ii) Offshore Supply ContractOffshore Supply Contract(iii)(iii) Onshore Service ContractOnshore Service Contract(iv)(iv) Offshore Service ContractOffshore Service Contract(iv)(iv) Offshore Service ContractOffshore Service Contract(v) Wrap Agreement(v) Wrap Agreement

-- Who is responsible for the Who is responsible for the designdesign of the works of the works –– fit for the fit for the purposepurpose

-- Fixed Price Fixed Price –– variation clausevariation clause-- Fixed date for completionFixed date for completion –– FM, Back to BackFM, Back to Back –– excuse,excuse,

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Fixed date for completion Fixed date for completion FM, Back to BackFM, Back to Back excuse, excuse, LDLD

CONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATION

How is completion determinedHow is completion determined ‘punch‘punch-- How is completion determinedHow is completion determined –– punch punch list’; passing of performances test, Back to list’; passing of performances test, Back to Back exerciseBack exerciseBack exercise,Back exercise,

-- Liquidated DamagesLiquidated Damages--delay & performancedelay & performance-- When do title & risk passWhen do title & risk pass: title pass when : title pass when

incorporated in the works, risk stays with incorporated in the works, risk stays with the contractor till take over datethe contractor till take over date

-- WarrantiesWarranties

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CONTRACT DOCUMENTATIONCONTRACT DOCUMENTATION–– WellWell--documenteddocumented contractualcontractual && performanceperformance

standardsstandards alongalong withwith regularregular inspectioninspection keepskeeps thethecontractorcontractor honesthonest

–– LendersLenders preferprefer clarityclarity ofof paymentspayments andand milestonesmilestones

–– Offtakers,Offtakers, LicensorLicensor && LendersLenders generallygenerally preferprefer-- uncappeduncapped contractorcontractor liabilityliability-- LimitedLimited forceforce majeuremajeure clausesclausesjj

–– UnlessUnless projectproject developerdeveloper happenshappens toto bebe thethe EPCEPCContractor,Contractor, thethe projectproject developerdeveloper alsoalso prefersprefers thethe samesame

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CONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONOPERATIONS & MAINTENANCE CONTRACTOPERATIONS & MAINTENANCE CONTRACT–– StructureStructureStructureStructure

»» SPVSPV itselfitself»» RelatedRelated 33rdrd PartyParty»» ArmsArms lengthlength 33rdrd PartyParty

–– StandardStandard»» GoodGood utilityutility practicespractices

OtherOther ParticipantsParticipants preferprefer strongstrong indemnitiesindemnities fromfrom–– OtherOther ParticipantsParticipants preferprefer strongstrong indemnitiesindemnities fromfromcontractor,contractor, incentiveincentive basedbased feesfees andand controlcontrol overoverexpensesexpenses throughthrough prepre--approvedapproved budgetsbudgets

–– EventEvent basedbased penaltiespenalties areare commoncommon

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M k tM k t dd RR l t dl t d i ki k bbCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATION

MarketMarket andand RevenueRevenue relatedrelated risksrisks cancan bebecoveredcovered byby executingexecuting backback--toto--backback offtakeofftakeagreementsagreements andand havinghaving recourserecourse toto financialfinancialagreementsagreements andand havinghaving recourserecourse toto financialfinancialproductsproducts likelike hedgeshedges

CreditCredit worthinessworthiness ofof offtakerofftaker reducesreduces–– CreditCredit worthinessworthiness ofof offtakerofftaker reducesreducesprojectproject riskrisk profile(Rasprofile(Ras Gas)Gas)

–– OfftakeOfftake agreementsagreements areare mostmost popularpopular ininOfftakeOfftake agreementsagreements areare mostmost popularpopular ininpowerpower generationgeneration projectsprojects wherewhere aa PPAPPA isisexecutedexecuted upfrontupfront withwith thethe ElectricityElectricity SupplySupplyCompanyCompany

–– MerchantMerchant PowerPower ProjectsProjects

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AbiliAbili i bli bl ffff kk ii

CONTRACT DOCUMENTATIONCONTRACT DOCUMENTATION–– AbilityAbility toto passpass onon variablevariable costscosts toto offoff--takerstakers isis

alsoalso helpfulhelpful»» OfftakersOfftakers wouldwould ideallyideally bebe reluctantreluctant toto taketake thethe riskrisk»» OfftakersOfftakers wouldwould ideallyideally bebe reluctantreluctant toto taketake thethe riskrisk

