qg

Foreword .................................................................................................................................................................... 3
Public - Private Partnerships (PPPs) in Infrastructure Projects..................................................................................... 6
Public private participation in infrastructure.......................................................................................................................................6
PPPs: Legal framework and definition .................................................................................................................................................7
PPPs: Models/arrangements .............................................................................................................................................................10
PPPs: Financing..................................................................................................................................................................................13
Concession Agreements in India – An Introduction ....................................................................................................20
Concession Agreements ....................................................................................................................................................................20
Development of MCAs ......................................................................................................................................................................21
Model Concession Agreement (MCA) ........................................................................................................................24
Rationale for MCAs............................................................................................................................................................................24
Implementation and criticism ...........................................................................................................................................................24
International approach and way forward ..........................................................................................................................................25
Infrastructure Projects: Highway Sector .....................................................................................................................28
Broad overview of the legal and institutional framework of the road sector....................................................................................28
Evolution of Concession Agreements for national highways .............................................................................................................29
BK Chaturvedi Committee Report .....................................................................................................................................................31
Process for framing MCAs .................................................................................................................................................................32
Risk allocation in PPP Models in the road sector...............................................................................................................................32
Comparative look at MCAs ................................................................................................................................................................34
Additional concerns/risks in existing road concessions based on MCAs ...........................................................................................48
Current trends in NHAI concessions ..................................................................................................................................................55
Infrastructure Projects: Ports Sector .........................................................................................................................61
Broad overview of the legal and institutional framework of the ports sector...................................................................................61
PPP in major ports .............................................................................................................................................................................62
Evolution of concession agreements in ports ....................................................................................................................................63
Comparative look at MCAs ................................................................................................................................................................65
Issues concerning port concessions ..................................................................................................................................................73
Balancing of Risks of Concession Agreements ............................................................................................................76
Comparison with international projects ............................................................................................................................................76
Changes required ..............................................................................................................................................................................79
Renegotiation of Concession Agreements ..................................................................................................................84
What is renegotiation? ......................................................................................................................................................................84
Need for renegotiation ......................................................................................................................................................................85
Potential perils and disadvantages ....................................................................................................................................................86
Proposed framework .........................................................................................................................................................................86
Broader Issues in Infrastructure Projects ...................................................................................................................90
25 Issues to be Considered in M&A Transactions in the Infrastructure Sector ............................................................98
Insolvency and Bankruptcy ......................................................................................................................................132
IBC process ......................................................................................................................................................................................134
IBC from the lens of the infrastructure sector .................................................................................................................................134
Dispute Resolution in Concession Agreements ........................................................................................................142
Trigger points for disputes ...............................................................................................................................................................142
Typical claims ..................................................................................................................................................................................142
Modes of dispute resolution ...........................................................................................................................................................143
Disputes arising out of Disqualification from Tendering Process – Development of the Law ....................................153
Introduction ....................................................................................................................................................................................153
Case Laws ........................................................................................................................................................................................153

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 Conclusion .......................................................................................................................................................................................157
Third Party Litigation Funding (TPLF) .......................................................................................................................160
TPLF: An overview ...........................................................................................................................................................................160
Types of third-party litigation funding .............................................................................................................................................160
Third party litigation funding across jurisdictions ...........................................................................................................................161
Third party litigation funding in India ..............................................................................................................................................163
Investor State Dispute Settlement Mechanism (ISDS) in the Infrastructure Sector and Model BIT ...........................172
Defining case studies .......................................................................................................................................................................172
The Model India BIT (2016) .............................................................................................................................................................174
Competition Law Issues in Concession Agreements .................................................................................................182
A Brief Overview of Competition Law in India .................................................................................................................................182
Section 3 – Anti Competitive Agreements.......................................................................................................................................182
Section 4 – Abuse of Dominance .....................................................................................................................................................183
Section 5 and Section 6 of the Competition Act – Combinations ....................................................................................................184
Powers of CCI ..................................................................................................................................................................................185
Essential Facilities Doctrine .............................................................................................................................................................185
Scope of Competition issues under the Concession Agreements ...................................................................................................187
Income Tax Issues: Infrastructure Contracts .............................................................................................................192
Taxability of the Special Purpose Vehicle ........................................................................................................................................192
Tax considerations of a foreign party ..............................................................................................................................................192
Concession Contracts: Implications of GST ...............................................................................................................196
Corruption: The Infrastructure Sector ......................................................................................................................199
The global context ...........................................................................................................................................................................199
The India context .............................................................................................................................................................................199
Data Privacy - Airports .............................................................................................................................................207
Data Protection: The India perspective ...........................................................................................................................................207
Proposed Bill ...................................................................................................................................................................................208
Employment issues that arise in Infrastructure Projects: Guest Column by Ayesha Damania-Advocate ...................212
The OMDA model of Concessionaire Agreements ..........................................................................................................................213
The BOT and BOOT Models of Concessionaire Agreements ............................................................................................................216
Concession Agreements in Highway Projects: Guest Column by Larsen & Toubro ....................................................223
Contractual Structure of Project Finance ........................................................................................................................................223
Challenges in BOT & Annuity Road Project Execution: Guest column by Pell Frischmann ........................................230
Key issues during project execution: An Independent Engineer’s perspective ...............................................................................231
Glossary ...................................................................................................................................................................233

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Fo reword
Re-Imagining…….

Challenging circumstances have unfolded in the wake of the Covid-19 pandemic. Although there are echoes in plagues
and the spread of viruses in both far and recent pasts, the Covid-19 pandemic is unprecedented in many ways. Firstly,
it touches upon nearly every country on earth due to a world more connected than ever before. And second, we’ve
seen the incredibly swift response, which has included long drawn lockdowns, development of vaccines and medical
science at a breakneck speed as well as a re-imagining of how we live.

Our re-imagined lives will reflect in the infrastructure we create. It is but natural that almost all businesses have been
adversely impacted by the pandemic. Infrastructure is no exception, and the ambitious Indian growth targets seem
impossible to reach. The lockdowns have slowed down or in some cases brought to a halt project development due to
unavailability of workers, materials or financial stress. Banks and financial institutions have been chary of lending to the
sector. The effects of the pandemic have exposed the systemic weaknesses of institutions as well as the regulatory and
contractual framework of the sector.

However, the infrastructure sector is still seen as a huge investment opportunity with high volume of private equity
investment, including FDI coming in through the last year. The Government of India’s push through various measures,
including the National Infrastructure Pipeline has caught the attention of the world. New investments have been made
in the road, railways and power sectors, with renewable energy leading the fore. On the operational front, despite the
difficulties, existing projects supplied the populace with utilities without a break, showing resilience.

The Union Budget for the year 21-22 also lays emphasis on infrastructure with the proposed investment in the sector
allocated being 34.5% more than that in the previous year. Stress has been laid on the development of the road and rail
infrastructure in the country for seamless national trade, presumably as a reaction to the difficulties faced during the
lockdown. The Government has also proposed to set up a new financial institution to be known as the National Bank
for Financing Infrastructure and Development, which will be set up with a corpus of INR 20,000 crore and an initial grant
of INR 5,000 crore to deal with the liquidity crunch inhibiting growth of infrastructure.

It is against this inflection point for the sector, that ELP has revised its book ‘Infrastructure Projects in India: From Cradle
to Grave to Resurrection’. This book is our endeavor to give our readers an in-depth view of ELP’s collective cross -
practice experience on infrastructure projects in India. We attempt to highlight practical difficulties that arise from the
complex issues created in the intersections of law, project development and financing. We have also been lucky to get
a ‘hands on’ view from clients and experts in their field, for which we are very grateful.

We remain cautiously optimistic about the growth of infrastructure in India, while envisioning a strengthening of social
infrastructure, technological advances, urban infrastructure development and greater connectivity. The world is still in
the throes of the pandemic. What we believed as axioms may have to be abandoned. A more humanistic approach in
all spheres, including infrastructure, is needed as we recalibrate our lives.

We do hope our book makes for some interesting reading. We enjoy every reader’s opinion and welcome your feedback
on [email protected]

Regards,
Team ELP

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© Economic Laws Practice 2021 Page | 4
© Economic Laws Practice 2021 Page | 5
Public - Private Partnerships (PPPs) in Infrastruc ture
Projec ts
Public private participation in infrastructure
For many years the development of infrastructure has served as one of the cornerstones of Indian economic policy. Vast
outlays are provided year on year in the union budget of India for the infrastructure sector. In the union budget for the
financial year 2019-2020, the Government of India (GOI) had announced its intention to invest INR 100 lakh crores in
infrastructure over the next 5 years. Further affirming its commitment towards achieving the goals and objectives of the
National Infrastructure Pipeline of the GOI, the union budget for the financial year 2021-2022 provides for a sharp
increase in capital expenditure of over INR 5,500,000 million in the infrastructure space. This is 35.4% more than the
budget estimate of financial year 2020-2021. As always, there is also a massive expectation that the private sector will
support infrastructure development. Such development is proposed to be achieved through creation of institutional
structures, asset monetization, and enhancement of share of capital expenditure in the central and state budgets.
Accordingly, a “Development Finance Institution” is proposed to be set up for providing long term debt support for
infrastructure projects. A sum of INR 200,000 million has been allocated to capitalize the finance institution which has a
lending target of INR 5,000,000 million in coming three years. As regards asset monetization, the GOI has announced
the launch of a “National Monetization Pipeline” of potential brownfield assets. An asset monetization dashboard will
also be created for tracking the progress and to provide visibility to investors. To allow ease of access to InvITs and REITS
the budget as provided some encouragement for private participation. The GOI highlighted some important measures
taken in the direction of asset monetization which includes sponsoring of infrastructure investment trusts by NHAI and
PGCIL and rollouts proposed in the roads, railways, transmission, oil and gas, airports, and sports space. An additional
sum of more than INR 2,000,000 million has been promised to States and autonomous bodies for their capital
expenditure for creation of infrastructure. To be fair, over the past few years, GOI has attempted to resolve the
bottlenecks of PPP projects and to address the policy paralysis that have long plagued the pace of growth of
infrastructure in India.
This image is part of a World Bank blog on India’s PPPs1

Private participation in infrastructure has a long history in

India. Early examples include private investments in the
railroads in the late 1800s and private enterprises producing
electricity in Kolkata and Mumbai in the early 1900s.
Internationally as well, governments relied on support from
the private sector for infrastructure development. The role and
scope of the private sector differed through the years - where
earlier private sector entities worked merely as suppliers of
materials and equipment, their role gradually expanded to that
of service providers and contractors to the GOI.

In India, since the past 30 years or so, PPPs have emerged as

the preferred mode for infrastructure development with the private sector assuming greater implementation and
operational risks under long term contracts. In India, the 90s saw PPPs taking root and the first concession agreements
being executed between the government and private entities for implementation of road and port projects.

Serious efforts have been made by the GOI to mainstream PPP in infrastructure after some early successes. In 2006, the
GOI established a ‘Public Private Partnership’ Cell (PPP Cell) for facilitating PPPs and related capacity building. Set up by
the Department of Economic Affairs (Infrastructure Policy & Finance Division), the PPP Cell is responsible for matters
concerning Public PPPs, including policy, schemes, programs and capacity building and all other matters relating to

1 https://blogs.worldbank.org/endpovertyinsouthasia/india-s-tryst-ppps-high-low-and-revival
© Economic Laws Practice 2021 Page | 6
mainstreaming PPPs. Various grants are also made available for significant and capital-intensive PPP projects in the form
of loans, equity and development funds. A central PPP appraisal committee has been formed to streamline approval and
appraisal of projects. It acts as the Secretariat for policy level matters concerning PPPs, including policies, schemes,
programs, and capacity building. Additionally, a PPP toolkit has been created with the assistance of the World Bank as a
guide to government officials to implement PPP schemes.

P P P s : L e g a l f ra m e w o r k a n d d e f i n i t i o n
Power to legislate
Under the Constitution of India (Constitution), the union (centre) and the states (provinces) are empowered to legislate
on various subjects. The Seventh Schedule of the Constitution has three lists namely, the ‘Union List’, the ‘State List’ and
the ‘Concurrent List’ which enumerate the matters on which the union and the state can legislate.

Only the Indian parliament can make laws on the subjects mentioned in the Union List, while the respective state
legislatures can make laws on subjects mentioned in the State List. Both the Indian parliament and the state legislatures
can legislate on subjects mentioned in the Concurrent List. If any provision of law made by the state legislatures on
subjects mentioned in the Concurrent List conflicts with any provision of law made by the Indian parliament, then the
provision of law made by the state legislature will be void to the extent of such a conflict. However, if a provision of law
made by the state legislature has been reserved for the President of India’s consideration and has received the president
of India’s assent, then such a provision of law made by the state legislature prevails in that state. In any event, the Indian
parliament has the power to repeal, modify or amend any state law by a subsequent central enactment even if the
president of India’s assent has been accorded to the state law.

The distribution of jurisdiction under the Constitution of India over subjects relating to infrastructure sectors between
the Union and the states can be divided into 2 broad categories:

▪ Distribution of the infrastructure sectors themselves

▪ Distribution of subjects that are relevant for the development and financing of infrastructure projects

The following is the distribution of jurisdiction over infrastructure sectors under the Seventh Schedule:

List I List II List III

Jurisdiction of the Union Jurisdiction of the State Concurrent jurisdiction of the
Union and State

Ports declared by or under law Communications, that is to say, roads, bridges, Ports other than those declared
made by Parliament or existing ferries and other means of communication not by or under law made by
law to be a major port, including specified in List 1; inland waterways and traffic Parliament or existing law to be
their delimitation and the thereon subject to the provisions of List I and List major ports
constitution and powers of the III with regard to such waterways; vehicles other
port authorities therein than mechanically propelled vehicles

Shipping and navigation on inland Water, that is to say, water supplies, irrigation Shipping and navigation on inland
waterways; Regulation and and canals, drainage and embankments, water waterways as regards
development of interstate rivers storage and water power mechanically propelled vehicles,
and river valleys and the rule of the road on such
waterways, and carriage of
passengers and goods on inland
waterways subject to the
provision of List I with respect to
the national waterways

Highways declared by or under Land, that is to say, rights in or over land, land Mechanically propelled vehicles
law made by Parliament to be tenures including the landlord and tenant, and including principles on which the
national highways the collection of rents, transfer and alienation of

© Economic Laws Practice 2021 Page | 7

 List I List II List III
Jurisdiction of the Union Jurisdiction of the State Concurrent jurisdiction of the
Union and State
agricultural land, land improvement and taxes on such vehicles would be
agricultural loans levied

Maritime shipping and navigation Regulation of mines and mineral development

subject to the provision of List I with respect to
the regulation and development under the
Control of the Union

Railways

Airways, aircrafts and air

navigation; provision of
aerodromes; regulation and
organization of air traffic and
aerodromes; provision for
aeronautical education

Carriage of passengers and

goods by railways, sea or air or
by national waterways

While the union and states have power to legislate on matters in the Concurrent List, only the Indian parliament is
empowered to make laws on matters that are not included in any list2.

Accordingly, private participation in infrastructure sectors mentioned in the Union List will be governed by the central/
union laws and administered by the centre and its agencies. Likewise, participation in infrastructure sectors mentioned
in the State List will be primarily governed and administered by state governments and its agencies. There are usually
overlaps in terms of governance and administration of sectors in the Concurrent List but, it is not essential to comment
on the same for the purpose of this book.

The underlying theme emerging from the above is that, on account of the federal structure of our constitution, for
infrastructure projects to be successful in India, it is imperative to obtain structural support from the states in certain
areas. As an example, national highways are under the jurisdiction of the Union List however, certain critical services
such as police support & healthcare (ambulances etc.) will be enforced by the state. For providing such support to set
up and implement a project, State Governments often execute ‘State Support Agreements’ with the concessionaire,
assuring all necessary support such as assistance in procuring approvals for the project, coordination with law and order
agencies etc. Such agreements are valid throughout the concession period. Interestingly, such state support obligations
are not specifically incorporated in concession agreements. At the same time, State Support Agreements do not
prescribe any specific consequences of failure of the State Government to provide the promised support.

PPPs defined
Central level
Currently there is no comprehensive central legislation that exclusively defines and governs PPPs in infrastructure sector.

▪ In 2012, The Public Procurement Bill, 2012 was tabled in the lower house of Parliament under the previous
government of the United Progressive Alliance. However, the bill had lapsed with the dissolution of the house

2
The Constitution (74th Amendment) Act decentralised the responsibilities of the state governments in respect of urban infrastructure to a
substantial extent to urban local bodies. These included solid waste management, urban roads and bridge, water supply etc.

© Economic Laws Practice 2021 Page | 8

 holding general elections3. The bill sought to regulate and ensure transparency in procurement by the central
government and its entities. It provided for aspects such as processes and method of procurement (which includes
award of PPP projects), institutional mechanisms, grievance redressal mechanisms, offences and penalties in
relation to the public procurements. Section 2 (w) of the bill defined PPP as:
"PPP" means, an arrangement between the Central Government, statutory entity or any other Government owned
entity on one side and a private sector entity on the other, for the provision of public assets or public services or
both, through investments being made or management being undertaken by the private sector entity, for a
specified period of time, where there is defined allocation of risk between the private sector and the public entity
and the private entity receives performance linked payments that conform (or are benchmarked) to specified and
predetermined performance standards, measurable by the public entity or its representative; ”
▪ As per the Scheme for Financial Support to PPPS in Infrastructure, of the GOI4 :
"The PPP Project means a project based on contract or concession agreement between a Government or statutory
entity on the one side and a private sector company on the other side, for delivering an infrastructure service on
payment of user charges."
▪ The Department of Economic Affairs, Ministry of Finance, GOI (DEA) has defined PPP as:
“A PPP means an arrangement between Government or statutory entity or Government owned entity on one side
and a private sector entity on the other, for the provision of public assets and/or related services for public benefit,
through investments being made by and/or management undertaken by the private sector entity for a specified
period of time, where there is a substantial risk sharing with the private sector and the private sector receives
performance linked payments that conform (or are benchmarked) to specified, pre-determined and measurable
performance standards”5.

State level
Certain states have created their own framework in the form of policies and even specific legislations for PPP in the
infrastructure sector. While the states of Andhra Pradesh, Gujarat, Bihar and Punjab have passed specific legislations
defining PPPs and setting out implementation aspects, states of Assam, Goa, Karnataka, Odisha, Rajasthan and West
Bengal are guided by the policies for development and implementation of the infrastructure sector through PPP. Some
of these policies define PPP:

▪ The Tamil Nadu Infrastructure Development Act, 2012 defines PPP as:

"PPP" means an arrangement between a public agency and a private sector participant for the provision of
infrastructure through investment made or through design, development, construction, maintenance or
operation undertaken by the private sector participant, where risks are allocated between them such that
the private sector participant takes on the risk beyond the stage of design and construction and the payment
for the services are performance linked, in the form of user charges, annuities or unitary payment;”

▪ The Andhra Pradesh Infrastructure Development Enabling Act, 2001 and the Bihar State Infrastructure
Enabling Act, 2006 define PPP as under

"PPP" means investment by private Sector Participant in an Infrastructure Project of the Government Agency
or the Local Authority in the State.”

Given the above definitions it can be concluded that:

▪ PPPs envision the provision of public goods or services (such as operation of projects) for public benefit by the
private sector where substantial risk associated to such goods and services is that of the private sector. In
consideration payments are received by the private party from the user or public sector based on the

3The new National Democratic Alliance government sought to revamp the bill through a new Public Procurement Bill, 2015. However, the draft of
the same is unavailable online.
4
https://www.pppinindia.gov.in/documents/20181/21751/VGF_GuideLines_2013.pdf
5 PPP Guide for Practitioners issued by the DEA in April 2016 (PPP Guide 2016)

© Economic Laws Practice 2021 Page | 9

 performance standard set out in the contract for PPP. Thus, under PPP, the private partner assumes the role
which is traditionally of the public entity (i.e. delivery of goods and services to the public).

