A Legal Perspective on India’s Quest for World Class Infrastructure: The Matrix of Legal “Must Knows” for Aspiring Law Professionals
Infrastructure makes economies efficient, cost effective, thereby contributing to their competitiveness globally. The greatest roadblock to our national aspirations of being a prosperous and influential country is the weak infrastructural base on which our hopes are founded. The Union and the State governments have been making a steady progress towards liberalizing the regulatory framework, promoting foreign direct investments, adopting public private partnership model to give sufficient boost to it. Though a lot of irritants are still there, yet the intent and hunger for the same cannot be missed. With a budgetary outlay of Rs.2,14,000 crore for infrastructure sector for 2011-12 period which is 48.5% of the gross budgetary support to plan expenditure, The seriousness of the government to achieve world class infrastructure for India is more than evident. For a number of years in the past decade infrastructure sector has been abuzz with a lot of work, with ambitious projects liken golden quadrilateral of national highways, development of Delhi Metro, upgradation of Mumbai and Delhi Airports and numerous other shining examples.
This article seeks to broadly outline the key infrastructure sectors, the opportunities therein, the model of development and the areas of law which need to be understood by an aspiring law professional to make a valuable contribution.
Infrastructure projects necessitate acquisition of huge chunks of land leading to dislocation of the life and livelihood of the local community, besides potential for serious environmental damage which brings into play political equations as well. If not managed well, such projects can very well go the TATA NANO project at Singur (West Bengal) way! Therefore, sensitive handling of projects is of critical importance. Although a legal professional cannot do much to address these complexities, awareness regarding local politics and economics will go a long way in handling such projects. The typical feature of all infrastructure projects is that they involve high risks and low returns, and hence remain risky propositions. It is, thus, imperative that all the associatedrisks are properly studied and allocated amongst the concerned stakeholders. Another critical issue is to find finance for the infrastructure projects since the gestation period from conceptualization to commissioning of projects is much greater than any other investment venture. Generally the projects are financed by way of syndicate finance, pursuant to which financial institutions are brought together to finance the projects. Another important aspect of these projects is their amenability to judicial review as greater public interest is involved in them. Needless to say, it is vital that all these issues are properly appreciated and understood by the budding legal professionals looking to carve a niche in this booming sector.
Public private partnership (PPP) involves an agreementbetween a government entity and a private sector company for providing an infrastructure service. This entails government’s role as a facilitator and enabler, while the private partner plays the role of financier, builder and operator. This is the preferred model as it entails stable governance, financial support as well as assurance against social, environmental and political risks on the part of the Government. At the same time, the private player brings in operational efficiencies, innovative technologies, managerial effectiveness, and access to additional finances. This model opens up tremendous avenues for lawyers since it calls for deal making, drafting, negotiation, compliance etc.
Generally the development of infrastructure projects is undertaken by a separate entity especially incorporated to undertake the development of infrastructure projects. Right from incorporation to the management and control over the entity, mutual rights and obligations of the consortium partners about to undertake the projects are to be delineated with a view to cover all the long and short term eventualities. Further, the respective shareholding, mutual rights and obligation qua project, need to be clearly put in place. This calls for understanding of a wide array of legislations, including, inter alia, Companies Act, Regulations framed by the Securities and Exchange Board of India Act in this connection, to name a few.
Primarily, the Foreign Exchange Management Act and the Foreign Direct Investment Policy govern the field related to foreign investments in India, therefore it is of considerable importance that they be understood properly to address the issues relating to financing of infrastructure projects. Additionally, investors also undertake legal and financial due diligence of the entities in whom they are about to invest, which involve lawyers to conduct a thorough study of all related legal aspects. There are various other aspects/nuances of infrastructure financing which a budding lawyer must be aware of. For instance, with a view to setting benchmark for market borrowing by other organizations, the Government has instituted concept of viability gap funding (VGF) which is available for projects which may be economically justifiable but are not viable in immediate future. Similarly, a special purpose vehicle (India Infrastructure Finance Company limited) has been created for rendering long term financial assistance to infrastructure projects through direct lending toeligible projects, refinance banks and financial institutions and any other method approved by the Government of India
Infrastructure practice in India was typically the domain of public sector undertakings and unexciting drudgery for the typical eager eyed lawyer straight out of law school. Not so anymore! With the opening up of infrastructure to private participation, deal making, drafting negotiation, compliance etc., have all come in as areas that interest youngsters and offeran opportunity to develop skills in multiple areas of the law.