((UltraUltra MegaMega PowerPower ProjectProject))OFFTAKEOFFTAKE AGREEMENTSAGREEMENTS

–– InIn anan OfftakeOfftake agreementagreement,, otherother participantsparticipants preferprefercertaintycertainty ofof offtakeofftake andand paymentpayment

ff ff ““ kk ”” bli ibli i // ll»» PreferencePreference forfor ““TakeTake--oror--PayPay”” obligationobligation v/sv/s penaltypenalty–– PaymentPayment securitysecurity inin thethe formform ofof TRATRA mechanismmechanism inin

offtakeofftake arrangementsarrangements preferredpreferred byby LendersLenders inin captivecaptiveofftakeofftake arrangementsarrangements preferredpreferred byby LendersLenders inin captivecaptivefacilitiesfacilities andand megamega--greengreen fieldfield projectsprojects

–– PetronetPetronet LNGLNG

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CONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONSomeSome risksrisks areare coveredcovered byby takingtaking insuranceinsurance policypolicy::

F iF i l dl d dd j tj t ti i tti i t l ll l t kt k–– ForeignForeign lenderslenders andand projectproject participantsparticipants regularlyregularly taketakePoliticalPolitical RiskRisk InsuranceInsurance CoverCover oror homehome countrycountryExportExport CreditCredit Guarantee/InvestmentGuarantee/Investment guaranteeguaranteeprotectionprotection

–– InsuranceInsurance covercover forfor naturalnatural forceforce majeuremajeure eventsevents likelikefirefire earthquakesearthquakes etcetc isis customarycustomaryfire,fire, earthquakesearthquakes etcetc isis customarycustomary

UponUpon thethe occurrenceoccurrence ofof extendedextended politicalpolitical forceforcejj LiLi h ldh ld llll tt bb ththmajeuremajeure,, LicensorLicensor shouldshould normallynormally agreeagree toto buybuy thethe

ProjectProject

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CONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONFINANCING DOCUMENTSFINANCING DOCUMENTS

AnyAny fundingfunding gapsgaps areare guaranteedguaranteed byby thetheSponsorSponsor

LendersLenders generallygenerally preferprefer thatthat contractualcontractualLendersLenders generallygenerally preferprefer thatthat contractualcontractualrightsrights underunder variousvarious projectproject documentsdocuments areareassigned/chargedassigned/charged toto theirtheir benefitbenefitg gg g ff

ANDANDThatThat theythey cancan exerciseexercise suchsuch rightsrights asas aa

iicontractingcontracting partyparty

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CONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONAssignmentAssignment ofof rightsrights helpshelps providedprovided thethe projectproject

tt itiiti hh flfl tt t kt k ffgeneratesgenerates positivepositive cashcash flowflow toto taketake carecare ofofdebtdebt exposureexposure

LendersLenders areare generallygenerally uncomfortableuncomfortable assumingassumingallall obligationsobligations owedowed byby thethe ProjectProject SPVSPV toto thethe

jj lili && hh ii iiprojectproject licensorlicensor && otherother contractingcontracting partiesparties

LenderLender insistinsist thatthat thethe projectproject licensorlicensor && otherotherLenderLender insistinsist thatthat thethe projectproject licensorlicensor && otherothercontractingcontracting partiesparties shouldshould recognizerecognize performanceperformance bybythethe LendersLenders oror theirtheir nomineesnominees ofof certaincertain obligationsobligationsasas sufficientsufficient dischargedischarge ofof thethe ProjectProject ContractsContracts

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asas sufficientsufficient dischargedischarge ofof thethe ProjectProject ContractsContracts

CONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATION–– ExecutionExecution ofof DirectDirect AgreementsAgreements:: PrivityPrivity

ContractContract–– SSubstitutionubstitution RightsRights

LendersLenders wouldwould generallygenerally insistinsist thatthat ininaa defaultdefault ofof licenselicense conditionsconditions theythey areareaa defaultdefault ofof licenselicense conditionsconditions,, theythey arearegivengiven anan optionoption toto curecure thethe defaultdefaultbeforebefore LicensorLicensor termsterms suchsuch eventevent asas aabeforebefore LicensorLicensor termsterms suchsuch eventevent asas aaeventevent ofof defaultdefault