▪ During the implementation and operation of the project under PPP, the role of the public sector becomes that
of monitoring the performance of the private partner and enforcing the terms of the contract executed with
the private partner in relation to the project. Under the applicable law or the terms of the contractual
arrangement with the private party, the public entity may or may not have a recourse to the private party for
any deficiency or defects in services of the private party. However, the ultimate accountability towards users
for the services, rests with the public entity.
Although the definitions of PPP above, are not limited to infrastructure projects, in the Indian context, PPP is largely
used for the delivery of infrastructure and ancillary services to the public.

PPPs: Models/arrangements
PPPs involve multiple stakeholders, key of which include: (i) the public entity (i.e. the government including its agencies
and institutions) who awards the project and to a certain extent, provide viability funding for the same (ii) the private
partner or the concessionaire (which can be a consortium of partners) to whom the project is awarded by the public
entity (iii) the Special Purpose Vehicle (SPV) created as a legal manifestation of the private partner/consortium for the
implementation of the project (iv) the lenders financing the project (v) independent engineers (IE) and consultants of
the project (vi) the users, who are the ultimate beneficiaries of the project. These key stakeholders play a significant role
in the success of the project as their interests coincide with the same.

Thus, it is imperative that the structure and framework of a PPP project is such that the interests of the stakeholders are
duly considered, and the risks associated with the project are carefully identified and appropriately distributed among
the stakeholders most capable of assuming such risks. Appropriate allocation of risks to the stakeholders in a project
increases efficiency in developing and managing the project and will also be considerably cost effective. If the risks of
the projects are not appropriately identified and allocated, the project is likely to suffer delays in implementation and
heavy costs and costs overruns which would ultimately adversely affect all the stakeholders of the project.

The risks addressed in a typical PPP contract can be broadly categorized into pre-construction phase risks, construction
phase risks and operation phase risks. The instances of risks in each of the above categories may vary from project to
project and may depend on various circumstances.

Pre-construction risks would include risks such as:

▪ Delay in acquisition of the land required for the project within the envisaged timelines
▪ Inability and delay in obtaining commitment from the lenders for financing the project
▪ Delay in obtaining necessary approvals such as environmental clearances, approvals of access to project
site etc. required for commencing a project
▪ Inadequate project viability studies carried out by the government/implementing authority (in connection
with the project) based on which a private player is expected to bid for the project

The risks in the construction phase would pertain primarily to:

▪ Project design
▪ Delay in construction due to change in construction parameters such as project specification, requirement
of additional material
▪ Failure or delay in obtaining the regulatory approvals

The operational risks would include maintenance related risks as the asset so constructed would firstly be required to
be maintained for longer duration of time and yet perform to desired levels. Other risks pertaining to the project during
the operational phase are payment related risks (for instance, in case of low recovery of tolls etc.) and financial risks (The
given list of risks during various phases of the project is merely indicative).

© Economic Laws Practice 2021 Page | 10

Further, there could also be events beyond the reasonable control of the government/private party which may adversely
affect their abilities to perform their respective obligations with respect to the project. Such instances are commonly
known as force majeure events. PPP contracts would generally exempt the affected party from performing its obligations
during the period of force majeure. The contract may further provide that the affected party would not be liable to the
other party for any non-performance by the affected party due to any force majeure event.

The kind of PPP structure is usually chosen by the government depending upon factors such as the nature of project
(whether greenfield or brownfield), the kind and extent of private participation determined by the public entity such as
construction, management or both, duration of the PPP contract, revenue sources of the project, demand stability,
forecast in respect of the project and most importantly desired allocation of risks among the stakeholders.

Project contracts for implementation of PPPs could broadly be classified as:

▪ Service contracts
▪ Operations & maintenance (O&M) (management) contracts
▪ Capital projects (i.e. high capital-intensive long-term projects involving building and/or improving a capital
asset) with O&M contracts

The general models/schemes of contractual arrangements for PPPs in projects include Build Operate and Transfer (BOT),
Build Own Operate and Transfer (BOOT), Build and Transfer, Build Transfer and Operate, Develop Operate and Transfer,
Lease Renovate Operate and Transfer, Build Lease and Transfer (BLT), Build Transfer and Lease (BTL), Build Own Lease
Transfer etc. Although the nomenclature of the models mentioned above gives a sense of the scope of responsibilities
of the private entity, the most commonly used/major models and their variants are briefly discussed:

Build Operate and Transfer

BOT is a contractual arrangement under which the private entity (project developer) undertakes construction, financing
and O&M of the project. The assets of the project facility created by the developer are transferred by the developer
back to the concerned government agency upon termination or expiry of the contract. BOT contracts are usually long-
term contracts (i.e. period of 20-30 years) where the ownership of the assets of the projects lie with the public entity.
These could be toll based (BOT Toll) or annuity based (BOT Annuity).

Under BOT Toll and the BOT Annuity models, the developer is required to meet upfront/construction costs and
maintenance expenditures. While under BOT Toll model, the developer recovers its costs and return on investments
through collection of tolls from the users, under BOT Annuity, the developer gets returns on its investments through
pre-determined cost of returns out of the annuities paid by the concession authority each year 6.

The revenue risk of the private developing entity in toll-based BOT projects is usually high risk. However, in annuity-
based BOT contracts the revenue risk is low as the government retains the risk with respect to traffic and fixed charges
are to be paid by the public authority to the developer at regular intervals.

Depending upon the allocation of roles and risks, some of the variants of BOT model are Design Build Operate (DBO),
Design Build Finance Operate Transfer (DBFOT). DBO contracts are usually short to mid-term contracts (i.e. 3 to 5 years),
however they are not very common in India.

BOT is the most common model used in Indian PPPs. Sectors where BOT models are currently used include roads -
largely used by the National Highways Authority of India (NHAI) - and in the port industry7.

6In BOT Toll models for highways, the viability of the project greatly depends on the traffic (i.e., toll). However, with a view to bridge the gap
between the investment required and the gains arising out of it, i.e., to increase the viability of the projects, capital grant is also provided by the
government (up to a maximum of 40% of the project cost).
7
The Delhi Gurgaon Expressway, the 2nd terminal Nahvasheva International Container Terminal, JNPT are good examples of BOT projects. The Tuni
Anakapalli Road Project is a BOT annuity project. The 4-laning of Muzaffarnagar - Saharanpur Road (SH-59) is implemented on DBFOT basis.

© Economic Laws Practice 2021 Page | 11

 The Durg Bypass Project Jaipur Kishangarh

Both of the above projects were awarded for development on a Build-Operate-Transfer (BOT) basis.

Build Own Operate and Transfer

In this model, the private entity/developer undertakes the financing, construction and O&M of the project. Recovery of
the developer’s investment is through tolls, rentals, fees etc. from the users/consumers. The asset is owned by the
private partner during the term of the contract and the developer may assign the O&M to a facility operator. BOOT
contract is typically a long-term contract8 .

Build Own Operate model is much like the BOOT model. However, the ownership of the asset remains with the private
entity and the service/facility provision responsibility is also with the private entity. BOOT model is not common in India.
These are typically perpetual contracts.

Management Contracts
Under this model, the private party undertakes operation and maintenance of public facilities or services. Although the
ultimate obligation of providing service remains with the public authority, the day-to-day management control of the
facility vests with the private sector. The ownership of the assets/facilities and the investments therein remain with the
public entity. The private entity is entitled to a pre-determined fixed fee for the management services along with
performance-based incentives. The public entity engages a private partner for a short term (3 – 5 years). This model is
prevalent in urban projects such as water supply, drainage management etc.9. These also include highway management
contracts.

Management contract with rehabilitation and expansion is another variant in this model. The private contractor takes
a management and financial risk for a volume incentive under this model. These are mid to short term contracts and
usually are applied to brownfield projects. Projects under this model generally entail limited investments. This mode
has been adopted in the power distribution and water supply sectors10.

Lease Contracts
These are usually mid-term to long term contracts which may involve capital investment by the private partner. Under
this model, the public entity leases the asset to a private partner. The private partner would usually require certain
assurances in terms of tariff levels, term of the lease and mechanism for review of tariff to meet the envisaged
estimates. The model is seen in retail outlets at railway stations by Indian Railways and in water supply contracts.

Other variants of lease contracts are BLT or build operate lease transfer (BOLT) and BTL. The BLT or BOLT involves
building of assets by the private party and leasing it to the government. After recovery of the investment made by the
private party, the asset is transferred to the government. This model has been seen in railway contracts and water
desalination plants. The contracts under BLT or BOLT model are mid-term contracts.

8 Greenfield minor port concessions in Gujarat are on a BOOT basis. The Bangalore International Airport Limited (BIAL) operates the Kempegowda
International Airport in Bangalore on a BOOT basis
9
Karnataka Urban Water Supply Improvement Project is based on simple management model.
10 Bhiwandi Distribution Franchise, Latur Water Supply Project are examples of management contracts with expansion and rehabilitation model.

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Under the BTL model, the private party builds the asset and transfers it to the government. Thereafter the same asset
is leased by the private party from the government. The private party earns revenue by collection of user charges.

Snapshot of a news article in the Financial Express on PPPs11

PPPs: Financing

Finance structures for PPPs

The private party to most PPP contracts is a specific project company formed for that purpose—the SPV. This project
company raises finance through a combination of equity—provided by the project company's shareholders—and debt
provided by banks, or through bonds or other financial instruments. The finance structure is the combination of equity
and debt, and contractual relationships between the equity holders and lenders.

The government's primary contractual relationship is with the project company. This may be complemented by a direct
agreement between contracting/ concession authority and lenders; although often this relationship is limited to the
provisions in favor of the lenders included in the PPP agreement, such as step-in rights or senior debt repayment
guarantees.

The initial equity investors, who develop the PPP proposal, are typically called project shareholders. Typical equity
investors may be project developers, engineering or construction companies, infrastructure management companies,
and private equity funds. Lenders to PPP projects may include commercial banks, multilateral and bilateral development
banks and finance institutions, and institutional investors such as pension funds and insurance companies.

The project company contracts with firms to manage design and construction (usually known as an Engineering,
Procurement and Construction (EPC) contract), and O&M. These contractors may be affiliated with the equity investors.

11 https://www.financialexpress.com/industry/bridging-the-public-private-divide/188781/
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Typical PPP project structure

Non-recourse project finance for PPPs

Under non-recourse project finance, lenders can be paid only from the project company's revenues without demanding
compensation from the equity investors. That is, the project company's obligations are ring fenced from those of the
equity investors, and debt is secured on the cash flows of the project. PPP project finance structures typically involve a
large proportion of debt. In many cases, it ranges from 70 to 95 % of total finance. From the equity investors'
perspective, this helps manage risk by limiting exposure to a project and makes it possible to undertake much larger
projects than would otherwise be the case. For lenders, it means undertaking rigorous due diligence, focusing on the
project cash flow and contractual structure.

Flow of funds

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Alternatives to non-recourse project finance
While helpful for raising finance for large, highly leveraged investments, project finance comes at a cost. Interest rates
for project-finance debt are more expensive than government borrowing, and often more expensive than borrowing by
established companies. The transaction cost—setting up the contractual structure and carrying out adequate due
diligence—can make it unattractive for smaller deals. For this reason, many smaller PPP projects do not adopt the non-
recourse project finance structure – this is to achieve greater contractual flexibility or lower the financing cost.

One option is for project shareholders to back up the project company by providing a corporate guarantee to the lender
for repayment for all or part of the project debt.

Large infrastructure companies can structure the financing of their projects either through traditional full
recourse corporate finance or through limited recourse project finance. If the corporate finance route is followed, the
lenders provide loans directly to the parent company, on the strength of its credit rating and balance sheet. In case of
default the lenders have full recourse to the balance sheet of the company, but their loan is generally unsecured, which
means that it is not backed by a specific asset. In project finance, an SPV is created to hold the assets of the project
exclusively. The SPV is owned by the infrastructure company and other equity investors. Lenders provide loans to the
SPV. Their recourse in case of default is limited to the cash flows generated by the assets of the SPV but not to the
balance sheet of the equity investors. On the other hand, lenders will typically have security over the assets of the SPV.
In general, investors prefer limited recourse, because the risk of the project is limited to the equity they put in the SPV
company. The cost of debt is generally higher, but the risk is circumscribed. From the public sector standpoint, if the
limited recourse project finance route is followed, it is important to ensure that the SPV is not too thinly capitalized,
that is, the debt/equity ratio should not be too high. Otherwise, the investors’ interests might not be aligned with those
of the public sector, and financial close might be difficult to achieve. In addition, project finance induces lenders to focus
on the PPP project assets and their ability to generate cash flows—implying that lenders will implement better due
diligence, and that they may later create an additional layer of protection to the public interest by exercising step-in
rights in order to guarantee service delivery according to standards.

From the lender’s perspective, limited recourse project financing will often not be sufficient. They will typically require
additional credit support from the PPP company shareholders and/or third parties. Sometimes, lenders will ask for step-
in rights in case of default. In full recourse schemes, the only drawback is a potentially long and complex process for
redress, especially if the investors’ parent company is based overseas.

These two cases are not the only financing structures available. PPP financing is actually quite diversified. In some
countries with less developed financial institutions, where project finance is not common, but where contracting
authorities wish to design good PPP arrangements, investors are required to create a PPP company (the SPV), which
then obtains loans with guarantees from the PPP company shareholders.

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Non-recourse and full-recourse corporate project finance structures

Government finance
Another alternative to lower the cost of finance for a PPP is for the government to participate in the finance structure.
The government — or a government owned financial institution — could provide finance as a lender to the project
company, or could provide a guarantee to some, or all, of the project debt.

At the most basic level, governments need to ensure that the project design is bankable — that is, the project company
can raise debt. Although the ability to raise debt is a necessary feature, too much debt can undermine risk-transfer, so
governments may want to limit the amount of debt finance (leverage) allowed. More arcane but still important details
include:

▪ How to manage risks in going from contract award to financial close

▪ How to deal with the possibility of refinancing project debt

▪ How to define step-in rights for lenders and the government

Governments may also participate in the finance structure. Governments can provide debt, equity, or guarantees—
either directly, or through government-owned financial institutions such as development banks and pension funds.

The exclusive use of private finance is not a defining characteristic of a PPP — governments can also partially finance
PPP projects. Reducing the amount of capital investment needed from private entities reduces the extent of risk transfer
— weakening private sector incentives to create value for money and making it easier for private entities to abandon
the project if things do not go according to plan. Nonetheless, there are several reasons why governments may choose
to provide finance for PPP projects. These include:

▪ Avoiding excessive risk premiums — the government may consider the risk premium charged by the private
sector for the project to be excessive in relation to the actual project risks. This can be a difficult call to make,
since financial markets are usually better at assessing risk than governments, but can apply particularly for new
projects or markets, or during financial market disruptions.

▪ Mitigating government risk — where project revenues depend on regular payments from government, the risk
of default by the government will be assessed by the private party and will be reflected in the project cost.
Where reliability of government payments may be in doubt, providing subsidies or payments upfront in the
form of loan or grant finance, rather than on-going payments, could improve the bankability and lower the cost
of the project.

▪ Improving availability or reducing cost of finance — particularly when capital markets are under- or disrupted,
the availability of long-term finance may be limited. Governments may choose to provide finance at terms that
would otherwise be unavailable. Governments have access to finance on concessional terms, which they may
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 pass on to lower the cost of infrastructure projects. This is part of a broader policy of involving state financing
institutions to provide long-term lending for developmental purposes.

There are different ways in which governments can contribute to the financing structure of a PPP. Governments may
provide loan or grant finance directly to the project company or provide a government guarantee on a commercial loan.

Viability Gap Fund

Snapshot of an article in the Livemint on the importance of funding from multilateral agencies

India's Viability Gap Fund uses funds appropriated from the national budget to provide upfront capital subsidies for PPP
projects. Viability Gap Funding (VGF) up to INR 100 crore for each project may be sanctioned by the empowered
Institution, subject to the budgetary ceilings indicated by the Finance Ministry. The Empowered Institution will also
consider other proposals and place them before the Empowered Committee.

Eligibility:

▪ The PPP projects may be posed by the Central Ministries, State Government or Statutory Authorities (like
Municipal Authorities and Councils), which own the underlying assets

▪ To be eligible for financing under the scheme, the PPP projects should be implemented, i.e. developed,
financed, constructed, maintained and operated for the Projects term by a Private Sector Company to be
selected by the Government or a statutory entity through a transparent and open competitive bidding process

▪ The criterion for bidding should be the amount of Viability Gap Funding required by the Private Sector Company
for implementing the project where all other parameters are comparable

▪ The project should provide a service against payment of pre-determined tariff or user charge

▪ This Scheme will apply only if the contract/concession is awarded in favor of a private sector company which
is not a ‘Government Company’ as defined under section 2(45) of the Companies Act, 2013 (Companies Act)

▪ The approval to projects is given prior to invitation of bids and actual disbursement takes place once the private
entity has expended his portion of the equity

▪ The final VGF is determined through the bidding

India Infrastructure Project Development Fund (IIPDF)12

The IIPDF provides financial support for quality project development activities. This fund has been created by the DEA
with an initial corpus of INR 100 crore for supporting the development of credible and bankable PPP projects that can
be offered to the private sector.

12 https://www.pppinindia.gov.in/schemes-for-financial-support

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Co ncessio n A greements in India – A n Intro duc tio n
Concession Agreements
The grant of rights for development, construction and O&M of a PPP project to a private partner is done by the
government either through grant of a license under a governing statute or by executing a contract with the private
party13. The right of the government to execute such contracts is enshrined in Article 298 of the Constitution which
prescribes that the executive power of the Union or States, extend to carrying on any trade or business, the acquisition,
holding and disposal of property and the making of contracts for any purpose (subject to certain provisos).

The complex arrangements that comprise a PPP project are usually enshrined in agreements commonly known as
concession agreements - the concession being a grant to a private sector entity permitting it to undertake actions for
the provision of public good or service, which would otherwise be provided by a public-sector entity.

A concession is a license granted by the relevant public authority to a private party to undertake the delivery of a public
service and in some cases, appropriate the user charges, the legal authority for which lies exclusively with the public
authority. Along with the grant of such right, a public authority seeks to pass on certain risks to the private party 14.

The concession agreement is therefore the agreement wherein the public-sector entity grants the private sector entity
the right to develop and implement an infrastructure project. Its purpose is to:

Achieve an appropriate
allocation of risks

Vest the concessionaire

with all the rights
necessary to implement
the project and obtain
the agreed returns in
accordance with the
terms of the concession
agreement

The grant of rights to the private entity is usually carried out through a competitive bidding process. The government
agency inviting proposals details the terms under which the bid is to be made by the private entities, and the entity
offering the most favorable terms is awarded the right to implement the project.

The commercial viability of the project determines whether the payment is to be made by the private party to the public
authority (in the form of a revenue share/concession payment) or vice versa (in the form of grant or annuity payment).

13
Sectors such as airports, national highways, major ports, power and cable TV have legislations that not only provide the legal framework for the
infrastructure of the projects in such sectors but also for private participation therein.
14 Concession agreement is defined under various state legislations as under:
The Andhra Pradesh Infrastructure Development Enabling Act 2001: ““Concession Agreement” means a contract of the nature specified in Schedule I
between the Developer and the State Government or Government Agency or the Local Authority relating to any Infrastructure Project or such other
contract as may be Prescribed from time to time by the Government.”
The Punjab Infrastructure (Development & Regulation) Act, 2002: ““Concession Agreement" means any of the contracts executed for the purposes of
private participation in an infrastructure project between a concessionaire and a public infrastructure agency in terms of this Act, or the rules or
regulations made there under as per the model specified in Schedule II;”
The Himachal Pradesh Infrastructure Development Act, 2001: “"concession agreement or arrangement" means a contract of the nature specified in
Schedule-II between a developer and the Government or a Government agency relating to a project.”

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Development of MCAs
The foundation of a PPP project is the allocation of risk to parties that are most capable of bearing such risks. Excessive
and inappropriate risks taken by either the public or private entity would result in difficulties and in some cases failure
of the projects. This is well known. Additionally, even where risks are appropriately allocated, the manner of addressing
such risks also is a decisive factor in whether a PPP project will be successful. This can be clearly seen in the evolution
of concession agreements as the PPP market and players in India matured.