At an empirical level, infrastructure requires a basic understanding of contract law coupled with industry specific legislation, regulations, policies and guidelines. At a slightly advanced stage you are expected to be aware of international aspects of your sector, treaties that are beneficial to you and sector specific trends and emerging issues. A case in point would be the power sector and the KYOTO protocol; sluggish power producers suddenly started exploring and evaluating their carbon footprint based on an international protocol. Another aspect that has been of importance in emerging economies such as ours is the creation of international documents that brought international expertise to India where none existed in the infrastructure operator in India. For example, no private sector player in India had the expertise to build a large trans harbour bridge. But by creating a consortium with a large overseas player, a small player was able to become a contender for building the same large trans-harbour bridge, even though it by itself had no expertise. All made possible by the proper drafting of a document of international scale requiring efficacy in multiple jurisdictions.
Infrastructure typically involves long term returns and is unable to sustain itself on long term commercial borrowings, consequently, most large infrastructure projects need concessional lending and need to go looking for developmental organizations disbursing subsidized funding. Typical loan documents won’t work and you would need to be familiar with developmental funding and sovereign guarantees if you are practicing in a weak economy, as India was a decade ago. Last but not the least, you must be aware of how the government works, how policies get framed, industry representation and bodies that affect it and finally of course how a proposal moves in the files of the government from initiation to fruition – and this will only come to you if you do not hesitate to pick up the phone and call the department or your client, not from law school or a firm.
As seen from the table above, new infrastructure projects enjoy tax holiday under Income Tax Act for a number of years. However, after the holiday period, various types of taxation may be attracted by infrastructure projects, viz., stamp duty, sales tax, and works contract tax etc. While stamp duty is levied on all the transactions related to projects, income tax is also levied on capital gains, dividends on equity finance, and interest earned on debt financing in the projects. Besides, one must familiarize oneself with Double Taxation Avoidance Treaties, entered into by Government of India with some foreign countries like Mauritius etc., as these facilitate in making India an attractive investment destination by helping in avoidance of double taxation on the gains from infrastructure projects.
Aspiring legal professionals must understand that infrastructure projects are massive ventures requiring ability to tackle a host of issues. These projects are executed through “public private partnerships” (PPPs) between the relevant government entity and the consortium of developers who borrow money from several financial institutions. After arranging for finance, construction of the project starts whichis achieved through engineering, procurement and construction contracts. It is thus obvious that being complex ventures, these projects involve significant amount of documentation. First and foremost between the project developers which is done through Share Subscription and Shareholders Agreements; Non- disclosure agreements; Joint Venture Agreements. Subsequently, Concession Agreement is entered into with the relevant Government entity which grants the rights to develop the project to the developers. Add to it several financial agreements entered into between the finance syndicate and the developers; different creditors entering into inter-creditor agreements etc. The common thread which runs through all these agreements is clarity on mutual rights and obligations amongst parties; proper risk allocation amongst all participants; sufficient incentives for all involved; and above all, these agreements must be interlinkedin such a way that all the agreements are in harmony and not conflicting in any way.
Arbitration remains the preferred remedy against contractual breaches or other disputes arising out of plethora of agreements entered into in pursuance of infrastructure projects. Therefore, understanding of the concepts of liability, damages, indemnification, guarantees is imperative. In addition, ability to apply relevant judicial pronouncements and legislations which would typically come into play in the event of any dispute, is also critical. The applicable laws are wide-ranging and include Contract Act, Specific Relief Act, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act etc, amongst others.
Since arbitrariness, procedural impropriety is rampant, each executive action is amenable to judicial review and infrastructure projects are no exception to it. Since all infrastructure projects involve public interest, these projects remain amenable to writ jurisdiction of courts. Consequently, a legal professional needs to be aware of the possibility of judicial review of all the stages of a project, so as to avoid any procedural improprieties from creeping in.
Undoubtedly, infrastructure is the foundation on which the economic success of a nation is built. It ensures the evolution of an economy as well as consistency in its growth. India having recently risen to “economic realities”, is trying to emerge in the new world order through consistent focus on the growth of infrastructure sector. Having embarked on the journey of economic liberalization years ago, the focus is now clearly on infrastructure development. It has long been felt that the Indian infrastructure space lacks adequate specialised legal expertise in order to deal with the potential pipeline of deals. Time is now ripe for the aspiring legal professionals to remedy the situation!
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