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CONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATION–– asas purchasepurchase priceprice isis oftenoften lowerlower thanthan eveneven thethe

d bd b ddcurrentcurrent debtdebt duedue

OtherOther rightsrights ofof thethe LendersLenders underunder thetheOtherOther rightsrights ofof thethe LendersLenders underunder thetheFinancingFinancing DocumentsDocuments–– LendersLenders generallygenerally insistinsist thatthat forfor mostmost itemsitems notnot–– LendersLenders generallygenerally insistinsist thatthat forfor mostmost itemsitems notnot

inin thethe ordinaryordinary coursecourse ofof businessbusiness,, Lender’sLender’spriorprior writtenwritten consentconsent isis obtainedobtainedpp

–– LendersLenders generallygenerally retainretain rightsrights forfor regularregularinspectioninspection andand sitesite visitsvisits

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CONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATIONCONTRACT DOCUMENTATION–– AbilityAbility toto nominatenominate personnel/observerspersonnel/observers toto thethe

P jP j SPVSPVProjectProject SPVSPVHugeHuge fundingfunding requirerequire thethe syndicationsyndication ofof thethe LoanLoanAmountAmountAmountAmount–– NeedNeed toto documentdocument thethe interinter--sese relationshiprelationship–– NecessaryNecessary thatthat securitysecurity bebe createdcreated inin favorfavor ofof aa thirdthirdNecessaryNecessary thatthat securitysecurity bebe createdcreated inin favorfavor ofof aa thirdthird

partyparty forfor thethe benefitbenefit ofof thethe lenderslenders»» AvoidsAvoids multiplemultiple securitysecurity creationcreation andand enablesenables

portfolioportfolio managementmanagement byby thethe LendersLenders–– ActionsActions ofof thethe thirdthird partyparty shouldshould bebe regulatedregulated andand

clearlyclearly expressedexpressed

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clearlyclearly expressedexpressed

PROJECT SECURITY PROJECT SECURITY CUSTOMARY FORMS CUSTOMARY FORMS ---- MortgageMortgage---- HypothecationHypothecation---- Assignment by way of securityAssignment by way of security---- PledgePledgeINNOVATIVE FORMSINNOVATIVE FORMS

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MORTGAGEMORTGAGEMORTGAGEMORTGAGE

•• CreationCreation ofof securitysecurity interestsinterests overover rightsrights attachedattached totoCreationCreation ofof securitysecurity interestsinterests overover rightsrights attachedattached totoimmoveableimmoveable propertyproperty

•• StatutorilyStatutorily defineddefined && legallylegally recognizedrecognized structurestructure

•• RightsRights andand d tiesd ties ofof ario sario s partiesparties areare (( ii thth•• RightsRights andand dutiesduties ofof variousvarious partiesparties areare ((eveneven inin thetheabsenceabsence ofof aa contractualcontractual frameworkframework)) wellwelldescribeddescribed

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MORTGAGEMORTGAGEcancan bebe inin differentdifferent formsforms butbut thethe mostmost commoncommon areare–– thethe LegalLegal (English)(English) MortgageMortgage wherewhere aathethe LegalLegal (English)(English) MortgageMortgage wherewhere aa

deeddeed//agreementagreement isis executedexecuted byby thethe mortgagormortgagorcreatingcreating aa securitysecurity interestinterest overover thethe immoveableimmoveablepropertyproperty whichwhich isis thethe subjectsubject mattermatter ofof thethe mortgagemortgagepropertyproperty whichwhich isis thethe subjectsubject mattermatter ofof thethe mortgagemortgage..TheThe deed/agreementdeed/agreement isis registeredregistered withwith thethe landlandregistrarregistrar;; andandhh E i blE i bl MM hh dd ff i li l–– thethe EquitableEquitable MortgageMortgage wherewhere documentsdocuments ofof titletitle

overover thethe immoveableimmoveable propertiesproperties areare depositeddeposited withwiththethe lenderslenders withwith thethe intentionintention ofof creatingcreating aa mortgagemortgage..TheThe deposit,deposit, thethe intentionintention andand thethe executionexecution ofof loanloanagreementsagreements aroundaround thethe timetime ofof thethe depositdeposit signifiessignifiesthethe creationcreation ofof mortgagemortgage