In the early stages of PPP projects, various state governments and authorities developed their own versions of
concession agreements for individual projects. Difficulties in implementation led to the need for creation of a standard
framework for PPP projects in India. The Planning Commission, through Mr. Gajendra Haldea, published in 2000 an MCA
for the highways sector. Almost simultaneously, the NHAI developed its own draft concession agreements that had
significant commonalities with the Planning Commission’s MCA. The NHAI completely adopted the MCA developed by
the Planning Commission in totality from 2008 onwards.

MCAs were then developed for sectors other than roads. Currently, there are MCAs for highways, metros, airports,
railway stations, ports and food storage. Even for sectors not covered under MCAs or concession agreements issued by
various States, language and concepts from MCAs are heavily borrowed. However, some authorities continue to use
their own standard concession agreements that predate the publication of the MCA (e.g. the port concession agreement
for non-major ports as used by the Gujarat Maritime Board(GMB)).

MCAs brought a standardization to the entire bidding process, the advantages of which are consistency in approach and
efficiency in the bidding and transaction process. However, there are several criticisms to the indiscriminate use of MCAs
in the PPP process. The topic of MCAs is covered in greater detail in the subsequent chapter.

Food Storage

Airports Railways/Metros

Highways

Ports

Currently, there are MCAs for highways, metros, airports, railway stations, ports and food storage

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Mo del Co nc essio n A greement (MCA )
Rationale for MCAs
Proponents for MCAs put forth the view that MCAs are preferable than a more individualistic approach as they believe
that use of such standardized documents results in reduced transaction time and cost, simplifies the bidding process
and develops the confidence of the bidders and financiers in the contracts. Given that the MCAs have been formulated
by relevant governmental agencies after considering technical, financial and legal advice, by using standardized
documentation, the administrative timelines of the relevant agencies using the MCAs is greatly reduced. Further, the
MCAs are used as templates by smaller local government agencies that may not have access to the same level of
expertise as the agencies responsible for drafting the MCAs.

The DEA itself has recommended that for sectors where the relevant Ministries have not issued an MCA, usually the MCA
for the development of National Highways may be used as a template and guidance material for the preparation of the
concession agreement15.

Implementati on and criticism

The actual implementation has left much to be desired as MCAs have been and are being used indiscriminately without
enough regard being paid to characteristics of each project. There is also a sense that the allocation of risks in the MCAs
is not entirely appropriate or otherwise the risk mitigation mechanisms are not workable or equitable. Being long term
and often complex contracts, it is probably impossible to account for all the risks or other developments that may arise
during the construction and operation of an infrastructure project. Any abrupt changes in the economic and policy
environment could adversely affect the financial ability and inclination of a contractor in implementing the project unless
the terms and conditions of the concession could be re-negotiated in full transparency. The MCAs are not responsive to
such changes and their lack of flexibility can be a deterrent to private developers or financiers.

Concession agreements differ from other agreements for provision of commercial creditors and services in several ways,
such as:

They relate to public goods and services

They are typically high value contracts

They are long term arrangements (which typically span from 5 to 60 years)

They are intended to provide essential services for which there are no substitutes

15 PPP Guide for Practitioners issued by the DEA in April 2016 (PPP Guide 2016)

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Accordingly, it is natural for there to be a lot of complexity in such agreements that need to be suitably addressed and
for which a straight-jacketed approach may not be appropriate. This has led to limited reliefs available through the MCA,
in case of events outside the control of the concessionaire (i.e. the private party). It has been noted that this creates a
perception of risk transfer but the likely (and actual) outcome is disputes which are settled in an unstructured way,
thereby undercutting the certainty and consistency of approach mooted as the rationale for the concession agreements.

Further, the MCAs do not permit the amendment of the same/concession agreement. The need for setting out an
appropriate framework for renegotiation has been proposed time and again by various stakeholders. Certain flexibility
in relation to tariff related issues is sometimes built into the MCA. However, similar flexibility in relation to other issues
such as major changes in scope, operating conditions or market conditions is missing. The scope of negotiating MCAs is
also quite limited, and this has resulted in a one-size-fits-all approach. Hence, project-specific risks remain unaddressed.
It has been noted that such an approach has resulted in multiple obligations not being met and the project purpose
being compromised.

Given that concession agreements are long term contracts, the inflexibility in the MCAs do not consider difficulties
in forecasting and providing for technological, commercial, financial, economic and legal developments. This has led
to litigation as well as underperformance of the MCA 16.

The terms and conditions of the concession agreements across many sectors/industries are common and, in many cases,
identical as the MCA prescribed by the government for highway projects seem to have been applied to the same. Thus,
the project specific risks do not get addressed and lead to implementation as well as contractual issues and disputes
with the concessionaires. Due to this, prospective bidders are seen to request numerous modifications of the terms of
the concession agreement which is often seen by the bidding authority as a request for substantial change in the terms
of the concession.

The draft concession agreements which are usually floated with the bid documents should be appropriately modified
keeping in mind the industry as well as the factual issues pertaining to the project in question. Consequently,
negotiations on the terms of the concession agreements during the bid stage would be minimal and could lead to lesser
litigations/disputes amongst stakeholders. Please see our detailed observations in the chapter on ‘Balancing of Risks’ in
PPP projects to get a deeper understanding of the issue.

International approach and way for ward

It is interesting to note that Australia has moved away from the usage of standardized documents. Instead, Infrastructure
Australia provides a set of commercial principles that are applied to each project using suitably qualified and experienced
commercial advisors and internal staff in public agencies. This is backed up by advisory teams from the state treasuries.
At the other end of the spectrum, South Africa has moved towards a completely standardized approach, not permitting
any deviation from the prescribed contract forms. However, these drafts were developed after an extensive review of
global best practices and consultations with numerous public and private sector actors by some of the best international
advisors available.

There is definitely great value in using model agreements as they do result in lower transaction costs and consistent
approaches. However, there are valid criticisms of the use of standardized documentation. A periodic overhaul of MCAs
together with inbuilt mechanisms for recalibration of the terms could be an approach to make them less rigid. Further,
institutional mechanisms for renegotiation of contracts should also be put into place.

16 Kelkar Committee report

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Infrastructure Projec ts: Highway Sec to r
Broad overview of the l egal and institutional framework of the road sector
India had the second largest road network in the world with approximately 5.9 million kilometers of roads as on March
31, 2017, consisting of national highways, state highways, district roads, rural roads, urban roads and project roads17.
National Highways (the primary system of road transportation in India) run through the length and the breadth of the
country connecting capitals of states and union territories, major ports, rail junctions, industrial and tourist centers and
link up with border roads and highways of neighboring countries. On the other end, State Highways link National
Highways, district headquarters of the state, important towns, tourist centers and minor ports. Likewise, district roads
and rural roads connect areas within the district and talukas which ultimately connect with the National Highways
and/or the State Highways.

Under the Constitution, the

Central Government has the
power to regulate highways which
have been declared either: (i) by
law, or (ii) under law made by the
Parliament, to be National
Highways18. As regards, road and
bridges19, the state legislatures
have been empowered to frame
laws. Accordingly, the
development and maintenance of
roads in India are undertaken by
various agencies of both Central
Governments and State
Governments. The Ministry of
Road Transport and Highways
(MORTH) is the nodal ministry responsible for development and maintenance of National Highways. It does so through
NHAI, National Highway Infrastructure Development Corporation of India Limited, State Public Works Departments
(PWDs) and Border Roads Organisations, etc. State roads and district roads are constructed and maintained through
State PWDs. Rural roads are executed by Panchayati Raj Departments, State PWDs and Rural PWDs, and the National
Rural Road Development Agency of the Ministry of Rural Development.

By virtue of the power vested in it under the Constitution20, the Central Government enacted the National Highways
Act, 1956 (NH Act) to declare certain highways as national highways to help the Central Government to exercise its
powers with respect to the development and maintenance of such highways more effectively 21. Recognizing the need
to tap private resources for the development of highways, the NH Act was amended in 1995. Pursuant to the
amendment in 1995, Section 8A was inserted in the NH Act which empowers the Central Government to enter into
agreements with any person in relation to the development and maintenance of the whole or any part of a national
highway. Such person is entitled to collect and retain fees at such rates, for services or benefits rendered by him as the
Central Government may, by notification specify having regard to the expenditure involved in building, maintenance,

17 Basic road statistics of Indian (2016-17) - https://morth.nic.in/sites/default/files/Basic%20_Road_Statics_of_India.pdf

18 Constitution of India, Seventh Schedule, List I (Union List), Entry 23.
19 Constitution of India, Seventh Schedule, List II (State List), Entry 13.
20
supra note 2.
21 Statement of Objects and Reasons to the NH Act.

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management and operation of such national highway, interest on capital invested reasonable return, the volume of
traffic and the period of such agreement. Thus, the amendment in 1995 paved the way for PPP in highways.

This chapter focuses on national highway concessions.

Evoluti on of Concession A greements

f o r n a t i o n a l h i g h w a y s 22
Following the economic liberalization in 1991, the highway
sector was one of the first sectors which opened up to
private participation.

The first highway concession agreements in India were for

the Durg Bypass project and the Jaipur Kishangarh project
around the year 2000. Both projects were awarded for
development on a BOT basis.

Following this, several projects were opened up for private

participation with different types of development models
on offer decided by the Government on the basis of
anticipated interest and the search for the most efficient
model in pursuit of maximum efficiency and minimum
stress on the Government exchequer.

Consequently, several models viz. BOT, Build-Operate-

Transfer-Viability-Gap-Funding (BOT-VGF), BOT on an
annuity basis, and EPC were devised. These were
introduced and used for bidding in projects at different
points. As an illustration, the earliest use of the BOT
(Annuity) model was as early as 2001 in the Panagarh-
Palsit project. The model is still being used.

Subsequently, policy makers sought for a model to be

standardized. Initially, standardized models were
extended only to BOT-VGF projects. The Planning
Commission came out with MCAs in the years 2000, 2006
and 2009.

As indicated earlier, the first set of concession agreements

were developed for projects on a BOT basis as the policy
framework for toll-based BOT projects was approved by
the Cabinet in 199723. Subsequently, in-principle approval
of National Highway Development Programme (NHDP)
Phase I and II was given by the Cabinet on April 5, 2000
followed by the Cabinet Committee on Economic Affairs’ (CCEA) approval of the NHDP-I on December 12, 200024. Under
the said approval of NHDP, contracts were to be awarded to the extent possible on BOT (Toll)/BOT (Annuity) model 25.

22The national highways are primarily governed by the Union Government and NHAI is the nodal agency which governs and implements such
projects. State highways are usually governed by the public works department or other development corporations of the respective states. This
chapter focuses on the NHAI concessions.
23The ‘Report of the Core Group Financing of the National Highway Development Programme’ published by the Secretariat for the Committee on
Infrastructure, Planning Commission, Government of India.
24
Id.
25 Id.

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However, whilst an MCA for BOT (Toll) was already in place at that point in time, the MCA for BOT (Annuity) was yet to
be finalized26. Consequent to discussions between the Planning Commission and the NHAI from 2006 to 2009, the
Planning Commission published improved versions of the MCAs in 2009 27.

Picture sourced from an article in the Tribune which discusses NHAI halting land acquisition for a four-lane road project
Although an MCA continued to exist through the 2000s, there continued to be extensive deviation from the MCAs, on
the basis of project requirements, anticipated interest, and post-bid NHAI-concessionaire negotiations. During this
period, competitive bidding was carried out on the basis of lowest quoted VGF or payment of a premium to the NHAI,
in applicable projects. In many cases, over-competitive bidding, unanticipated cost-overruns, inability to procure
permits, inability to achieve financial closure and lower-than-expected toll revenues pushed an increasing number of
projects into failure and unresolvable limbo. Meanwhile, this increased the number of non-performing assets in the
accounts of banks and affected their ability to fund more such inherently risky and uncertain long-term projects.

Some of the major issues concerning NHAI concession and awards during this period were:

▪ Over aggressive bidding causing drops in Internal Rate of Return (IRR), exposing them to increased possibility
of failure due to factors such as cost overruns and drop in revenues

▪ Already overleveraged balance sheets causing inability to pump in promoter capital or obtain refinancing to
fund cost overruns

▪ Delays and uncertainty in the procedure for obtaining permits from various points of governmental
departments, causing delays in financial closure, penalties and interest

▪ Delays and inability in acquisition of land required for the project

26 Id.
27
Evolution of Model Concession Agreement for National Highways in India by Ramakrishnan. T. S and Raghuram. G, published by the Indian
Institute of Management, Ahmedabad.

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 ▪ Unavailability of sufficient assets with the concessionaire leading to higher provisioning and capital adequacy
norms, as ownership of land and project assets existed with the NHAI

▪ Inability to divest from the ownership and control of projects due to restrictions incorporated in the concession
agreements

▪ Lower than expected traffic flowing through the highways causing drops in revenue

▪ Force majeure events or changes in law causing cost overruns, disruption in revenues, and unmanageable
repayment obligations

▪ Refusal of the NHAI to engage in re-negotiation of terms of concession agreement

BK Chaturvedi Committee Report

In August 2009, the then Prime Minister constituted a committee headed by Shri B.K. Chaturvedi (BKC Committee) for
implementation of the National Highways Development Project. The BKC Committee, in its report proposed several
changes to the MCA. The major recommendations were as follows:

▪ In the existing MCA, the NHAI could terminate the agreement, if the average daily traffic of passenger cars
exceeded the designated capacity for specified accounting years. The BKC Committee was of the view that such
a provision left very little incentive for the concessionaire to augment the facility. Accordingly, the BKC
Committee recommended that in such circumstances a detailed project report be commissioned by the NHAI
based on which NHAI could determine the required extension in the concession period.

▪ The Toll based MCA released in 2016 (Toll MCA of 2016) gave NHAI the right to terminate the concession in the
event of variation in estimated traffic while the Toll Operate Transfer (TOT) MCA released in 2017 (TOT MCA of
2017) has implemented this suggestion.

▪ The BKC Committee recommended revising the definition of change in ownership to mean the bidder
consortium’s equity shareholding dropping below 51% any time until 2 years after Commercial Operations Date
(COD). The BKC Committee further recommended that each consortium member whose technical and financial
capacity was evaluated for the purposes of pre-qualification and short-listing in response to the request for
qualification should hold at least 26% of equity until 2 years after COD. Prior to the recommendations, the NHAI
(i) required the bidder consortium to hold 51% of the shareholding of the concessionaire during the
construction period, (ii) allowed the bidder consortium to reduce their shareholding to 33% on COD and for the
period up to 3 years into the operations period, and (iii) required the bidder consortium to maintain 26% (or
such lower proportion as may be permitted by the NHAI) till the end of the concession period.

▪ The aforementioned recommendation was first implemented in the MCA released in 2009 (MCA of 2009) and
has been subsequently implemented in the Toll MCA of 2016, Hybrid Annuity Model MCA released in 2016
(HAM MCA of 2016).

▪ The BKC Committee recommended that the three modes of delivery viz. BOT (Toll), BOT (Annuity) and EPC
contract (item rate contract) should be carried out concurrently rather than sequentially. The then extant policy
required that all projects are to be first bid out as BOT (Toll) and on failure of the same, are to be then offered
under BOT (Annuity) and if this also fails, then they are to be taken under EPC after taking specific approval
from CCEA.

▪ Another recommendation made by the BKC Committee was to make an explicit provision in the MCA for
permitting lenders to create a charge on the Escrow Account to the extent permissible as per their priority in
the ‘waterfall’. This suggestion was implemented in the Toll MCA of 2016. The HAM MCA of 2016 provides for
a lien on the escrow account.

© Economic Laws Practice 2021 Page | 31

Process for framing MCAs
The MCAs are released periodically by the Government taking into account the economic scenario and needs of the
sector. Prior to 2014, the Planning Commission was responsible for formulating the MCAs, while currently the MORTH
has taken over this responsibility.

The process of formulating MCAs involves inviting comments from stakeholders, investors, developers and industry
experts on the existing MCAs. The drafts are also circulated to inter-ministerial groups for review and revision. In
addition to such comments, reports of expert committees also play an important role while drafting such MCAs. For
example, the MCA of 2009 was drafted considering the recommendations made by the BKC Committee. The
amendments are made to address the changing economic climate and to make the MCAs more investor friendly. They
are aimed at inducing lenders to invest in such road projects. To illustrate, the Toll MCA of 2016 was amended pursuant
to the BKC Committee report, to make a provision for charge on escrow mechanism in favor of senior lenders.

Risk allocation in PPP Models in the road sector

The most common concession models for PPPs in road sector in India are BOT Toll, BOT Annuity and HAM. The
comparison of the terms of each of the above models is set forth in the latter part of this chapter. Set forth immediately
below, is a risk matrix available on the website of PPP India summaries typical allocation of risks in some of the road
sector PPP models28. Please note that the government has brought about major changes in the BOT toll model by making
changes in the MCA in the month of August 2020. However, a substantial part of the risk allocation in respect of BOT
based project remains the same, as earlier.

Risk Type BOT Toll BOT Annuity BOT Shadow Toll Performance Based
Maintenance
Contracts

A Pre-Operative Task Risks

A1 Delays in Land Public Sector Public Sector Public Sector Not Relevant
Acquisition

A2 External Public Sector Public Sector Public Sector Not Relevant

Linkages

A3 Financing Risks Private Sector Private Sector Private Sector Not Relevant

A4 Planning29 Private Sector Private Sector Private Sector Not Relevant

A5 Approvals Private Sector Private Sector Private Sector Not Relevant

B Construction Phase Risks

B1 Design Risk Private Sector Private Sector Private Sector Not Relevant

28 https://www.pppinindia.gov.in/toolkit/highways/module1-oopmv-raudpm.php?links=oopmv1c
29Although the aforementioned table mentions that the planning and approvals related risks (A4 and A5) in BOT projects are that of the private
sector, in our experience with BOT based concessions, the obligation to obtain the pre-construction approvals such as environmental clearance,
mining related approvals are that of the concession authority / public sector. However, the concession agreements typically lack adequate remedies
for compensating the private entity/ concessionaire in the event of any delay in performance of pre-construction obligations by the public entity.
Accordingly, in the event of delay by the authority in performing its pre-construction obligations such as obtaining required approvals, if any costs
such as interest on capital borrowed and/or employed, liquidated damages to third party contractors etc. are incurred by the concessionaire, the
same are at the risk of the concessionaire / private party. However, the concession agreements provide for extension of timelines for completion of
the projects/ term of the concession as a remedy to the default of the authority, which obviously does not address these of a private developer.

© Economic Laws Practice 2021 Page | 32

 Risk Type BOT Toll BOT Annuity BOT Shadow Toll Performance Based
Maintenance
Contracts

B2 Construction Private Sector Private Sector Private Sector Not Relevant

Risk

B3 Approvals Private Sector Private Sector Private Sector Not Relevant

C Operations Phase Risks

C1 Technology Private Sector Private Sector Private Sector Private Sector

Risk

C2 Operations & Private Sector Private Sector Private Sector Private Sector
Maintenance
Risk

C3 Volume Risk Private Sector Public Sector Private Sector Public Sector

C4 Payment Risk Private Sector Public Sector Public Sector Public Sector

C5 Financial Risk Private Sector Private Sector Private Sector Private Sector

D Handover Risk Events

D1 Handover Risk Private Sector Private Sector Private Sector Private Sector

D2 Terminal Value Private Sector Private Sector Private Sector Private Sector
Risk

E Other Risks

E1 Change in Law Public Sector* Public Sector* Public Sector Public Sector

E2 Force Majeure Shared Shared Shared Shared

E3 Concessionaire Public Sector Public Sector Public Sector Public Sector

Risk

E4 Sponsor Risk Private Sector Private Sector Private Sector Private Sector

E5 Concessionaire Private Sector Private Sector Private Sector Private Sector

Event of
Default

E6 Government's Public Sector Public Sector Public Sector Public Sector

Event of
Default
* In case of financial implications lower than Rs. 1 crore, risk is retained by private sector (Source: NHAI model concession agreement)

© Economic Laws Practice 2021 Page | 33

Comparative look at MCAs
To illustrate the changes to the NHAI MCAs in light of the evolving PPP landscape as well as the requirements to address the risks realized after implementation, we have set
below a table comparing certain key terms in the 2009 MCA, the 2016 MCA, 2017 MCA, the 2001 BOT Annuity model and the 2016 HAM. In August 2020, the GOI has brought
various changes in the model MCA for BOT Toll based road projects. Per the government’s office memorandum dated August 24, 202030, the changes have been brought keeping
in mind the issues faced by the stakeholders and requirement of reforms relating to project preparation and conditions precedents, dispute resolution and limitation of liability
ease of doing business, incorporation of new policies such as policy for harmonious substitution policy for resolution of stuck projects etc. and other miscellaneous reforms such
as use of latest technology for traffic and road condition monitoring, additional performance security etc. Some of the key features of the revised MCA 2020 toll model include
provisions pertaining to:

▪ Mutual foreclosure of the concession agreement in circumstances which do not constitute any party’s default.

▪ Reassessment of revenue potential of the project in every 5 (five) years – This is against the reassessment / the target traffic testing that usually happens at ninth, tenth
and eleventh year from the date of concession agreement to capture variation in traffic growth in the concession period. This is likely to provide more certainty of cash
flows and any extension to concession period can be anticipated early in the tenure of the concession agreement (typically, the terms of the concession agreement
provides that lesser than expected traffic volumes usually result in an extension of the concession period). The revision of the concession period, however, has been kept
as in the previous years at 20%.

▪ Obligation on the NHAI to provide vacant access and Right of Way (ROW) for a minimum 90% (ninety percent) of the construction zone. The award of BOT toll project is
proposed to take place now only after NHAI taking possession off 90% of the project land like the HAM projects. This is aimed at addressing one of the primary reasons
cited by private developers for delay in starting work on road projects. If the NHAI’s failure to arrange 90 per cent of the land in time results in a delay in starting the
project, it will be liable to pay a fine equivalent to 0.1 per cent of the performance security, or the financial guarantee concessionaires offer the government to assure
fulfilment of contract obligations. The revised agreement also mandates that if the NHAI fails to provide the remaining 10 per cent of the land to the developer within 180
days of work starting, it will be removed from the scope of the project.

▪ The aggregate liability of either party has been limited to 100% (hundred percent) of the total project cost. However, the focus on limiting liability to 100% of total project
cost for both NHAI and developers appears to be largely beneficial for NHAI. This is because many claims raised by developers in the past have been at a multiple to the
total project cost.

30 https://morth.nic.in/sites/default/files/om_11.pdf

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 SR PARTICULARS TOLL ANNUITY
NO.
2009 MCA 2016 MCA 2017 MCA 2020 MCA 2001 BOT Annuity MCA HAM MCA of
201631

1.
Mode of Toll Toll Toll Toll Annuity Annuity
returns/
payments to
concessionaire
2.
Concession DBFOT DBFOT TOT DBFOT BOT Design, Build,
model (as Operate, and
provided under Transfer (DBOT)
the concession
agreement)
3.
Concession For a period of 20 years For a period of 20 years from For a period of 30 For a period of 20 years For a period of 17 years and 6 For a period of 15
period commencing from the the Appointed Date. years from the from the Appointed months from the years commencing
Appointed Date. Appointed Date. Date. Commencement Date. from COD.
[Appointed Date shall be the
[Appointed Date shall be date on which financial close [Appointed Date shall [Appointed Date shall [Commencement Date shall [COD shall be the
the date on which the as under the concession be the date on which mean the date on which be the date 7 months from the date on which the
project enters into agreement is achieved, or an all Conditions all Conditions date of the concession completion
commercial service/ earlier date that the parties Precedent have been Precedents have been agreement] certificate or the
commercial operations on may decide by mutual satisfied in satisfied in accordance provisional
completion/waiver of all consent.] accordance with with Article 4 of the certificate as
of the conditions Article 4 of the concession agreement] under the
precedent as under the concession concession
concession agreement.] agreement.] agreement is
issued.]

31 During the operations period for a HAM project, the recovery from authority is in the form of fixed annuity payments along with interest on balance accumulated annuity payments (calculated @300 bps over prevailing
bank rate). Low bank rate thus reduces the overall inflows for a HAM project, thereby adversely affecting its debt coverage and returns to the investors. There has also been a problem of delayed and inadequate interest
rate transmission. Recent changes in model concession agreement with a shift to the marginal cost of funds based lending rate (MCLR) from bank rate for computing interest on annuities As per revised concession agreement
dated November 10, 2020, interest rate on annuities will be equal to the average MCLR of top 5 scheduled commercial banks plus 1.25% instead of bank rate. With the average MCLR replacing the bank rate, a hedge
between the annuity inflows and interest costs, thereby reducing the interest rate risks to a large extent, and that too without any delay.
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SR PARTICULARS TOLL ANNUITY
NO.
2009 MCA 2016 MCA 2017 MCA 2020 MCA 2001 BOT Annuity MCA HAM MCA of
201631

4. ▪ NHAI to provide ▪ NHAI to provide vacant ▪ NHAI to provide ▪ NHAI to provide

Land Not applicable To be acquired by NHAI.
vacant access and access and ROW to the vacant access and vacant access
procurement
ROW to the Concessionaire with 80% ROW to the and ROW to the
obligation
Concessionaire with being handed over on Concessionaire as a Concessionaire
80% being handed Appointed Date. licensee with a with 80% being
over on Appointed minimum of 90% of handed over on
Date. the Construction Appointed
▪ NHAI to procure land for
Zone being handed Date.
Change of Scope.
▪ NHAI may require over by the
Concessionaire to Appointed Date. ▪ NHAI to procure
procure additional land for Change
land for Change of ▪ NHAI may require of Scope
Scope or for toll plazas Concessionaire to
etc. procure additional
land for Change of
Scope or for toll
plazas, traffic aid
posts, medical aid
posts, under passes
and over passes.

5. Permits NHAI to procure: NHAI to procure: NHAI to procure the NHAI to procure: To be procured by the NHAI to procure:
procurement ROW: concessionaire
▪ ROW ▪ ROW ▪ ROW
obligation ▪ ROW
The Concessionaire is
▪ Approval of the ▪ Approval of the railway ▪ All applicable
required to: ▪ Approval of the
railway authorities in authorities in the form of permits relating
railway authorities in
the form of a general a general arrangement ▪ Make applications to
the form of a general
arrangement drawing drawing that would for obtaining the environmental
arrangement
that would enable the enable the concessionaire Applicable protection, and
drawing that would
concessionaire to to construct road Permits. conservation in
enable the
construct road overbridges/underbridges respect land
▪ Obtain requisite concessionaire to
overbridges/ at level crossings on the forming part of
regulatory permits construct road
underbridges at level project highway in the ROW.
and approvals for overbridges/
crossings on the accordance with the
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SR PARTICULARS TOLL ANNUITY
NO.
2009 MCA 2016 MCA 2017 MCA 2020 MCA 2001 BOT Annuity MCA HAM MCA of
201631

project highway in specifications and employment of underbridges at level ▪ Forest

accordance with the standards and subject to foreign nationals. crossings on the clearance for
specifications and the terms and conditions project highway in and in respect
▪ Obtain the
standards and subject specified in such approval. accordance with the land forming
Applicable Permits
to the terms and specifications and part of the
▪ All applicable permits for felling of trees
conditions specified in standards and ROW.
relating to environmental to be identified by
such approval. subject to the terms
protection and the Authority, if
and conditions ▪ Approval of the
▪ All applicable permits conservation of the site. such trees cause a
specified in such general
relating to material adverse
If environmental protection approval. arrangement
environmental effect on the
and conservation of site drawings for
protection and operation or ▪ All applicable permits
permits pertain to only small the road over
conservation of the maintenance of relating to
portion of site, it will be bridges/under
site. the Project environmental
included in the remaining bridges at level
Highway. protection and
If environmental 20% length of road to be crossings on
conservation of the
protection and obtained by the the project.
site.
conservation of site concessionaire.
permits pertain to only The Concessionaire shall The above permits
Further, NHAI may postpone will be procured
small portion of site, it obtain all remaining
the period within which it by NHAI, provided
will be included in the Applicable Permits.
needs to acquire the above they are not for
remaining 20% land to be
permits, up to an aggregate the area falling
obtained by the
period of 6 months, beyond within the 20%
concessionaire.
which it will be considered to length of road to
Further, NHAI may fall within the 20% area of be acquired by the
postpone the period land to be acquired by the concessionaire.
within which it needs to concessionaire, and an
acquire the above additional period of 12 Further, NHAI will
permits, up to an months will be provided to be entitled to a
aggregate period of 6 construct the overhead penalty free
months, beyond which it bridges. period of 90 days
will be considered to fall additional to the
The concessionaire shall period provided
within the 20% area of
obtain all remaining permits. for this purpose.
land to be acquired by the

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SR PARTICULARS TOLL ANNUITY
NO.
2009 MCA 2016 MCA 2017 MCA 2020 MCA 2001 BOT Annuity MCA HAM MCA of
201631

concessionaire, and an
The
additional period of 12
concessionaire
months will be provided
shall obtain all
to construct the overhead
remaining permits.
bridges.
The concessionaire shall
obtain all remaining
permits.
6. Maintenance During the development During the development Prior to Appointed During the development Prior to commencement of During the
obligations period, NHAI shall: period, NHAI shall: Date or the O&M period, NHAI shall: any construction activity, the development
prior to Handover Date (in concessionaire shall finalise, period, the
▪ Maintain the project ▪ Maintain the project ▪ Maintain the project
appointed date case of Annuity in consultation with the IE, an concessionaire
highway at its own highway at its own cost highway at its own
Concession/New operations and maintenance shall:
cost and expense. and expense. cost and expense.
EPC), NHAI shall, at its plan for the project during the
▪ Maintain the
▪ Undertake routine ▪ Undertake routine own cost and implementation period.
▪ Undertake routine existing project
maintenance during maintenance during the expense:
maintenance during road.
the development development period.
▪ Maintain the the development
period. ▪ In the event of
▪ In the event of any Project Highway. period
any material
▪ In the event of any material deterioration or
▪ Undertake repair deterioration
material deterioration damage other than In the event of any
of Project Highway or damage
or damage other than normal wear and tear, material deterioration
in the event of any other than
normal wear and tear, undertake repair thereof, or damage other than
material normal wear
undertake repair or pay the Concessionaire normal wear and tear,
deterioration or and tear,
thereof, or pay the the cost and expense as undertake repair
damage other than undertake
concessionaire the determined by the IE for thereof, or pay the
normal wear and repair thereof.
cost and expense as undertaking such repair concessionaire the cost
tear.
determined by the IE after the appointed date. and expense as ▪ In the event of
for undertaking such ▪ Undertake routine determined by the IE for excessive
repair after the maintenance. undertaking such repair deterioration
appointed date. after the appointed or damage
▪ Undertake special date. caused due to
repairs only for
unforeseen
ensuring safe
events such as
© Economic Laws Practice 2021 Page | 38
SR PARTICULARS TOLL ANNUITY
NO.
2009 MCA 2016 MCA 2017 MCA 2020 MCA 2001 BOT Annuity MCA HAM MCA of
201631

operation of the floods or

Project Highway or torrential rain,
in the event of NHAI shall
excessive undertake
deterioration or special repairs
damage caused at its own cost
due to unforeseen and expense.
events.
7. Financial ▪ The concessionaire is ▪ The concessionaire is to Financial closure is ▪ The concessionaire is To be achieved on or before ▪ The
closure to achieve financial achieve financial close defined to mean to achieve financial the Commencement Date. concessionaire
close within 180 days within 180 days from the fulfilment by close within 180 days is to achieve
from the date of the date of the concession Concessionaire of all from the date of the financial close
concession agreement. condition precedents concession within 150 days
agreement. set out under the agreement. from the date of
▪ Period may be extended to
Financing Agreement, the concession
▪ Period may be 120 days on payment of
so that the financial ▪ Period may be agreement.
extended to 320 days damages, provided that no
assistance sought to extended to 320 days
on payment of damages shall be payable ▪ Period may be
be disbursed on payment of
damages, provided if such delay is attributable extended to 215
thereunder, are ready damages, provided
that no damages shall to default or delay by NHAI days on
and available to be that no damages
be payable if such or due to force majeure. payment of
disbursed on demand. shall be payable if
delay is attributable to damages,
such delay is
default or delay by provided that no
attributable to
NHAI or due to force damages shall
default or delay by
majeure. be payable if
NHAI or due to force
such delay is
majeure.
due to force
majeure.
8. Deemed If financial close is not If financial close is not Not provided for. If financial close is not Not provided for. If financial close is
termination achieved within the achieved within the achieved within the not achieved
prescribed periods, the prescribed periods, the prescribed periods, the within the
concession agreement concession agreement would concession agreement prescribed
would be deemed to have be deemed to have been would be deemed to periods, the
been terminated by have been terminated concession

© Economic Laws Practice 2021 Page | 39

SR PARTICULARS TOLL ANNUITY
NO.
2009 MCA 2016 MCA 2017 MCA 2020 MCA 2001 BOT Annuity MCA HAM MCA of
201631

mutual consent of the terminated by mutual by mutual consent of the agreement would
parties. consent of the parties. parties. be deemed to
have been
terminated by
mutual consent of
the parties.

9. Variation of Increase in costs: Increase in costs: Increase in costs: Increase in costs: Increase in costs: Increase in costs:
costs arising
If as a result of change in If as a result of change in law, If as a result of Change If as a result of change in If as a direct consequence of a If as a result of
from change in
law, the concessionaire the concessionaire suffers an in Law, the law, the concessionaire change in law, the change in law, the
law
suffers an increase in increase in costs or reduction concessionaire suffers suffers an increase in concessionaire is obliged to concessionaire
costs or reduction in net in net after-tax return or an increase in costs or costs or reduction in net incur additional cost in any suffers an increase
after-tax return or other other financial burden, the reduction in net after- after-tax return or other accounting year, such in costs or
financial burden, the aggregate of which exceeds tax return or other financial burden, the additional cost shall be reduction in net
aggregate of which the higher of INR 1 crore and financial burden, the aggregate of which allocated and shared after-tax return or
exceeds the higher of INR 0.5% of the realizable fee in aggregate of which exceeds the higher of between the concessionaire other financial
1 crore and 0.5% of the any accounting year, the exceeds the higher of INR 1 crore and 0.5% of and NHAI as follows: burden, the
realizable fee in any concessionaire may so notify INR 1 crore and 0.5% the realizable fee in any Increase in NHAI’s aggregate of which
accounting year, the NHAI and propose of the realizable fee in accounting year, the capital share exceeds the higher
concessionaire may so amendments to the any Accounting Year, concessionaire may so expendit- of INR 1 crore and
notify NHAI and propose concession agreement so as the concessionaire notify NHAI and propose ure 2% of the total
amendments to the to place the concessionaire in may so notify NHAI amendments to the annuity payments
concession agreement so the same financial position as within 45 days of concession agreement in any accounting
as to place the it would have been in, had knowledge of so as to place the From INR 0 0% year, the
concessionaire in the there been no such change in applicability of such concessionaire in the to 6 crores concessionaire
same financial position as law causing the cost increase. Change in Law and same financial position may so notify NHAI
it would have been in, propose amendments as it would have been in, and propose
Decrease in costs:
had there been no such to this Agreement so had there been no such amendments to
change in law causing the If as a result of change in law, as to place the change in law causing the concession
cost increase. the concessionaire benefits concessionaire in the the cost increase agreement so as to
from a reduction in costs or same financial place the
Decrease in costs: Decrease in costs:
increase in net after-tax position as it would concessionaire in
return or other financial have been had there the same financial

© Economic Laws Practice 2021 Page | 40

SR PARTICULARS TOLL ANNUITY
NO.
2009 MCA 2016 MCA 2017 MCA 2020 MCA 2001 BOT Annuity MCA HAM MCA of
201631

If as a result of change in gains, the aggregate of which been no such change If as a result of change in Above INR 6 100% of position as it
law, the concessionaire exceeds the higher of INR 1 in law resulting in the law, the concessionaire crores the capital would have been
benefits from a reduction crore and 0.5% of the cost increase, benefits from a expenditu- in, had there been
in costs or increase in net realizable fee in any reduction in return or reduction in costs or re in no such change in
after-tax return or other accounting year, NHAI may other financial burden increase in net after-tax excess of law causing the
financial gains, the so notify the concessionaire as aforesaid. return or other financial INR 6 cost increase.
aggregate of which and propose amendments to gains, the aggregate of crores
Decrease in costs: Decrease in costs:
exceeds the higher of INR the concession agreement so which exceeds the
1 crore and 0.5% of the as to place the If as a result of change higher of INR 1 crore and If as a result of
realizable fee in any concessionaire in the same in law, the 0.5% of the realizable Increase in NHAI change in law, the
accounting year, NHAI financial position as it would concessionaire fee in any accounting Costs/ Taxes share concessionaire
may so notify the have been , had there been benefits from a year, NHAI may so notify benefits from a
concessionaire and no such change in law reduction in costs or the concessionaire and reduction in costs
propose amendments to causing the cost decrease. increase in net after- propose amendments to or increase in net
From INR 0 0%
the concession tax return or other the concession after-tax return or
to 1 crore
agreement so as to place financial gains, the agreement so as to place other financial
the concessionaire in the aggregate financial the concessionaire in gains, the
same financial position as effect of which the same financial aggregate of which
it would have been in, exceeds the higher of position as it would have exceeds the higher
Above INR 1 100% of
had there been no such INR 1 crore and 0.5% been in, had there been of INR 1 crore and
crore the
change in law causing the of the realizable fee in no such change in law 2% of the total
amount in
cost decrease. any Accounting Year, causing the cost annuity payments
excess of
NHAI may so notify decrease. in any accounting
INR 1
the concessionaire crore year, NHAI may so
within 45 days of notify the
knowledge of concessionaire
applicability of such Decrease in costs: and propose
Change in Law and amendments to
propose amendments Not provided for. the concession
to this Agreement so agreement so as to
as to place the place the
concessionaire in the concessionaire in
same financial the same financial
position as it would position as it
© Economic Laws Practice 2021 Page | 41
SR PARTICULARS TOLL ANNUITY
NO.
2009 MCA 2016 MCA 2017 MCA 2020 MCA 2001 BOT Annuity MCA HAM MCA of
201631

have been, had there would have been

been no such change in, had there been
in law resulting in the no such change in
decreased costs, law causing the
increase in return or cost decrease.
other financial gains .