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g gg g

MORTGAGEMORTGAGEImportantImportant toto analyzeanalyze thethe rightright andand titletitle whichwhich thetheProjectProject SPVSPV hashas onon thethe propertyproperty soughtsought toto bebejj p p yp p y ggmortgagedmortgaged–– BrownfieldBrownfield developmentsdevelopments dodo notnot givegive aa rightright toto

mortgagemortgage thethe immoveableimmoveable propertypropertymortgagemortgage thethe immoveableimmoveable propertyproperty–– LeaseLease rightsrights cancan bebe mortgagedmortgaged butbut onlyonly withwith thethe

consentconsent ofof thethe lessorlessor–– EquitableEquitable mortgagemortgage cancan bebe concludedconcluded onlyonly inin specifiedspecified

townstowns–– NecessaryNecessary toto conductconduct legallegal duedue diligencediligence onon thetheNecessaryNecessary toto conductconduct legallegal duedue diligencediligence onon thethe

immoveableimmoveable propertyproperty toto ensureensure perfectionperfection ofof rankingranking

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HYPOTHECATIONHYPOTHECATIONHYPOTHECATIONHYPOTHECATION•• CreationCreation ofof securitysecurity interestsinterests overover moveablemoveableyy

propertiesproperties withoutwithout transferringtransferring possessionpossession toto thethebeneficiarybeneficiary

•• StatutorilyStatutorily defineddefined onlyonly inin 20022002 inin thethe SecuritisationSecuritisationandand ReconstructionReconstruction ofof FinancialFinancial AssetsAssets andandEnforcementEnforcement ofof SecuritySecurity InterestInterest ActAct (“(“SARFAESISARFAESI”)”)EnforcementEnforcement ofof SecuritySecurity InterestInterest ActAct (( SARFAESISARFAESI ))butbut legallylegally understoodunderstood forfor aa longerlonger periodperiod ofof timetime

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HYPOTHECATIONHYPOTHECATIONHYPOTHECATIONHYPOTHECATIONRightsRights andand dutiesduties ofof variousvarious partiesparties areare defineddefinedii thth H th tiH th ti D dD dinin thethe HypothecationHypothecation DeedDeed–– thoughthough SARFAESISARFAESI hashas providedprovided forfor specificspecific

rightsrights whichwhich banksbanks andand financialfinancial institutionsinstitutionsrightsrights whichwhich banksbanks andand financialfinancial institutionsinstitutionshavinghaving thethe benefitbenefit ofof SARFAESISARFAESI cancan enjoyenjoyuponupon aa loanloan beingbeing classifiedclassified asas aa NPANPApp gg

HypothecationHypothecation cancan bebe floatingfloating oror fixedfixedypot ecat oypot ecat o caca bebe floatingfloating oo fixedfixeddependingdepending onon commercialcommercial agreementagreement

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HYPOTHECATIONHYPOTHECATIONHYPOTHECATIONHYPOTHECATIONFurther,Further, givengiven controlcontrol ofof assetsassets withwith borrower,borrower,essentialessential toto retainretain rightsrights toto conductconduct surprisesurprise visitsvisitsessentialessential toto retainretain rightsrights toto conductconduct surprisesurprise visits,visits,inspectionsinspections andand auditsaudits

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ASSIGNMENT BY WAY OF ASSIGNMENT BY WAY OF SECURITYSECURITYSECURITYSECURITY

UsedUsed forfor creatingcreating securitysecurity interestsinterests overover debts,debts, rightsrightsdd i ili ilandand privilegesprivileges

RightsRights && privilegesprivileges ofof thethe BorrowerBorrower areare chargedcharged alongalongwithwith aa mortgagemortgage overover certaincertain immoveableimmoveable propertyproperty

TheThe StructureStructure hashas statutorystatutory supportsupport inin thethe TransferTransfer ofofyy ppppPropertyProperty Act,Act, 18821882 whichwhich providesprovides thatthat oneone cancan assignassignaa debtdebt byby wayway ofof securitysecurity whereunderwhereunder thethe transfereetransfereehashas aa claimclaim overover thethe surplussurplus afterafter thethe securedsecured debtdebt hashashashas aa claimclaim overover thethe surplussurplus afterafter thethe securedsecured debtdebt hashasbeenbeen discharged,discharged, withoutwithout seekingseeking aa reconveyancereconveyance ofofthethe surplussurplus

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PLEDGEPLEDGEPLEDGEPLEDGEAA bailmentbailment ofof movablesmovables

commonlycommonly usedused forfor creatingcreating aa securitysecurity interestinterest overover–– commonlycommonly usedused forfor creatingcreating aa securitysecurity interestinterest overoversharesshares andand otherother suchsuch securitiessecurities

HasHas statutorystatutory recognitionrecognition underunder thethe IndianIndian ContractContractAct,Act, 18721872