10. Change of Expenses arising out of a Expenses arising out of a Expenses borne by Expenses arising out of a NHAI may require a change in Expenses borne by
scope change in scope order change in scope order the concessionaire change in scope order the scope of the project, the concessionaire
aggregating over 0.25% of aggregating over 0.25% of from carrying out aggregating over 0.25% provided that such change from carrying out
the total project cost shall the total project cost shall be works required by of the total project cost does not involve additional works required by
be reimbursed by NHAI. reimbursed by NHAI. NHAI through a shall be reimbursed by capital expenditure NHAI through a
change of scope order NHAI. exceeding INR 17 crores and change of scope
shall be reimbursed to 50 lakhs. order shall be
it by NHAI. reimbursed to it by
NHAI.
11. Commercial COD shall be the date on COD shall be the date of Not applicable. COD shall be the date on COD shall be the date on COD shall be the
operations date which all conditions Financial Close or Appointed which the IE has issued which the IE has issued the date on which the
(COD) precedent as under the Date, whichever is later. the provisional provisional certificate or the completion
concession agreement certificate or the completion certificate. certificate or the
Provided that, the period for
have been satisfied or completion certificate. provisional
achievement of COD shall be
waived. Provided that, COD shall be certificate as
within 180 days of the date of
Provided that, COD shall on or before the scheduled under the
Provided that, the period the concession agreement.
be on or before the project completion date as concession
for achievement of COD An additional period of 120
scheduled four laning defined under the concession agreement is
shall be within 180 days days shall be provided to the
date as defined under agreement, such date being issued.
of the date of the concessionaire subject to
the concession 2.5 years from the
concession agreement. payment of damages for the Provided that,
agreement, such date commencement date.
An additional period of achievement of COD. COD shall occur
being 650th day from the
120 days shall be Exclusions to payment of prior to the 90th
appointed date.
provided to the damages for the period of day after the SCOD
concessionaire subject to delay in achievement of COD: as defined under
payment of damages for the concession
▪ Due to delay in
the achievement of COD. agreement, failing
achievement of COD
© Economic Laws Practice 2021 Page | 42
SR PARTICULARS TOLL ANNUITY
NO.
2009 MCA 2016 MCA 2017 MCA 2020 MCA 2001 BOT Annuity MCA HAM MCA of
201631

Exclusions to payment of solely attributable to which, the

damages for the period of default or delay by the concessionaire
delay in achievement of NHAI in satisfying its shall pay damages
COD: conditions precedent to NHAI in a sum
under the concession calculated at the
▪ Due to delay in
agreement rate of 0.2% of the
achievement of COD
amount of
solely attributable to ▪ Due to force majeure
performance
default or delay by the
security for delay
NHAI in satisfying its
of each day until
conditions precedent
COD is achieved.
under the concession
[The 550th day
agreement
from the
▪ Due to force majeure Appointed Date
shall be the SCOD
of the Project.]
12. Change in ▪ The concessionaire ▪ The concessionaire shall ▪ The concessionaire ▪ The concessionaire ▪ In the event that any of the ▪ The
ownership shall not undertake or not undertake or permit shall not undertake shall not undertake representations or concessionaire
permit any change in any change in ownership or permit any or permit any warranties made/given by shall not
ownership as defined as defined under the change in change in a party ceases to be true or undertake or
under the concession concession agreement, ownership as ownership as stands changed, the party permit any
agreement, except except with the prior defined under the defined under the who had made such change in
with the prior approval approval of NHAI. concession concession representation or given ownership as
of NHAI. agreement, except agreement, except such warranty shall defined under
▪ Promoters/consortium to
with the prior with the prior promptly notify the other the concession
▪ Promoters/consortium hold at least 51% of the
approval of NHAI. approval of NHAI. party of the same. agreement,
to hold at least 51% of shareholding in the
except with the
the shareholding in the concessionaire until 2 ▪ The aggregate ▪ Consortium along ▪ Promoters/consortium to
prior written
concessionaire until 2 years from the COD. holding of the with their hold at least 51% of the
approval of
years from the COD. selected bidder associates to hold shareholding in the
▪ Each member of the NHAI.
together with at least 51% of the concessionaire until 3
▪ Each member of the consortium whose
(its/their) shareholding in the years from the COD. ▪ Promoters/
consortium whose financial or technical
associates, in the concessionaire consortium to
financial or technical capacity was evaluated for ▪ After a period of 3 years
issued and paid-up during the hold at least
capacity was evaluated the purposes of pre- from the COD, promoters/
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SR PARTICULARS TOLL ANNUITY
NO.
2009 MCA 2016 MCA 2017 MCA 2020 MCA 2001 BOT Annuity MCA HAM MCA of
201631

for the purposes of qualification and short- equity share capital Construction consortium to hold at least 51% of the
pre-qualification and listing in response to the of the Period and 2 years 26% of the shareholding in shareholding in
short-listing in request for qualification concessionaire thereafter. the concessionaire for the the
response to the shall hold at least 26% of shall not decline term of the concession. concessionaire
request for the shareholding in the below 51% thereof until 2 years
▪ Each member of
qualification shall hold concessionaire until 2 during the first two from the COD.
the consortium
at least 26% of the years from the COD. years of the
whose technical ▪ Each member
shareholding in the Concession Period
and financial of the
concessionaire until 2
capacity was consortium
years from the COD. ▪ Each member of
evaluated for the whose financial
the consortium
purposes of pre or technical
whose technical
qualification and capacity was
and financial
short-listing in evaluated for
capacity was
response to the the purposes of
evaluated for the
RFQ shall hold at pre-
purposes of pre-
least 26% of such qualification
qualification and
equity during the and short-listing
short-listing in
construction period in response to
response to the
and 2 years the request for
RFP shall hold at
thereafter. qualification
least 26% of such
shall hold at
equity during the
least 26% of the
first two years of
shareholding in
the concession
the
period along with
concessionaire
its associates.
until 2 years
from the COD.

13. Levy and On and from the COD till On and from the COD till the On and from the On and from the COD till ▪ The concessionaire shall Not provided for.
collection of the date of transfer of the date of transfer of the project appointed date till the the date of transfer of not levy, demand or collect
fees project to NHAI, the to NHAI, the concessionaire date of transfer of the the project to NHAI, the from or in respect of any
concessionaire shall have shall have the sole and project to NHAI, the concessionaire shall vehicle or person, any sum
the sole and exclusive exclusive right to demand, concessionaire shall have the sole and

© Economic Laws Practice 2021 Page | 44

SR PARTICULARS TOLL ANNUITY
NO.
2009 MCA 2016 MCA 2017 MCA 2020 MCA 2001 BOT Annuity MCA HAM MCA of
201631

right to demand, collect collect and appropriate fee have the sole and exclusive right to whatsoever in the nature
and appropriate fee from from the users subject to and exclusive right to demand, collect and of a toll or fee.
the users subject to and in in accordance with the demand, collect and appropriate fee from the
▪ NHAI shall have the
accordance with the concession agreement and appropriate fee from users subject to and in
authority to levy toll or fee
concession agreement the applicable laws. the users subject to accordance with the
on the vehicles using the
and the applicable laws. and in accordance concession agreement
project facilities and
with the concession and the applicable laws.
demand, collect, retain
agreement and the
and appropriate the fee in
applicable laws.
accordance with the
applicable laws. NHAI may
do so by itself or authorise
any person for this
purpose.
14. Charge on Not permitted. A charge on the escrow Not permitted A charge on the escrow Not permitted. A lien on the
escrow account account arising or created in account arising or escrow account,
in favour of the ordinary course of [A security over the created in the ordinary subject to and
senior lenders business and a charge on project receivables course of business and a without prejudice
receivables of the through by way of charge on receivables of to the rights of
concessionaire as security hypothecation/charge the concessionaire as NHAI under the
only for indebtedness to the thereon, for the security only for concession
senior lenders under the purposes of securing indebtedness to the agreement is
finance agreements and/or repayment of the senior lenders under the permitted.
for working capital financial assistance finance agreements
arrangements for the project availed from lenders is and/or for working
is permitted. permitted] capital arrangements for
the project is permitted.

15. Annuity Not applicable. Not applicable. Not applicable. Not applicable. Biannual instalments as Biannual
payments provided for the specific instalments over a
project under Schedule J of period of 15 years
the relevant concession commencing from
agreement. COD.

© Economic Laws Practice 2021 Page | 45

SR PARTICULARS TOLL ANNUITY
NO.
2009 MCA 2016 MCA 2017 MCA 2020 MCA 2001 BOT Annuity MCA HAM MCA of
201631

16. Capacity NHAI may issue a notice NHAI may issue a notice to ▪ NHAI may, require If the average daily NHAI may invite bids from Not provided for.
augmentation to the concessionaire to the concessionaire to the capacity traffic of PCUs in any eligible persons for capacity
undertake augmentation undertake augmentation as augmentation of accounting year exceeds augmentation. On failure of
as determined by NHAI. determined by NHAI. On the project the designed capacity of the concessionaire, after
On refusal, non- refusal, non-acceptance, or highway in the the project highway, an participating in the bidding
acceptance, or failure by failure by the concessionaire event the average Indirect Political Event process to give the lowest
the concessionaire to to undertake such daily traffic of PCUs shall be deemed to have bid, the concessionaire shall
undertake such augmentation, an indirect in any accounting occurred and the NHAI be given the right of first
augmentation, an indirect political event shall be year exceeds the may in its discretion refusal to match the
political event shall be deemed to have occurred designed capacity terminate the preferred bid. On refusal or
deemed to have occurred and NHAI may in its of target traffic of concession agreement failure of the concessionaire
and NHAI may in its discretion terminate the project highway by issuing a termination to take up such option to
discretion terminate the concession agreement by and continues to notice and making the undertake works for capacity
concession agreement by issuing a termination notice exceed the termination payment as augmentation, NHAI shall be
issuing a termination and making the termination designed capacity under the concession entitled to accept the
notice and making the payment as under the for 3 consecutive agreement. preferred bid and terminate
termination payment as concession agreement. accounting years the concession agreement
under the concession following If the Concessionaire with the concessionaire and
agreement. thereafter. shall have, prior to issue pay to the concessionaire an
of a termination notice, amount equal to the
▪ NHAI would bear
completed the termination payment as
the costs towards
construction works provided under the
required land
necessary for respective concession
acquisition, shifting
augmenting the capacity agreement.
of utilities/facilities
of the project highway
as would be
such that its capacity
necessary for
shall have increased
undertaking the
sufficiently for carrying
capacity
the then current traffic,
augmentation.
the aforesaid indirect
political event shall
deemed to be cured.

© Economic Laws Practice 2021 Page | 46

SR PARTICULARS TOLL ANNUITY
NO.
2009 MCA 2016 MCA 2017 MCA 2020 MCA 2001 BOT Annuity MCA HAM MCA of
201631

17. Refinancing No specific provision. ▪ Refinancing permitted in NHAI can, in NHAI can, in conformity No specific provision. Refinancing
However, the definition accordance for the conformity with any with any regulations or However, the definition of permitted in
of ‘Financing purpose of the project and regulations or guidelines that may be ‘Lenders’ includes financial accordance for the
Agreements’ includes with the consent of NHAI. guidelines that may notified by the institutions, banks, funds or purpose of the
refinancing. be notified by the Government or the trusts who refinance debt. project and with
▪ Refinanced debt to be
Government or the Reserve Bank of India, the consent of
repaid within 1 year prior
Reserve Bank of India, permit and enable the NHAI.
to expiry of concession
permit and enable the concessionaire to secure
period.
concessionaire to refinancing on such
secure refinancing on terms as may be agreed
such terms as may be upon between the
agreed upon between concessionaire and the
the concessionaire entity providing such
and the entity refinancing; NHAI would
providing such not unreasonably
refinancing; NHAI withhold such consent.
would not
unreasonably
withhold such
consent.

© Economic Laws Practice 2021 Page | 47

Additional concerns/risks in existing road concessions based on MCAs
In addition to the general risks around any concessions, some key concerns that may be seen in road concessions
are mentioned below:

Termination payments
In BOT concession model, in the event of termination of a concession agreement due to an event of default of
the concessionaire or of the concession authority, the project asset reverts to the authority and the
concessionaire is entitled to certain payments by the concession authority known as ‘termination payments’.
Under the BOT concession models, termination payments are only payable if the contract has been terminated
after the project has achieved the COD. If the concession agreement has been terminated for any reason
whatsoever prior to the COD, the concessionaire is not entitled to any termination payments. However, the
HAM MCA of 2016 and the TOT MCA of 2017 provide for termination payments in event of termination before
COD.

In certain contracts, termination payments are also to be made if the concession agreement had to be
terminated on account of a force majeure event (i.e. where the non-performance in the contract was for reasons
which were beyond the reasonable control of either parties to the concession agreement).

It has been reported that the MORTH is seeking to amend the termination clauses in BOT concession agreements
in order to revive the BOT concession model by making it more investor friendly 32. However, the revised
guidelines have not yet been issued.

Debt due
The amounts to be paid to the concessionaire towards termination payments usually vary depending upon the
event leading to the termination (i.e. whether the termination was due to default or force majeure). Usually,
termination payments are an amount equal to certain percentage of the ‘Debt Due’ 33 less insurance proceeds
and certain adjusted equity. Debt due is defined to include, inter alia, the principal amount provided by lenders
to finance the ‘Total Project Cost’. The Total Project Cost is usually defined as a percentage of Bid Project Cost.
Additionally, certain models of road concessions provide a cap on the Total Project Cost 34.

32
https://economictimes.indiatimes.com/news/economy/infrastructure/nhai-identifies-950-km-highway-projects-to-be-built-at-rs-30000-
cr-under-ppp/articleshow/71202337.cms?from=mdr
33 HAM MCA of 2016 defines Debt Due as:
“Debt Due" means the aggregate of the following sums expressed in Indian Rupees outstanding on the Transfer Date:
(a) the principal amount of the debt provided by the Senior Lenders under the Financing Agreements for financing the Total
Project Cost (the "principal") but excluding any part of the principal that had fallen due for repayment two years prior to the
Transfer Date;
(b) all accrued interest, financing fees and charges payable under the Financing Agreements on, or in respect of, the debt referred
to in Sub-clause (a) above until the Transfer Date but excluding (i) any interest, fees or charges that had fallen due one year
prior to the Transfer Date, (ii) any penal interest or charges payable under the Financing Agreements to any Senior Lender, and
(iii) any pre- payment charges in relation to accelerated repayment of debt except where such charges have arisen due to
Authority Default; and
(c) any Subordinated Debt which is included in the Financial Package and disbursed by lenders for
financing the Total Project Cost;
provided that if all or any part of the Debt Due is convertible into Equity at the option of Senior Lenders and/or the Concessionaire, it shall
for the purposes of this Agreement be deemed to be Debt Due even after such conversion and the principal thereof shall be dealt with as if
such conversion had not been undertaken
33 HAM MCA of 2016 defines Total Project cost as
''Total Project Cost" means 60 % (sixty percent) of the Bid Project Cost specified in Clause 23.1.
34 HAM MCA of 2016

© Economic Laws Practice 2021 Page | 48

The Bid Project Cost is already pre-determined and is fixed by the NHAI. It does not take into consideration the
actual expenditure incurred by the concessionaire in developing and operating the project. Thus, essentially the
actual debt incurred by the concessionaire may be more than the Debt Due under the concession agreement.
This is an important issue, especially in the event of termination, where payments must be made to lenders in
accordance with the escrow mechanism provided in the concession agreement. Since a portion of the actual
debt would not fall under the definition of Debt Due, such unallocated debt would not be prioritized over other
payments which are required to be made under the concession agreement. Further, such unallocated debt
would not form part of the termination payments which will be paid by the NHAI/concession authority.

The 236th report of Parliamentary Standing Committee on Transport, Tourism and Culture revolved around
infrastructure lending in road sector (Standing Committee Report). The committee after interacting with
stakeholders had noted that NHAI typically underestimates the project costs and the concessionaires who bid
out a project, have to approach banks and financial institutions with an inflated project cost for taking loans.
The committee suggested that the total project cost should be realistic irrespective of the model of the project 35.

NHAI vide its circular dated November 18, 201336 has allowed refinancing/restructuring of loans in cases where
there is no change in loan amount. If the revised repayment schedule extends beyond the original repayment
schedule, refinancing would be permitted provided that ‘Debt Due’ would be treated as zero beyond the original
payment schedule.

Computation of traffic volume (PCUs)

Concession agreements provide for estimated traffic volumes in terms of passenger car units (PCUs) which are
required to be met by the concessionaires. A failure to meet the expected traffic volumes usually result in an
extension of the concession period. Such an extension may not always further the best interests of the
concessionaire as it may impose additional liabilities and obligations for the extended term. Further, the PCU
factor is computed as per the 'Indian Roads Congress' publication of 1990. Given the evolving state of the sector,
the three-decade old mechanism needed to be re-analyzed. Keeping this in mind the government has in the
revised BOT toll model agreement (August, 2020) provided for reassessment of revenue potential of the project
in every 5 (five) years This is likely to provide more certainty of cash flows and any extension to concession period
can be anticipated early in the tenure of the concession agreement (typically, the terms of the concession
agreement provides that lesser than expected traffic volumes usually result in an extension of the concession
period). The revision of the concession period, however, has been kept like the previous years at 20%.

Additionally, the traffic forecast used

by the NHAI may be outdated. As a
result, the actual traffic volume will
outnumber the projections from the
beginning. This may result in queuing
at toll booths and delays in traversing
the stretch. Thus, further changes
would have to be made to the project
resulting in extra costs. This was seen
in the Delhi Gurgaon expressway
project awarded on BOT (Toll) model
in 200237.

35http://164.100.47.5/newcommittee/reports/EnglishCommittees/Committee%20on%20Transport,%20Tourism%20and%20Culture/236.pdf

36 https://nhai.gov.in/writereaddata/portal/images/pdf/10-Re-Financing.pdf
37 https://www.pppinindia.gov.in/toolkit/pdf/case_studies.pdf

© Economic Laws Practice 2021 Page | 49

Further, the Bharatmala program of the GOI is expected to result in diversion of traffic from the existing road
network to new roads, thereby affecting the PCU/traffic volume, toll collection and, consequently, the debt
servicing ability of some of the BOT and Operations, Maintenance and Tolling (OMT) projects.

Lengthy and ineffective dispute resolution process

The MCAs provide for a lengthy dispute resolution process which normally involves mediation, conciliation and
arbitration. The disputes are required to be first resolved amicably by the Parties, failing which conciliation with
the help of the IE (appointed under the terms of the concession agreement) is required to be undertaken. Usually
a time period is provided for resolving disputes through the conciliation process but even that can be extended
by mutual consent. In the event of failure of such conciliation, the disputes are referred to arbitration. Despite
having a detailed dispute resolution procedure, a substantial number of the arbitral awards are appealed against
in courts, thereby increasing the duration of such disputes even further and rendering the whole process of
mediation, conciliation and arbitration ineffective. As per the BOT MCA of 2020, a dispute resolution board has
been included in the dispute resolution process. Further in case a statutory Regulatory Authority, Tribunal, or
Commission is set up for adjudicating disputes between NHAI and the concessionaire, all disputes will from then
on be referred to such an Authority, Tribunal or Commission in place of arbitration. It appears that this is partially
owing to the effect of changes brought to the challenge procedure to arbitral awards by way of the Arbitration
and Conciliation (Amendment) Act, 2015 (Amendment Act, 2015), whereby under section 36, the award debtor
can be called upon to deposit the whole or part of the sum under the award as a condition to stay the execution
of the award, whilst the challenge to the award is pending. It is observed that the government and its agencies
as the award debtors have been consistently ordered to deposit sums into court under such amended provisions.
Thus, a move towards a parallel dispute resolution procedure seems to be in the works.

Case Study
The Supreme Court has in few instances acknowledged that with public sector undertakings (PSUs), the
option of not filing the appeal is generally not open for fear of corruption allegations and vigilance enquiries.
Thus, invariably, PSUs challenge an arbitral award lengthening the process of dispute resolution. Recently,
the Supreme Court in the case of Ssangyong Engineering & Construction Co. Ltd vs. NHAI 38, emphasized on
the fact that the grounds for appeal under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration
Act) are available only in exceptional circumstances. Also, courts have been quick to order deposit of amounts
by PSUs who are award debtors seeking to challenge the award, thereby curtailing frivolous challenges to
arbitral awards.

Additionally, even the ‘Committee for Revisiting and Revitalizing the PPP Model of Infrastructure’ (also known
as the Kelkar Committee) in its report had welcomed the review and amendment of the Arbitration Act and had
endorsed the need for time limit on hearings. It further suggested that disputes related to change of scope,
delayed land handover, delayed COD, termination, cost overrun, delayed payments, penalties, and claims may
be disposed of in a time-bound manner through an independent body with representatives of NHAI, developers,
lenders and an independent chairman.

Delay in payments by NHAI

In the event of any award passed against the government/concession authority, the concession authority
invariably ends up challenging the same. Such a situation would result in deferring payments to the
concessionaire (leading to a cash crunch/liquidity issue with the concessionaire) and the concessionaire incurring
extra costs for the arbitration proceedings. The TOT MCA of 2017 does not mention that the arbitral award is
final and binding on the parties. On the contrary it makes provisions in case the award is challenged. The HAM

38 2019 (3) Arb LR 152 (SC)

© Economic Laws Practice 2021 Page | 50

MCA of 2016 and the TOT MCA of 2020 mentions that the arbitral award is final and binding, however NHAI may
still challenge the award and further defer such claims.

To address this issue NITI Aayog released an office memorandum in September 201639, providing measures for
revival of the construction sector. The measures were referred to and approved by the CCEA in its meeting held
on August 31, 2016. NITI Aayog, inter alia, instructed the government departments, ministries, PSUs that in the
event claims where the PSU/department has challenged the already announced arbitral award, 75% of the
award would be payable by the PSU/department to the contractor/concessionaire against a bank guarantee
without prejudice to the final order of the Court. To this effect MORTH issued a standard operating procedure
(SOP)40 which provides that prior to making an application for payment of 75% of the arbitral award, a
designated escrow account is required to be established by the concessionaire with the ‘Lead Bank’. A tripartite
agreement between the PSU/department, concessionaire and the bank would be required to be executed. The
SOP further provides details on bank guarantee, rate of interest, ‘Arbitral Award Escrow Default’ and
closure/termination of the escrow account and agreement.

The withdrawal mechanism from the escrow account provides that the funds will be appropriated in the
following order: (i) payment of lender dues (ii) payments for completion of project (iii) payments for completion
of other projects of same department/PSU as mutually agreed (iv) balance may be used by the
contractor/concessionaire with prior approval of the department/PSU. This was aimed to ensure that payment
to the concessionaires are not deferred for long periods.

This measure, however, has not been as successful as it was expected to be. Statistics of the past year show that
the less than 10% of the eligible concessionaires have opened an escrow account and furnished bank
guarantees41. One of the reasons for failure to furnish bank guarantees is due to the hesitation of banks and
lenders to advance money to such concessionaires who are already involved in such cost intensive litigations.

Stricter policy/criteria for internal assessment in a time bound manner should be put in place which shall be
satisfied before challenging of such awards by the government/concession authority. In respect of amounts that
are stuck with the government, a policy for immediate relief through take out funding etc. could also be
envisaged and firmed up to ease the stress on availability of working capital with the concessionaires. A well-
defined policy of the government in respect of release of award money and in respect of challenging of awards
would be helpful in supporting availability of working capital for re-investment in the project and servicing of
financing facilities availed for the purposes of the project. The same may be appropriately built in the terms and
conditions of the concession agreements.

Additional funding scheme by NHAI

With an aim to revise and physically complete the languishing BOT projects, NHAI vide its circular dated June 9,
201542 prescribed a scheme for a one-time fund infusion in the project companies. As per the scheme, NHAI
would provide the financial assistance/bridge funds on loan basis to projects in BOT (Toll) that have achieved at
least 50% (fifty percent) physical completion and where moderate funding would bring about completion of the
project. This scheme was further extended to BOT (Annuity) projects by the CCEA in October 201543. The scheme
provides that after completion of the project, first charge on the toll receivables of the project would be ensured
for NHAI by executing a tripartite agreement between senior lenders, concessionaire and the NHAI. This is a risk
for the lenders since NHAI has first charge on the toll receivables.

39 OM No. 14070/14/2016-PPPAU dated September 5, 2016

40 http://morth.nic.in/showfile.asp?lid=2510
41 http://morth.nic.in/index3.asp?sslid=2614&subsublinkid=1391&lang=1
42 https://nhai.gov.in/writereaddata/portal/images/pdf/12-One-time-fund.pdf
43 http://pib.nic.in/newsite/mbErel.aspx?relid=128702

© Economic Laws Practice 2021 Page | 51

 Even the Standing Committee Report found the
insistence of NHAI for the first charge on
toll/annuity in the project which is 50%
completed as impractical. The committee
recommended that NHAI should offer its help to
complete the incomplete project rather than
claiming rights of collecting revenue. Further
NHAI should pay full attention to its duty
towards extending all facilities/help to
concessionaire in completing the projects 44.

As an alternate to such funding, the concessionaire can securitize the annuity payments receivable from NHAI
and thereby raise debts at very low interest rates. This ensures lower cost funding.

This alternate mode of funding was tried during the operations period in the Tuni-Anakapalli project (above
image) in Andhra Pradesh and contributed to the success of the project 45. The project was based on the (BOT
Annuity) model.

Absence of major Maintenance Reserve

Major maintenance reserve (MMR) is the largest expense item during the operations phase of a BOT road
project. In a study of 35 road projects, conducted by ICRA, in 60% of the projects MMR was not created whereas
in other 25%, though created, it was inadequate to fund the associated costs. The absence or inadequacy of
MMR would mean that the concessionaires will have to either depend on the sponsors for fund infusion or will
have to utilize its tail period to raise additional debt by further leveraging the project. Other implications would
include exponential increase in maintenance cost and penalties from NHAI in case of delayed maintenance
activity.

Substitution of concessionaire
Clause 3.4.4 of the Substitution Agreement included in the HAM MCA of 2016 and the BOT MCA of 2020 gives
NHAI the power to object to any substitution of the concessionaire by the senior lenders provided it gives a
reasoned order after hearing the lenders’ representative. In the event of any such objection, the lenders’
representative may nominate another company for substitution and then the same process would apply. There
is no limit on the number of times that NHAI can object to the nominations made by the lender’s representative.
Thus, in practice, substitution by lender’s representatives may not be easy considering that NHAI can keep
objecting to the nominated candidates. Any dispute related to the NHAI’s reasoned order would result in
arbitration (unless settled amicably) further delaying and complicating such substitution.

Case Study
In one of the highway concessions, NHAI had issued a termination notice to Delhi Gurgaon Super Connectivity
Limited (the concessionaire). The lenders led by Infrastructure Development Finance Company (IDFC) raised
a dispute with NHAI, claiming that they did not get the termination notice from NHAI as envisaged under the
agreement. NHAI justified it by claiming that they never recognized these lenders which were replaced by the
concessionaire, additionally they did not execute the substitution agreement and escrow agreement with
them. IDFC claimed that despite submitting the financing documents and following up, NHAI did not execute
the substitution and escrow agreements as a result of which their rights under the agreement were in a fix 46.

44http://164.100.47.5/newcommittee/reports/EnglishCommittees/Committee%20on%20Transport,%20Tourism%20and%20Culture/236.pdf

45 https://www.pppinindia.gov.in/documents/20181/27199/Compendium_July8.pdf/74f766db-c9ba-4ff9-8492-a0ff4493103f
46https://timesofindia.indiatimes.com/business/india-business/Lenders-NHAI-fight-over-Delhi-Gurgaon-

expressway/articleshow/12013412.cms

© Economic Laws Practice 2021 Page | 52

Right of Way and effect of change in scope on the O&M costs
Clause 10.3.4 of the HAM MCA of 2016 provides that if NHAI is unable to provide any part of the site within 180
days from the ‘Appointed Date’, the remaining site of the ‘Project Highway’ will be removed from the scope of
work under the provision of ‘Change of Scope’. If the ‘Change in Scope’ leads to a reduction or increase in the
length of the ‘Project Highway’, the ‘O&M Payments’ will be reduced or increased in proportion to the reduction
or increase in the length of the ‘Project Highway’.

On a conjoint reading of Clause 10.3.4 and Clause 16.7 of the HAM MCA of 2016, it is clear that in the event
NHAI is not able to hand over ‘ROW’ for a particular stretch of the ‘Project Highway’, it would be dealt as a
‘Change in Scope’ of the project leading to reduction of the length in the ‘Project Highway’ thereby amounting
to a proportionate reduction in the ‘O&M Payments’. This may affect the repayment of the debt provided by
the senior lenders, as the ‘Financial Close’ is achieved prior to the reduction in the change in length envisaged
under 10.3.4. This will also mean that for the project the concessionaire has provided a higher ‘Performance
Security’, which should have been reduced after the change in scope is reduced as the ‘Total Project Cost’ gets
reduced.

COD on Completion Certificate

As per the HAM MCA of 2016, upon completion of the ‘Construction Works’ and the IE determining that the
tests to demonstrate the completion of the project, are successful, the IE is required to issue a ‘Completion
Certificate’ or a ‘Provisional Certificate’ (if minor punch list items are outstanding) to the concessionaire.

Clause 15.1.1 provides that the commercial operation date of the project shall be on the date on which the
‘Completion Certificate’ or the ‘Provisional Certificate’ is issued. Clause 15.2 further provides that if the COD
does not occur prior to the 91st day after the ‘Scheduled Completion Date’(SCOD) due to reasons other than
‘Force Majeure’ or NHAI’s default, damages will be payable by the concessionaire for such delay @ 0.2% of the
‘Performance Security’ for each day of such delay.

Historically, NHAI has viewed the date of the issue of the final completion certificate as the COD Date for all
purposes under the concession agreement.

Further, it is pertinent to note that the concession agreement does not specify the time period (from the
completion of construction work and successful completion of tests) within which the IE must issue the
‘Completion/Provisional Certificate’. As mentioned above, the date of the ‘Completion Certificate’ or the
‘Provisional Certificate’ will be the COD and if the COD is delayed beyond 90 days from the SCOD, the
concessionaire is liable to pay damages. In the absence of any definite timelines for issuance of the
‘Completion/Provisional Certificate’ or any deemed issuance provision, a delay in issue of the
‘Completion/Provisional Certificate’ could potentially expose the concessionaire to damages.

Compensation for default by NHAI

As per Clause 29.2 of the HAM MCA of 2016, in the event of a material breach by NHAI, compensation payable
by NHAI will not include any:

▪ Loss of annuity payments

▪ Debt repayment obligations

▪ Consequential losses
▪ Loss of profits

▪ EPC contractor claims

Similarly, the BOT MCA of 2020, excludes loss of fee revenues, debt repayment obligations and consequential
losses from the compensation payable by NHAI.

© Economic Laws Practice 2021 Page | 53

The Clause also does not clarify whether the compensation of direct costs suffered by the concessionaire would
be in addition to the termination payments prescribed under the concession agreement. The concessionaire
would not be compensated for loss of any annuity payments on account of any delay or defaults by NHAI. This
is critical as the concessionaire has no toll collection rights to improve its cash flows and would be relying solely
on annuity payments and O&M payments during the concession period.

The exclusion of EPC contract claims (which may arise directly or indirectly) due to any NHAI default is also critical
as the concessionaire would have no control or mitigation over any delays or defaults caused due to events such
as delay/failure in land acquisition, delay/failure in procuring ROW, shifting of utilities, procurement of
environmental approvals etc. In order to mitigate its risks, the concessionaire should ensure that under the EPC
Contract, the concessionaire should exclude its liability towards any claims that the EPC contractor may raise
which arises out of or is attributable to any breach or delay by NHAI.

Vignettes of issues in the highways sector

Delays in acquisition of land Everyday Disruptions

Floods A Unique method in India: Candies for Change

Lower than expected traffic Construction delays

The picture immediately above is from the ET online website (August 29, 2019). The issue being the widening gap
between toll collection and interest outgo which is limiting the ability of National Highways Authority of India
(NHAI) to expand the national highway network in India.

© Economic Laws Practice 2021 Page | 54

Current trends in NHAI concessions
The introduction of the HAM model in 2016 brought a major boost to the roads sector. This was primarily since
the projects were financially viable to the lenders as 40% of the project costs was released by the NHAI in the
construction phase itself. By combining the features of the EPC model and BOT-toll model, the HAM model
ensures that the project is partly financed by the government unlike the EPC model. Additionally, the risks
associated with toll collection and revenue generation in the BOT-toll model are also taken care of as the
concessionaire receives 40% of the project costs in the construction period itself and its revenue is in the form
of annuity paid by NHAI.

Statistics from NHAI show that in the year

2018-2019, 54 projects out of 77 projects
were EPC, 19 were based on the HAM
model and 4 were item rate47. In a written
reply provided in the Lok Sabha in
Snapshot of
an article in
November 2019, the Union Minister for
the Economic
Road Transport and Highways indicated
Times
that national highways projects worth
approximately INR 10,000 crore have
already been approved in the financial year
2018-2019 till October 31, 2019 under the
HAM mode. However, despite the recent
trends, the HAM model is also facing
certain critical issues. One of the primary issues is failure to achieve financial closure due to lack of appetite
and lending freeze on many public sector banks48. A report by CRISIL states that a number of HAM projects are
awaiting appointed dates despite having achieved financial closure because of delays in land acquisition and
environment clearances49. One of the recent developments in the highway concessions is roll out of the Toll
Operate Transfer (TOT) model under the Bharatmala scheme. The model was approved in March 201850 and has
been discussed below.

TOT Model
The GOI, in 2016, had authorized NHAI to monetize public funded National Highway projects which are
operational and are generating toll revenues for at least two years after the COD through the TOT model51.

▪ Under the TOT model, the right of collection and appropriation of fee of existing operational highways
is assigned to the concessionaire for a period of 30 years.

▪ The fee collected by the concessionaire during the term of the concession agreement is assigned to the
pocket of the concessionaire.

▪ In exchange of such right to collect the fee, the concessionaire, is required to pay an upfront, one-time,
lump sum bid concession fee to NHAI, which is to be quoted by the concessionaire in its bid.

47 https://nhai.gov.in/bid-awarded-in-year.htm
48https://www.indiaratings.co.in/PressRelease?pressReleaseID=33980&title=FY19-Mid-Year-Infrastructure-Outlook%3A-Reasonable-

Stability-with-No-Big-Surprises
49 https://www.crisil.com/content/dam/crisil/our-analysis/reports/Research/documents/2018/november/crisil-opinion-ham-in-a-jam.pdf
50 http://pib.nic.in/newsite/PrintRelease.aspx?relid=177882
51 http://pib.gov.in/newsite/PrintRelease.aspx?relid=148306

© Economic Laws Practice 2021 Page | 55

 ▪ As per the request for proposal 52 the bid concession fee for a project would be summation of ‘Net
Present Value’ (NPV) of ‘Net free Cash Flow’ as estimated by the concessionaire during the entire
concession period at the concessionaire's own discount rate.

▪ Sum of bid concession fee for all the projects in the bundle would be considered for selection of
concessionaire. The bid concession fee would be the sole criteria for evaluation of bids.

Screenshot of an article in the Deccan Chronicle on the importance of the TOT model

The scope of work of the concessionaire includes O&M of the project during the concession period. The projects
are more suited to private investment since major issues related to land acquisition, environmental clearances
and other construction risks are eliminated since the highways are already functional and operational.

However, considering that the concession period is for 30 years, a large amount of financing would be required
for payment of upfront sum. Thus, the repayment obligations of the concessionaire would kick in sooner than
other finances where the repayment obligations usually kick in post the COD of the project.

Currently, a total of 3 bundles of highways have been auctioned since the inception of the TOT model. While the
first model which was launched in February 2018 was a huge success, the second bundle launched in August
2018 received a lack luster response due to estimation of poor expected toll revenue and geographical location
of the highways, following which NHAI cancelled the second round of auction. The bid for the third bundle was
floated by the NHAI in June 2019. After a significant period of time since the first bundle, in November 2019,
Cube Highways and Infrastructure Pte Limited emerged as the highest bidder in the third round of auctions. As
a result of a poor response, the NHAI is contemplating a new mechanism wherein an SPV would be formed and
NHAI would seek equity participation from investors for highway projects 53. In relation to the bid for the third
bundle, Chairman of the NHAI, Shri Narendra Nath Sinha indicated that several more bundles would be offered
in the months to come54. Mr. Sinha invited investors to come up with more innovative investment models for the
infrastructure sector.

52 http://morth.nic.in/showfile.asp?lid=2960
53https://economictimes.indiatimes.com/industry/indl-goods/svs/construction/after-muted-tot-response-nhai-toys-with-equity-offer-to-

raise-funds/articleshow/69193126.cms?from=mdr
54 https://pib.gov.in/PressReleseDetail.aspx?PRID=1581157

© Economic Laws Practice 2021 Page | 56

Recent Trends
The most recent development in the sector was the announcement by the MORTH that the NHAI has identified
certain stretches covering about 950 km on a pan India basis55. Such stretches have been identified in an attempt
to revive PPP for national highways and would be constructed through on the BOT (Toll) mode. The estimated
cost of such stretches is stated to be INR 30,000 crores. The MORTH also noted that certain modifications have
also been made in the existing request for annual pre-qualification to make it more industry friendly.

Whilst the Government has been actively inviting bids for national highways, issues such as delays associated
with land acquisition continue to plague the sector. The Supreme Court has in its order dated September 19,
2019 in Union of India and Another vs. Tarsem Singh and Others, held that Section 3J of the NH Act which stated
that Land Acquisition Act, 1894 would not be applicable for acquisitions of land under the NH Act was
unconstitutional. It was further held that provisions of the Land Acquisition Act, 1894 regarding payment of
solatium and interest would also apply to acquisitions made under the NH Act. It should however be noted that
the provisions pertaining to the determination of compensation in accordance with the first schedule,
rehabilitation and resettlement in accordance with the second schedule and infrastructure amenities in
accordance with the third schedule of the Right to Fair Compensation and Transparency in Land Acquisition,
Rehabilitation and Resettlement Act, 2013 have been made applicable to all land acquisitions under the NH Act.
We hope that the changes brought in the BOT toll model in August 2020 which seeks to ensure that the
government will acquire at least 90% of the project land before awarding any project would be achieved on
ground. On the other hand, vide an order dated August 27, 2019, the Supreme Court held that the power to
appoint an arbitrator under Section 3G(5) of the NH Act in relation to disputes as regards compensation in lieu
of acquisition of land under the NH Act was exclusively vested with the Central Government and any application
filed under Section 11(6) of the Arbitration Act for appointment of an arbitrator was not maintainable as regards
such disputes.

Separately, a report dated September 17, 2019 by CARE Ratings56 predicted that the overall pace of construction
would slow down from the current rate of 30 km per day to about 26-27 km per day during April 2019 to March
2020 owing to slow down in pace of awards, limited budgetary support, high risk aversion of public sector banks
to infrastructure projects, worsened liquidity position of non-banking financial companies and disruption in
construction activity during monsoon and high cost of land acquisition. Furthermore, any short fall in external
borrowings or any short fall in fund raising under TOT model has also been estimated to have a negative impact
on construction rate. In this regard, CARE Ratings was of the view that the Government needs to mitigate or
eliminate traffic risks and construction risks to attract private investment in BOT road projects viz. by way of
extending concession period in case of shortfall in traffic estimates.

It has also been reported 57 that the Government is considering doing away with the requirement of furnishing
bank guarantees for highway projects as procuring the same has continued to be a challenge for concessionaires.
While the Government may bring in an alternative to the bank guarantee requirement, such proposal is an
indication that the Government is mindful of the issues faced by concessionaires and is taking steps to remedy
them.

Accordingly, the MORTH vide its circular dated October 7, 2019 has amended the bid security provisions of the
standard Request for Proposal (RFP) for National Highways and centrally sponsored road works implemented on
EPC mode. The requirement of submitting a bid security has been replaced by a bid securing declaration. Under
the amended RFP, the bidders are required to sign and submit a declaration in the prescribed format, stating that

55 https://pib.gov.in/PressReleseDetail.aspx?PRID=1585561
56
http://www.careratings.com/upload/NewsFiles/SplAnalysis/Highways%20construction%20to%20slow%20down%20to%2026-
27%20km%20per%20day%20in%20FY2020.pdf

© Economic Laws Practice 2021 Page | 57

if the bidder withdraws or modifies its bid during the period of validity or fails to sign the contract or submit a
performance security before the deadline, the bidder would be suspended for participation in the tendering
process for works of MORTH/NHAI/National Highways and Infrastructure Development Corporation Limited
(NHIDCL) and works under other centrally sponsored schemes, for a period of 1 year from the bid due date of
the work for which the bid was originally submitted.

On November 26, 2019 the CCEA approved the proposed amendments in the TOT Model developed by the NHAI.
These amendments are aimed at monetizing existing operational projects that have a 1-year history of revenue
generation through tolls. The MORTH or the NHAI will approve projects for monetization on a case to case basis.

The following changes have been proposed:

▪ The current TOT model considered existing projects that have been generating revenue for a minimum
period of two years.
▪ The proposed amendments have reduced this period to 1 year of revenue generation so as to expand
the ambit of the TOT model in order to make the proposition more attractive to investors.
▪ As such, 75 projects have been identified for monetization under the TOT model, which will be bundled
under 10 separate bids.
▪ This is aimed at attracting the economies of scale of the private sector.
▪ Another significant change that has been reportedly proposed in the existing model is that the NHAI
now would have the power to vary the concession period of the projects to 15-30 years as opposed to
the present concession period of 30 years.
On December 11, 2019, the Union Cabinet approved another proposal by the NHAI aimed at monetizing
completed and operational national highway projects. The NHAI has proposed setting up an Infrastructure
Investment Trust (InvIT) under the Indian Trusts Act, 1882 and SEBI (Infrastructure Investment Trusts)
Regulations, 2014 so as to enable private players to invest directly in the construction of national highways. Like
the TOT Model, it is proposed that national highways with a toll collection track record of at least one year would
be considered for monetization. The InvIT may hold the asset directly, or through a SPV. The setting of an InvIT,
along with the TOT model described above, are attempts made by the NHAI optimize the value of existing
projects and incentivize private participation in funding the development of national highways under the GOI’s
Bharatmala program58.