ForFor aa pledgepledge overover dematerializeddematerialized securities,securities, thetheDepositoriesDepositories ActAct andand thethe rulesrules andand regulationsregulations issuedissuedpp ggpursuantpursuant toto itit areare alsoalso relevantrelevant

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INNOVATIVE FORMSINNOVATIVE FORMSHasHas developeddeveloped onon accountaccount ofof highhigh costcost ofofsecuritysecurity creationcreation oror regulatoryregulatory hurdleshurdlessecuritysecurity creationcreation oror regulatoryregulatory hurdleshurdlesinhibitinginhibiting creationcreation ofof traditionaltraditional formsforms ofofsecuritysecuritysecuritysecurity–– TheThe NonNon DisposalDisposal UndertakingUndertaking coupledcoupled withwith aa

PowerPower ofof AttorneyAttorney asas anan alternativealternative toto PledgePledgePowerPower ofof AttorneyAttorney asas anan alternativealternative toto PledgePledge–– HypothecationHypothecation ofof debts,debts, rightsrights andand privilegesprivileges asas

anan alternativealternative toto assignmentassignment byby wayway ofof securitysecurityanan alternativealternative toto assignmentassignment byby wayway ofof securitysecurity

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The Non Disposal Undertaking with a The Non Disposal Undertaking with a Power of AttorneyPower of Attorney

UsedUsed wherewhere lenderslenders areare unableunable toto taketake aaUsedUsed wherewhere lenderslenders areare unableunable toto taketake aapledgepledge overover sharesshares–– SectionSection 1919((22)) ofof thethe BankingBanking RegulationRegulation ActAct(( )) gg gg

actsacts asas aa restrictionrestriction–– IfIf foreignforeign lenderslenders areare involved,involved, thenthen theythey

ii RBIRBI i ii i hh hh b fib fi ffrequirerequire RBIRBI permissionpermission toto havehave thethe benefitbenefit ofof aapledgepledge

InvolvesInvolvesInvolvesInvolves–– depositdeposit ofof sharesshares inin aa DematDemat AccountAccount overover

whichwhich anan EscrowEscrow isis createdcreated;;

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whichwhich anan EscrowEscrow isis createdcreated;;

The Non Disposal Undertaking with a The Non Disposal Undertaking with a P f AttP f AttPower of AttorneyPower of Attorney

–– GrantGrant ofof authorityauthority toto thethe SecuritySecurity TrusteeTrustee oror thetheLendersLenders toto sellsell thethe sharesshares;; andand

–– AppropriateAppropriate thethe resultantresultant proceedsproceeds towardstowardsth ith i ddtheirtheir duesdues

ThisThis isis notnot akinakin toto aa pledgepledge asas itit doesdoes notnotcreatecreate anyany interest/rightinterest/right inin thethe subjectsubjectcreatecreate anyany interest/rightinterest/right inin thethe subjectsubjectSharesSharesItIt isis aa combinationcombination ofof contractualcontractual negativenegativeItIt isis aa combinationcombination ofof contractualcontractual negativenegativeandand affirmativeaffirmative covenantcovenant

TheThe ObligorsObligors agreementagreement notnot toto sellsell

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–– TheThe ObligorsObligors agreementagreement notnot toto sellsell

The Non Disposal Undertaking with a The Non Disposal Undertaking with a P f AP f APower of AttorneyPower of Attorney

–– UnlessUnless thethe salesale isis requiredrequired toto dischargedischarge duesdues totothethe LendersLendersthethe LendersLenders

TheThe PoAPoA andand thethe escrowescrow safeguardsafeguard thethe lenderslendersii bb hh ObliObli b hb h iiagainstagainst anyany attemptsattempts byby thethe ObligorObligor toto breachbreach itsits

promisepromise

TheThe structurestructure givesgives thethe comfortcomfort thatthat barringbarring forforbankruptcybankruptcy ofof thethe Obligor,Obligor, thethe ObligorObligor hashas providedprovidedthethe concernedconcerned assetsassets forfor dischargedischarge ofof duesdues toto thethethethe concernedconcerned assetsassets forfor dischargedischarge ofof duesdues toto thetheLendersLenders

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Hypothecation of debts, rights and Hypothecation of debts, rights and i ili ilprivilegesprivileges

UsedUsed wherewhere BorrowersBorrowers areare unwillingunwilling toto bearbear thethe stampstampgg ppdutyduty onon thethe registeredregistered mortgagemortgage deeddeed–– StatesStates likelike KarnatakaKarnataka wherewhere stampstamp dutyduty ratesrates onon

dd dd ll l il i hhMortgageMortgage DeedDeed areare adad--valoremvalorem relativerelative toto thetheamountamount ofof thethe debtdebt withoutwithout aa capcap