Recently, the NHAI and Indian Highways Management Company Limited engaged the National Payments
Corporation of India (NCPI) with the aim of arriving at a viable solution to meet electronic tolling requirements
of the national highways in India. The national electronic toll collection program (NETC) was launched in
December 2016 pursuant to this engagement 59. The embodiment of the NETC is the ‘FASTag’, a radio frequency
identification (RFID) enabled tag that can be affixed to the windshield of the vehicle and allows the automatic
deduction of the toll from the person’s linked bank account as they pass through the toll gate. The FASTag method
has seen steady growth since its introduction and electronic toll collections made through the FASTag have for
the first time in December 2019, surpassed cash collections.

Changes in the Model MCA for BOT Toll projects. Please refer to our comments above the table comparing
the various MCA models in this regard.

58 https://pib.gov.in/Pressreleaseshare.aspx?PRID=1595947
59

https://www.npci.org.in/sites/default/files/Press%20release-%20Extending%20FASTag%20program%20across%20State%20and%20City%2
0toll%20plaza....pdf

© Economic Laws Practice 2021 Page | 58

© Economic Laws Practice 2021 Page | 59
‘’
T
he maritime tradition of
ancient India begins with the
Indus Valley civilization
which saw long-distance maritime
voyages by 2900 BCE…
Infrastructure Projec ts: Po rts Secto r
Broad overview of the legal and institutional framework of the ports
sector
India has approximately 7,500 kilometers of coastline spanning 13 maritime states and union territories. India’s
ports are broadly classified into 2 categories namely, major ports and non-major ports (also referred to as minor
or intermediate). There are 12 major ports60 and about 200 minor ports in India.

The distinction between major ports and minor ports is based on the distribution of maritime jurisdiction
between Central Government and the State Governments.

▪ Major Ports are listed in

entry 27 of the Union List
and are administered
primarily under the Major
Ports Trusts Act, 1963
(MPTA).

▪ All ports other than

major ports are listed in
entry 31 of the Concurrent
List and are administered
jointly by Central
Government and State
governments under the
Indian Ports Act, 1908.

While major ports are

declared as such under the
MPTA and have specific
port trusts constituted for their administration, minor ports are under the operational jurisdiction of the
states/maritime boards set up by the states. Pursuant to the Indian Ports Act, 1908, states are empowered to set
up bodies to govern minor ports. Certain states have established dedicated maritime boards for this purpose
while in other states, there are designated state departments which supervise the functioning of minor ports.
Some of the states which have established a maritime board are the states of Gujarat, Maharashtra and Tamil
Nadu.

The main activities of the ports include maintenance of port infrastructure, pilotage, towage, berthing and un-
berthing of ships, handing and warehousing, storage and transportation of goods etc. The main sources of
revenue from cargo traffic include wharfage/landing fees, cargo related charges, rentals from warehouses,
demurrage charges, charges for providing port infrastructure for movement and transportation of goods,
revenue from ships such as in respect of ship docking, pilotage, port dues etc. Tariffs, in the case of major ports,
are regulated by 61Tariff Authority for Major Ports (TAMP) 62 and in case of minor ports are decided by the State

60
The major ports are located at Kolkata/Haldia, Chennai, Cochin, Ennore, Jawaharlal Nehru Port at Nhava Sheva, Kandla, Mormugao,
Mumbai, New Mangalore, Paradip, Tuticorin and Vishakhapatnam.
61TAMP was constituted in April 1997. It regulates all tariffs, both vessel related and cargo related, and rates for lease of properties in
respect of major port trusts and the private operators located therein. The MPTA was amended by Port Laws (Amendment) Act 1997 to
constitute the TAMP.

© Economic Laws Practice 2021 Page | 61

Governments or the appropriate body appointed by State Governments. The Major Ports are free to fix tariffs
on various services at any level, which is less than the notified tariff ceilings prescribed by TAMP. TAMP’s mandate
is limited to only notification of the tariff bands.

The characteristics of major ports and minor ports do not necessarily suggest differences in terms of importance
of port infrastructure since some of the minor ports (such as Mundra port in Gujarat) have large amounts of
traffic volumes and a higher level of investment made in comparison to some of the major ports.

The GOI intends to replace the MPTA with a new law. For this purpose, the government has approved the draft
Major Port Authorities Bill, 2020 (MPA Bill) which was passed by the Lok Sabha on September 23, 2020 and by
the Rajya Sabha on February 10, 2021 but is yet to obtain presidential assent. The bill aims to provide greater
efficiency to major ports by providing them full autonomy in decision making. Some of the key salient features
of the proposed bill are:

▪ To allow the concessionaire to fix the tariff based on market conditions, for PPP projects

▪ To frame the scales of rates for assets and services available at major ports

▪ To constitute an adjudicatory board for adjudication of disputes among major ports, PPP
concessionaries and captive users

▪ To entitle the board of each major port to create a specific master plan in respect of any development
or infrastructure established or proposed to be established within the port limits and the land
appurtenant thereto. This master plan shall be independent of any local or State Government
regulations of any authority whatsoever.

Ports have enormous potential for wide ranging investment and modernization. The pace of development
gathered momentum since the GOI invited private sector participation in development of major ports
infrastructure in 199663.

For the purpose of this Chapter, we are primarily focusing on concessions pertaining to major ports.

PPP in major ports

In order to encourage private participation, the GOI, had through MORTH, issued the guidelines dated October
2, 1996 to be followed by Major Port Trusts for private participation in the major ports. As per the PPP Guidelines,
participation/investment by the private sector is permitted through leasing of existing assets or concession
agreements for construction/creation of new assets and operation and maintenance of the same. The major
areas which have been thrown open for private investment, mainly on BOT basis, include construction of cargo
handling berths, container terminals and warehousing facilities, installation of cargo handling equipment,
construction of dry-docks and ship-repair facilities, etc. Private sector participation is permitted through an open
competitive bidding process.

Further the MORTH has with the guidelines for private sector participation in ports through joint ventures (JVs)
and foreign collaboration dated June 1, 1998 approved the formation of JVs between: (i) major ports and foreign
ports (ii) major ports and minor ports (iii) between major ports and companies or a consortium of companies for
facilitating major ports to:

63 In India, Foreign Direct Investment (FDI) of up to 100 %63 is permitted under the automatic route for port and harbour construction and
maintenance projects. However, the GOI has also issued certain guidelines to be followed by major port trusts for private sector participation
wherein specific areas have been identified for participation/investment by the private sector and also subject to certain approval
requirements It has also facilitated a 10-year tax holiday to enterprises that develop, maintain and operate ports, inland waterways and
inland ports. In 2016, 19% of PPP projects have attracted foreign investors.

© Economic Laws Practice 2021 Page | 62

 ▪ Attract new technology

▪ Introduce better managerial practices

▪ Expedite implementation of schemes

▪ Enhance confidence of private sector in funding ports

Evoluti on of concession agreements in p orts

The port sector has seen significant investments through the PPP model. The preferred model for private
participation in the port sector has been DBFOT and both major and non-major ports and terminals therein are
bid out and awarded to private players.

An MCA for ports was introduced in the year 2001 by IDFC Limited. Prior to 2014, the Planning Commission
released MCA for major ports. Presently, the Ministry of Shipping releases MCAs for major ports from time to
time.

By periodically revising the MCAs, the Central and State Governments essentially aim at addressing the views of
stakeholders and the changing requirements of the evolving industry. An MCA for ports was introduced in the
year 2001 by IDFC. An MCA was also developed by the Ministry of Shipping, and projects under both these
regimes continue till this day. Separate concession agreements for State ports i.e. non-major ports was also
issued.

Separately, several states have adopted their own

concession agreements for non-major ports that are
different from the MCAs drafted by the central authorities.
For instance, the MCAs developed by the GMB, which
predate the MCAs issued by the Planning Commission’s
draft, expressly recognize grant of sub-concessions while
the MCA do not directly recognize this.

Salient features of latest MCA

Set out below are some of the salient features of the latest
MCA issued by the Ministry of Shipping for major ports in
January 2018. The release of the latest version of the MCA
(2018 Port MCA) was notified by the Ministry of Shipping
vide press release dated January 3, 2018.

The notable changes brought into the 2018 Port MCA are
as follows:

▪ The Society for Affordable Redressal of Disputes

Ports (SAROD-PORTS). It provides for constitution of
SAROD-PORTS as a dispute resolution mechanism similar
to a provision available in the highway sector.

▪ Provision of an exit clause. It provides exit route to developers by way of divesting their equity
upto 100% after completion of 2 years from the COD.

▪ Reduction of rent for additional land. Under the clause relating to provision of additional land to
the concessionaire, land rent has been reduced from 200% to 120% of the applicable scale of rates
for the proposed additional land.

© Economic Laws Practice 2021 Page | 63

 ▪ Calculation of royalties payable. Concessionaire would pay royalty on “(MT) of cargo/TEU (Twenty-
foot Equivalent Unit) handled" basis which would be indexed to the variations in the Wholesale Price
Index (WPI) annually. This will replace the present procedure of charging royalty which is equal to
the percentage of Gross revenue, quoted during bidding, calculated on the basis of upfront
normative tariff ceiling prescribed by TAMP. This will help to resolve the long pending grievances
of the PPP operators that revenue share is payable on ceiling tariff and price discounts are ignored.
The problems associated with fixing storage charges by TAMP and collection of revenue share on
storage charges (which has plagued many projects) will also get eliminated.

▪ Changes to the scope of the change in law clause. The new definition of change in law includes:

− Imposition of standards and conditions arising out of the guidelines/orders issued by the
TAMP, environmental laws, and labor laws.

− Increase and imposition of new taxes, duties, etc. for compensating the concessionaire. Since
the viability of the project was affected, the concessionaire will now be compensated for the
increase and imposition of new taxes, duties etc. except in respect of imposition/increase of a
direct tax, both by the Central and State Governments.

▪ Commencement of operations before COD. Provision for commencement of operations before

COD has been prescribed. This will lead to better utilization of assets provided by the Port in many
projects before the formal completion certificate.

Many issues in port concessions and implementation continue to remain unaddressed. Some of these are
common to most concessions i.e. delays in land acquisitions and approvals. Other port specific issues such as
the lack of connectivity to ports (which often is an obligation of the port authorities), requirements for minimum
throughput which may not track realistic levels and providing for a revenue share instead of a profit share (which
results in a skewed sharing of returns) still remain.

Vignettes of issues in the ports sector

A screenshot of a recent interview in India’s Economic Times (May 15, 2019) on India’s ports lagging way behind in
comparison to other countries in Asia.

A screenshot of an article in Business Standard (August 27, 2019) on cargo growth at India's major ports falling to 2% in
April-July this fiscal year.

© Economic Laws Practice 2021 Page | 64

 Comparative look at MCAs
A comparison of the key terms in the 1999 MCA issued by the GMB for minor ports, the 2008 MCA issued by the Ministry of Shipping for major ports, the
2016 MCA issued by the Ministry of Shipping for major ports, and the 2018 MCA issued by the Ministry of Shipping (MoS) for major ports is provided below
to trace the evolution of concession agreements in the port sector.

Sr No. Particulars 1999 MCA – GMB – Minor 2008 MCA – MoS – 2016 MCA – MoS – 2018 MCA – MoS –
Ports64
Major Ports65 Major Ports66 Major Ports67
1. Concession model BOOT BOT BOT BOT
(as provided
under the
concession
agreement)

2. Concession period Unless otherwise provided under As determined on a project-to- As determined on a project-to- As determined on a project-
the concession agreement, the project basis. However, the MCA project basis. However, the to-project basis. However,
concession period shall be for a states that the maximum MCA states that the maximum the MCA states that the
period of 30 years from the date concession period shall be 30 concession period shall be 30 maximum concession period
of signing of the concession years. years. shall be 30 years.
agreement.
Notwithstanding which, the same Notwithstanding which, on the Notwithstanding which, the
Provided that, the concession can be extended by the Authority, basis of the actual target traffic same can be extended by the
period may be extended by a or terminated by either party in achieved in terms of the Authority, or terminated by
maximum of 2 years or the period accordance with the terms of the concession agreement, the either party in accordance
taken for the institution of concession agreement. concession period can be with the terms of the
transport linkages required for the extended by a maximum period concession agreement.
operation of the port as provided of 10 years or reduced by a
in the approved detailed project maximum period of 3 years in
reports. accordance with the terms of
the concession agreement.

64 https://gmbports.org/policy-structure
65
https://www.pppinindia.gov.in/documents/20181/36970/MCA_for_Major_Ports_22072019.pdf/191b5961-3ba3-4a7d-bfe6-21bdee0f7cb0?version=1.0
66 http://sagarmala.gov.in/sites/default/files/666788205MCA18052016.pdf
67 http://shipmin.gov.in/writereaddata/l892s/FinalMCA17012018-18610118.pdf

© Economic Laws Practice 2021 Page | 65

Sr. No. Particulars 1999 MCA – GMB – Minor 2008 MCA – MoS –Major Ports 2016 MCA – MoS –Major 2018 MCA – MoS –Major
Ports Ports Ports
3. Land The Authority shall acquire the The ownership of the land shall The ownership of the land shall The ownership of the land
procurement land for subsequent phases of the remain with the Authority and the remain with the Authority and shall remain with the
obligation project, as identified in the concessionaire may use such the concessionaire may use Authority and the
approved detailed project report assets for the purposes of the such assets for the purposes of concessionaire may use such
within 18 months of the date of project. the project. assets for the purposes of the
the agreement. project.
The concession agreement does The concession agreement
Ownership of leased land, expressly not lay down obligations does expressly not lay down The concession agreement
reclaimed land and waterfront relating to land acquisition. obligations relating to land does expressly not lay down
land shall remain with the acquisition. obligations relating to land
Authority. acquisition.
4. Additional land The Authority shall acquire and Not provided for. On deemed insufficiency of On deemed insufficiency of
keep in reserve additional land land by the concessionaire for land by the concessionaire for
from the boundary of the leased the purpose of providing the purpose of providing
premises as identified in the services under the concession services under the concession
Approved detailed project report agreement, the concessionaire agreement, the
for future expansions of the port. may approach the Authority in concessionaire may approach
this regard. The Authority, on the Authority in this regard.
consideration of the issue, and The Authority, on
subject to availability, provide consideration of the issue,
such additional land. and subject to availability,
provide such additional land.
The concession agreement
additionally states that, in
case of non-facilitation of
such additional land by the
authority, the concessionaire
would not be entitled, on
these grounds, to any
relaxation on the
performance of its
obligations under the
concession agreement.

© Economic Laws Practice 2021 Page | 66

Sr. No. Particulars 1999 MCA – GMB – Minor 2008 MCA – MoS –Major Ports 2016 MCA – MoS –Major 2018 MCA – MoS –Major
Ports Ports Ports
5. Permits The Authority agrees to make Specific permits to be procured by Specific permits to be procured Specific permits to be
procurement reasonable efforts to assist the either the concessionaire, or the by either the concessionaire, or procured by either the
obligation concessionaire in obtaining Authority as determined during the Authority as determined concessionaire, or the
clearances. the execution of the project during the execution of the Authority as determined
specific concession agreement. project specific concession during the execution of the
agreement. project specific concession
Provided that the permits to be
agreement.
obtained by the Authority shall be Provided that the permits to be
clearances relating to the project obtained by the Authority shall Provided that the permits to
site, including clearances from the be clearances relating to the be obtained by the Authority
Ministry of Environment and project site, including shall be clearances relating to
Forests, and any in-principle clearances from the Ministry of the project site, including
clearances, as the case may be. Environment and Forests, and clearances from the Ministry
Such permits to be obtained by any in-principle clearances, as of Environment and Forests,
the Authority may also include the case may be. Such permits and any in-principle
consents to establish. to be obtained by the Authority clearances, as the case may
may also include consents to be. Such permits to be
establish. obtained by the Authority
may also include consents to
establish.
6. Financial closure Financial close shall occur upon Financial close shall occur upon: Financial close shall occur Financial close shall occur
the fulfilment of all conditions upon: upon:
▪ The conditions precedent under
precedent to the initial availability
the concession agreement ▪ The conditions precedent ▪ The conditions precedent
of funds under the financing
being fulfilled by both the under the concession under the concession
documents, and on receipt of
concessionaire and the agreement being fulfilled by agreement being fulfilled
commitments for the equity
Authority. both the concessionaire and by both the concessionaire
required for the first phase of the
the Authority. and the Authority.
project. ▪ Completion of all actions
▪ Completion of all actions
relating to financial assistance ▪ Completion of all actions
relating to financial
as provided under the relating to financial
assistance as provided
respective concession assistance as provided under
under the respective
agreement, including the the respective concession
concession agreement,
concessionaire obtaining access agreement, including the
including the
to financial assistance. concessionaire obtaining
concessionaire obtaining
access to financial assistance.
access to financial
assistance.

© Economic Laws Practice 2021 Page | 67

Sr. No. Particulars 1999 MCA – GMB – Minor 2008 MCA – MoS –Major Ports 2016 MCA – MoS –Major 2018 MCA – MoS –Major
Ports Ports Ports
7. Termination due On failure of achievement of ‘zero Conditions precedent provided Conditions precedent provided Conditions precedent
to failure to day’ within a period of 18 months under the concession agreement under the concession provided under the
achieve financial from the date of signing of the shall be fulfilled within a period of agreement shall be fulfilled concession agreement shall
close concession agreement, the 90 days from the date of within a period of 180 days be fulfilled within a period of
concession agreement would execution of the concession from the date of execution of 180 days from the date of
stand terminated. agreement. the concession agreement. execution of the concession
agreement.
8. Variation of costs In the event that a change in law The Authority and the The Authority and the The Authority and the
arising from renders exercise by the concessionaire may discuss and concessionaire may discuss and concessionaire may discuss
change in law concessionaire of any of its make modifications to the terms make modifications to the and make modifications to
material rights or performance of of the concession agreement so as terms of the concession the terms of the concession
its obligations impossible, the to mitigate the effect of the agreement so as to mitigate the agreement so as to mitigate
concessionaire may serve a change in law. effect of the change in law. the effect of the change in
termination notice to the law.
Authority. However, the parties to
the concession agreement shall
engage in consultations, failing
which, the matter may be referred
for dispute resolution.
9. Change of scope Any expansions outside the scope The Authority may require the The Authority may require the The Authority may require
of the approved development plan concessionaire to carry out works concessionaire to carry out the concessionaire to carry
shall be subject to the prior other than what has been agreed works other than what has out works other than what
approval of the Licensor. Any to, through a change in scope been agreed to, through a has been agreed to, through
expansion, including any order, provided that, the cost of change in scope order, a change in scope order,
expansion envisaged in the and/or implementing a single change of provided that, the cost of provided that, the cost of
approved detailed project report, scope order shall not exceed 5% of implementing a single change implementing a single change
entailing capital investment in the estimated project cost and the of scope order shall not exceed of scope order shall not
excess of 25% of the ‘Capital Cost cumulative cost of such change in 5% of the estimated project exceed 5% of the estimated
for Contracted Assets for Phase 1’ scope orders issued during the cost and the cumulative cost of project cost and the
shall be considered a Major concession period shall not exceed such change in scope orders cumulative cost of such
Expansion. 20% of the estimated project cost. issued during the concession change in scope orders issued
period shall not exceed 20% of during the concession period
The Authority shall make
the estimated project cost. shall not exceed 20% of the
payments for the increased costs
estimated project cost.
arising from the change of scope The Authority shall make
order. payments for the increased The Authority shall make
costs arising from the change of payments for the increased
The Authority may also seek
scope order.
competitive bids for carrying out

© Economic Laws Practice 2021 Page | 68

 of works in relation to a change of The Authority may also seek costs arising from the change
scope. The concessionaire shall competitive bids for carrying of scope order.
have an option to match the out of works in relation to a
The Authority may also seek
preferred bid in order to carry out change of scope. The
competitive bids for carrying
works under a change of scope concessionaire shall have an
out of works in relation to a
order, in the terms of the option to match the preferred
change of scope. The
agreement. bid in order to carry out works
concessionaire shall have an
under a change of scope order,
option to match the
in the terms of the agreement.
preferred bid in order to
carry out works under a
change of scope order, in the
terms of the agreement.
10. Change in The Lead Promoter shall maintain Management control shall be Management control shall be Management control shall be
ownership a minimum interest of 26% in the retained in the concessionaire at retained in the concessionaire retained in the
shareholding of the least until the expiry of the at least until the expiry of the concessionaire at least until
concessionaire till the completion exclusivity period. exclusivity period. the expiry of 2 years after the
of a period of 7 years from the date of commercial
[Management control shall mean [Management control shall
date of the concession agreement. operations.
the power to elect or appoint more mean the power to elect or
The combined shareholding of key
than 50% of the directors, appoint more than 50% of the [Management control shall
promoters in the concessionaire
managers, partners or other directors, managers, partners mean the power to elect or
shall not be less than 51% for a
individuals exercising similar or other individuals exercising appoint more than 50% of the
period of 7 years from the date of
authority with respect to the similar authority with respect to directors, managers, partners
the concession agreement. A
concessionaire.] the concessionaire.] or other individuals exercising
reduction in shareholding below
similar authority with respect
51% can be undertaken with the [Exclusivity period shall be (i) the [Exclusivity period shall be (i)
to the concessionaire.]
prior permission of the Authority. period of 5 years from the the period of 5 years from the
scheduled project completion date scheduled project completion At any time, after expiry of a
During the term of the concession
of the project, as provided under date of the project, as provided period of 5 years from the
agreement, an acquisition of more
the respective concession under the respective concession date of commercial
than 10% direct or indirect
agreement, or (ii) until when the agreement, or (ii) until when operations, the lead member
interest in the shareholding of the
average annual turnover of cargo the average annual turnover of under the respective
concessionaire by any person
handled reaches a level of at least cargo handled reaches a level concession agreement, can
(either alone or together with its
75% of the project capacity for of at least 70% of the project approach Authority for
associates) shall require and shall
two consecutive years. In cases capacity for two consecutive approval proposing a new
be subject to the prior approval of
where an exclusivity period is not years. In cases where an entity/consortium.
the Licensor.
provided for, such period shall be exclusivity period is not
Any change in shareholding, other
till the expiry of 3 years from the provided for, such period shall
than those which require the
date of commercial operations.] be till the expiry of 3 years from
approval of the Authority, shall be
the date of commercial
operations.]