InIn termsterms ofof actualactual utilityutility postpost SARFAESISARFAESI LendersLendersInIn termsterms ofof actualactual utility,utility, postpost SARFAESI,SARFAESI, LendersLendersnotnot anyany worseworse offoffButBut inin thethe absenceabsence ofof SARFAESI,SARFAESI, mortgagemortgage isisButBut inin thethe absenceabsence ofof SARFAESI,SARFAESI, mortgagemortgage isispreferablepreferable toto hypothecationhypothecation asas mortgageemortgagee hashas statutorystatutoryrightsrights toto taketake actionaction independentindependent ofof recourserecourse toto CourtsCourts

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PAYMENT SECURITYPAYMENT SECURITYPAYMENT SECURITY PAYMENT SECURITY

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PAYMENT SECURITYPAYMENT SECURITYPAYMENT SECURITYPAYMENT SECURITYControlControl overover cashcash flowflow ofof thethe ProjectProject isis crucialcrucial–– AvoidsAvoids leakageleakagegg–– ActsActs asas aa riskrisk mitigantmitigant

CashCash flowflow isis controlledcontrolled throughthrough aa TRATRA mechanismmechanism–– InvolvesInvolves cashcash trappingtrapping andand cashcash applicationapplication–– OfftakersOfftakers (if(if nono defineddefined offtakerofftaker butbut multiplemultiple spotspot

offtakes,offtakes, likelike toll,toll, retailretail usageusage charges,charges, thenthen SPV)SPV) agreeagreeofftakes,offtakes, likelike toll,toll, retailretail usageusage charges,charges, thenthen SPV)SPV) agreeagreetoto depositdeposit allall offtakeofftake paymentspayments inin anan accountaccount withwith aa 33rdrd

PartyParty (The(The EscrowEscrow Agent)Agent)TheThe EscrowEscrow AgentAgent agreesagrees toto applyapply thethe proceedsproceeds onlyonly asas–– TheThe EscrowEscrow AgentAgent agreesagrees toto applyapply thethe proceedsproceeds onlyonly asasperper thethe termsterms ofof thethe TRATRA AgreementAgreement

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PAYMENT SECURITYPAYMENT SECURITYPAYMENT SECURITYPAYMENT SECURITY–– TRATRA AgreementAgreement andand periodicperiodic budgetsbudgets definedefine mannermanner ofof

applicationapplication ofof cashcash flowflowRightsRights withwith uninteresteduninterested thirdthird partiesparties ensureensure thatthat therethereareare nono leakagesleakages oror breachbreach ofof contractualcontractual covenantscovenants ononcashcash flowflow applicationapplication andand usageusagecashcash flowflow applicationapplication andand usageusageNormally,Normally, lenderslenders preferprefer aa trusttrust beingbeing createdcreated onon thetherevenuesrevenues andand thethe accountsaccounts–– Though,Though, mechanismsmechanisms withoutwithout truststrusts areare alsoalso possiblepossible

EscrowEscrow AgentAgent actsacts asas aa trusteetrustee ofof thethe fundsfunds andand makesmakesthethe fundsfunds bankruptcybankruptcy remoteremote ofof itselfitselfthethe fundsfunds bankruptcybankruptcy remoteremote ofof itselfitselfAgentsAgents dodo notnot preferprefer toto taketake onon discretionarydiscretionary dutiesduties

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PAYMENT SECURITYPAYMENT SECURITYPAYMENT SECURITYPAYMENT SECURITYImportantImportant toto definedefine aa clearclear waterfallwaterfall mechanismmechanism forforthethe cashcash flowflowthethe cashcash flowflow–– Supplier,Supplier, governmentgovernment duesdues generallygenerally rankrank higherhigher inin

prioritypriority thanthan lender’slender’s duesdues»» DebtDebt serviceservice reservesreserves andand suppliersupplier paymentpayment reservesreserves

toto avoidavoid defaultsdefaults inin casecase ofof cashcash flowflow mismis--matchmatchFF jj i ii i i dii di jj ii»» ForFor projectsprojects requiringrequiring periodicperiodic majormajor maintenance,maintenance, aamaintenancemaintenance reservereserve isis alsoalso maintainedmaintained

»» AnyAny surplussurplus isis distributabledistributable asas dividenddividend»» AnyAny surplussurplus isis distributabledistributable asas dividenddividend

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