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 intimated to the Authority by the
concessionaire.
Further, the (i) applicant, or the Further, (i) the applicant, or the Further, (i) the applicant, or
members of the consortium shall members of the consortium the members of the
hold not less than 51% of the paid shall hold not less than 51% of consortium shall hold not less
up equity capital in the the paid up equity capital in the than 51% of the paid up
concessionaire until a period of 3 concessionaire until a period of equity capital in the
years from the date of commercial 3 years from the date of concessionaire until a period
operations and not less than 26% commercial operations and not of 3 years from the date of
of its paid up equity capital during less than 26% of its paid up commercial operations and
the balance concession period; equity capital for another three not less than 26% of its paid
and (ii) lead member, as provided years, provided that the up equity capital for another
under the respective concession concessionaire shall be entitled 2 years; and (ii) the lead
agreement, shall hold at any time to waive the equity holding member, as provided under
not less than 50% of the requirement of 26% during the the respective concession
consortium’s holding in the paid period of three years after the agreement, shall hold at any
up equity capital of the date of commercial operations; time not less than 50% of the
concessionaire. and (ii) the lead member, as consortium’s holding in the
provided under the respective paid up equity capital of the
concession agreement, shall concessionaire.
hold at any time not less than
At any time, after expiry of a
50% of the consortium’s
period of 5 years from the
holding in the paid up equity
date of commercial
capital of the concessionaire.
operations, the lead member
under the respective
concession agreement, can
approach the Authority for
approval proposing a new
entity/consortium.
Any transfer of shareholding in the Any transfer of shareholding in Any transfer of shareholding
concessionaire, and/or direct or the concessionaire, and/or in the concessionaire, and/or
indirect change in the direct or indirect change in the direct or indirect change in
management control of the management control of the the management control of
concessionaire shall only be with concessionaire shall only be the concessionaire shall only
the prior written approval of the with the prior written approval be with the prior written
Authority. of the Authority. approval of the Authority.

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Sr. No. Particulars 1999 MCA – GMB – Minor 2008 MCA – MoS –Major Ports 2016 MCA – MoS –Major 2018 MCA – MoS –Major
Ports Ports Ports
11. Levy and The concessionaire shall comply The concessionaire may charge The concessionaire may charge The concessionaire may
collection of with the provisions of the Indian fees for the project facilities and fees for the project facilities charge fees for the project
fee/tariff Ports Act, 1908 relating to tariff. services tendered in accordance and services provided in facilities and services
with the specific tariff notification accordance with the specific provided in accordance with
provided under the respective tariff notification provided the specific tariff notification
concession agreement published under the respective provided under the
by the TAMP. concession agreement respective concession
published by the TAMP or any agreement published by the
such other competent TAMP or any such other
authority under the applicable competent authority under
law. the applicable law.

A comprehensive tariff schedule The tariff caps shall be revised The aforesaid Tariff caps shall The aforesaid Tariff caps shall
and the time period from which every year based on a variation in be revised every year based on be revised every year based
such tariff shall be in effect, shall the WPI. Such revision shall be a variation in the WPI. Such on a variation in the WPI.
be notified to the public by the based on indexation against 60% revision shall be based on Such revision shall be based
concessionaire. Any user shall be of the variation in the WPI for a indexation against 60% of the on indexation against 60% of
entitled to avail the port’s services relevant year beginning 1st variation in the WPI for a the variation in the WPI for a
at the notified tariffs. A revision in January and ending 31st relevant year beginning 1st relevant year beginning 1st
the notified tariff shall be December. January and ending 31st January and ending 31st
intimated to the Authority and December. December.
notified as provided under the
concession agreement.
The Concessionaire shall collect all The Concessionaire shall collect all The Concessionaire shall collect The Concessionaire shall
cesses and charges including cesses and charges including all cesses and charges including collect all cesses and charges
infrastructure cess, if any, levied infrastructure cess, if any, levied infrastructure cess, if any, including infrastructure cess,
on the users as may be requested on the users as may be requested levied on the users as may be if any, levied on the users as
by the Authority. by the Authority. requested by the Authority. may be requested by the
Authority.
12. Charge on escrow Not provided for. Not provided for. Permitted. Permitted.
account in favour
of senior lenders

13. Dispute Disputes are to be resolved Failing amicable settlement with Failing amicable settlement Failing amicable settlement,
resolution through arbitration by an expert the assistance of the ‘expert’ with the assistance of the the dispute shall be referred
committee to be set up by the appointed by the Authority and ‘expert’ appointed by the to the SAROD-PORTS for
Authority and the concessionaire. the concessionaire by mutual Authority and the resolution.
The Authority and the consent, the dispute shall be concessionaire by mutual

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 concessionaire, on failure to agree settled through arbitration consent, the dispute shall be
on one person, each shall each following the procedure agreed settled through arbitration
nominate a person, who will then, to, by the parties. Unless mutually following the procedure agreed
nominate a third member. agreed otherwise, the rules of to, by the parties. Unless
arbitration prescribed by the mutually agreed otherwise, the
International Centre for rules of arbitration prescribed
Alternative Dispute Resolution, by the International Centre for
New Delhi shall apply to the Alternative Dispute Resolution,
arbitration. The arbitral panel shall New Delhi shall apply to the
consist of one member nominated arbitration. The arbitral panel
by each party, and a third member shall consist of one member
appointed by the two arbitrators nominated by each party, and a
third member appointed by the
two arbitrators.

14. Refinancing Not provided for. Permitted. Permitted. Permitted.

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Issues concerning port concessions
Set out below are notable concerns pertaining to major ports/under the concession agreements for major ports:
Minimum Guaranteed Cargo (MGC)
The MCAs (2018 Port MCA) prescribes that the concessionaire is required to meet a MGC, or the ‘MCA’ as prescribed in
the annexure to the concession agreement, annually. If the concessionaire is unable to meet the MCA requirements for
a continuous period of 3 years, the concession is liable to be terminated.
It has however been a view of the private
operators that the port authority should be
concerned with the minimum guaranteed
revenue to be achieved by the
concessionaire (as the port authority’s
concern is primarily the revenue earned by
the concessionaire which has to be shared
with the authority) instead of MGC with
regard to a particular type of cargo required
to be handled.
The cargo volumes handled at ports is
considerably dependent on various factors
including changes in international market
conditions and government policies. A
change in either has significant impact on
trade and thereby the MGC requirements.
Therefore, flexibility should be provided in
the concession agreements regarding
MGC, after factoring in such effects. It should be noted that the draft 2018 Port MCA does prescribe that in the event
the concessionaire is unable to meet its MGC obligations due to reasons other than a substantial change in economic
policies including the policy regarding import/export of a commodity as a result of which the throughput could not be
achieved, the same will not be a default of the obligations of the concessionaire.
Tariff issues
While the TAMP determines the tariffs to be charged by major ports, non-major ports are free to set their own tariffs
based on the market conditions. This puts business in the major ports in a disadvantageous position as ports are unable
to offer the competitive tariffs. Further, TAMP only fixes the maximum tariffs that can be levied leaving it to the discretion
of the port to fix tariffs subject to the maximum ceiling. However, ports usually do not prescribe lower tariffs. There has
been a huge debate about the requirement of TAMP and operators have desired that ports/port operators should be
allowed to fix the tariffs based on best practices. The MPA Bill aims at providing the ability to the port
authority/concessionaire to fix tariffs based on market conditions.

Foreign Direct Investment (FDI): Ports

In India, FDI of up to 100 % is permitted under the
automatic route for port and harbor construction
and maintenance projects. The GOI has also
facilitated a 10-year tax holiday to enterprises that
develop, maintain and operate ports, inland
waterways and inland ports. In 2016, 19% of PPP
projects have attracted foreign investors.

Snapshot of an article in Hindu Business Line

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B alancing o f Risk s of Co ncessio n A greements
Although the Government has launched and continues to work with great enthusiasm, many projects end up languishing
or distressed. The forms of distress may vary but factors generally include the following:

▪ Lower than expected revenue

▪ Higher than expected costs One of the raisons d’etre of a concession
agreement is that it provides for allocation of
▪ Delays
risks to the party who is most capable of
▪ Variations in contractual specifications bearing such risks. However, the general view
▪ Disagreements between parties in is that Indian concession agreements have a
relation to the cause and effect of their very aggressive risk profile and private
actions/inactions parties are not capable of bearing all the risks
that are transferred to them.
Improper allocation of risks is identified as one of the
key factors that leads to distress in projects, although
not all risks can fit within the 4 corners of a
concession agreement.

It may also be noted that risk positions set out in contracts are only as good as the management thereof by the two
parties but in particular, the contracting authority.

The Delhi Metro Rail Corporation (DMRC) on Tuesday agreed to take over the liability of INR 1,617 crore debt owed to banks by
Reliance Infrastructure subsidiary DAMEPL, which pulled out of the Airport Express Line leading to a dispute.

Comparison with international projects

The DEA has compared risk allocation under Indian concession agreements against several foreign projects to examine
the differences. What was discovered is that apart from allocation of risks to different parties, the way foreign
concessions dealt with risks was also quite different. Further, Indian concession agreements also did not account for
certain risks that were addressed in these foreign concession agreements.

A table setting out the way some of the risks are addressed in Indian NHAI MCAs as compared to foreign concessions
based on the studies carried out by the DEA is set out in the following section.

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SR NO. ISSUES
INTERNATIONAL INDIA

HOW DEALT WITH PROJECT CONTRACTUAL HOW DEALT WITH

FORM
1.
Site unavailable Land made available pre-financial Lane Cove Tunnel and Compensation Event Obligation to provide site within 150 days of agreement or
close or Compensation Event Gautrain penalty payable
2.
Regulatory Compensation Event / Chapman’s Peak Drive/ Compensation Event Applicable permits is a Condition Precedent to the MCA
Approvals Delayed Renegotiation Lane Cove Tunnel

3.
Failure to Reach Termination – mitigated by All projects require firm Terminate and retender Damages payable by the concessionaire to the NHAI
Financial Close requiring underwriting financial underwriting

4.
Refinancing Refinancing gain share regulated. Lane Cove Tunnel Amendments Permitted with the consent of the NHAI
Prohibition on additional debt.
Approval rights for public sector.
5.
Traffic Demand No trigger unless results in Return Chapman’s Peak Drive Private party risk – no For every 1% increase in traffic a 0.75% decrease in
above Forecast of Equity above base case then change concession period with a cap of 10%
sharing
6.
Traffic Demand No trigger unless loan covenants Sydney Harbour Tunnel Lender step In and If actual traffic falls below target traffic, for every 1%
below Forecast breached then lender step-in/ and Lane Cove Tunnel substitution shortfall, the concession period, on payment of requisite
liquidation/termination concession fees will be increased by 1.5% subject to a cap of
not more than 20% increase of concession period
Loan to private company to make Chapman’s Peak Drive Renegotiation
good shortfall, repaid once debt
service complete
7.
Uninsurable events Compensation by public party on Melbourne Southern Compensation Event Not Covered
no-better-no worse basis measured Cross Station
against base case financial model.
This base case financial model is
required to be provided by the
concessionaire, audited and signed
off by its lenders and reviewed by
the public authority.

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SR NO. ISSUES
INTERNATIONAL INDIA

HOW DEALT WITH PROJECT CONTRACTUAL HOW DEALT WITH

FORM
8.
Changes in WPI pre- Standby equity used or Government Gautrain Private party risk – no Not Covered
completion Capital Grant increased by WPI change

9.
Changes in WPI No trigger as revenue WPI indexed All Private party risk – no Not Covered
post-completion change

10.
Accurate Reporting Audited accounts, inspections and Sydney Harbour Tunnel Amendments Status reports in the form as provided under the MCA to be
audits, financial statements on 6 and Lane Cove Tunnel sent to the NHAI and the relevant IE on a monthly basis.
months’ and year’s performance; and Chapman’s Peak Reports of unusual occurrences to be sent to the NHAI and
daily, monthly annual reports on Drive the relevant IE on a daily, weekly and monthly basis. In BOT
traffic volumes and toll revenues Toll projects, the concessionaire must additionally send
monthly fee statements to the NHAI and the relevant IE,
install electronic/computerized traffic counters and conduct
traffic surveys and samplings as the NHAI may require.
11.
Delay to If public party, then compensation Lane Cove Tunnel Compensation Event ▪ If fault attributable to the NHAI, the concessionaire will
Completion for delay to place private party in not be obligated to pay damages. COD will be modified
no-better-no-worse position accordingly.
▪ If fault attributable to a force majeure event, the
Loan to private company to make Lane Cove Tunnel Relief Event concessionaire will not be obligated to pay damages.
good shortfall, repaid once debt
COD will be modified accordingly.
service complete
▪ If concessionaire fails to achieve a project milestone
If private party fault, then relief on Lane Cove Tunnel Private party risk – no within 90 days of the contractually specified date,
completion granted relief and change damages at a rate of 0.1% of the amount of
liquidated damages payable Performance Security per day will be payable to NHAI
until such milestone is achieved.

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Improper addressing of risks
Even where it appears that an issue is addressed in an MCA, it may not actually be true, given that the commercial reality
flowing from the language of the contract differ from the intention of the persons drafting or because the actual practice
on ground does not conform to the requirements of the contract. The DEA itself has acknowledged the issue and
provided certain relevant examples of this:

▪ The NHAI MCA provides for an increase in the concession period in order to address variations in traffic volumes
as a manner to address demand risk. However, this solution fails to consider that reduced traffic volumes result
in reduced revenues that create an immediate cashflow problem for the concessionaire. Adding a period at the
end of the original concession term may have a positive impact on the return on equity but would not ease the
stress on the cashflows.

▪ Even where the risk of land acquisition is placed on the authority, the obligation is expressed in percentage
terms i.e. a certain percentage of the extent of the land is required to be provided by a certain date. However,
the materiality of the portion of land is not considered. This could result in a situation that a critical piece of
land required for the development of the project is not provided by the authority; however, the obligations
relating to construction imposed on the concessionaire would commence.

It is evident that the

issues around risk
allocation need to be
addressed to ensure
that the private
developer is not
distressed, leading to
the project being
stalled. Even from the
perspective of the
concession authority,
if excessive risks are
allocated to the
private developer,
such risks are usually
either priced into the
bid, thereby affecting its competitiveness, or such risks are not provided for by the developer as the developer may have
presented an aggressive bid, thus jeopardizing the project.

It may be noted that issues around obsolescing bargains remain unaddressed. A developer who invests money during
the construction period often loses bargaining power related to tariffs and other matters in case there are abrupt
changes in the economic or policy environment, which are beyond his control. In such situations the developer is left to
the mercy of the relevant government authority, with often very little recourse.

Changes required
Various stakeholders have espoused their concerns to the DEA and the concession authorities. Common themes emerge
as to certain changes that could be considered as desirable to the concession agreements themselves, as well as the
framework for their implementation.

Some changes that may be considered to ensure better risk management and better implementation are:

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Change in scope provisions
Change in scope provisions in the concession agreements only provide for change in scope of work of the private
developer up to certain percentage of the total project cost. However, for complex projects where the construction
period can be quite long drawn out, greater change in scope may be required. A better mechanism for consultation and
agreement on change in scope and compensation therefore would be necessary. Further, it is also necessary to clearly
define what would amount to change in scope of work of the concessionaire. Concession authorities and concessionaires
often dispute as to whether a certain work required to be done is or is not outside the agreed scope of work of the
concessionaire.

Case Study
In a road project in Andhra Pradesh, there was a substantial damage to the road project due to floods. As a result, the
concession authority required the concessionaire to repair the damage and bring the project up to speed in
accordance with the latest standards of repair and design. The concessionaire argued that the road project has been
following earlier prescribed standards and that if the project was to be repaired as per the latest standards the same
would be work outside its scope and would entail additional costs. While the authority argued that the repair and
upgradation of the project as per the latest standards was within the scope of work of the concessionaire, the
concessionaire argued that the concession agreement was not specific on whether the same standards were to be
applied (as existed at the time of commencing the project by the concessionaire) while undertaking repairs or the
latest standards were to be applied.

Contract management and review

Contract management and review needs to be institutionalized and written into concession agreements. Currently, there
is an inadequate mechanism established for contract management where reliance is placed on IEs appointed through a
Government bid process. More focused public contracting agencies with the necessary expertise should be involved.

Risks and sector specific concessions

Risk and sector specific concessions are the need of the hour. The terms and conditions of the concession agreements
across many sectors/industries are common and, in many cases, identical as the MCA prescribed by the government for
highway projects seem to have been applied to the same. This is particularly common in projects floated by state
government agencies, for instance the desalination projects in the state of Gujarat. In many cases, drafts circulated along
with the tender documents have clauses that are irrelevant to the project under consideration and one can identify that
such clauses have been picked up indiscriminately from other MCAs. Consequently, project specific risks do not get
addressed and lead to implementation as well as contractual issues and disputes between the concessionaires and
concession authorities. Due to this, prospective bidders are seen to request numerous modifications of the terms of the
concession agreement which is often seen by the bidding authority as request for substantial change in the terms of the
concession.

The draft concession agreements which are usually floated with the bid documents should be appropriately modified
keeping in mind the industry as well as the factual issues pertaining to the project in question. Consequently,
negotiations on the terms of the concession agreements during the bid stage would be minimal and could lead to lesser
litigations/disputes among stakeholders.

Dispute resolution clauses

Dispute resolution clauses in concession agreements prescribe conciliation and arbitration for resolution of disputes
between parties. There is now a move towards inclusion of DRBs as part of this multi layered resolution procedure.
However, the same have often proven to be time consuming. Before a matter is referred to arbitration, the parties are
required to resolve their disputes mutually, failing which the dispute is referred to an expert panel prescribed in the
concession agreement. Thus, before the matter can be finally submitted to arbitration, a substantial time is lost which
may affect the ability of the parties to perform their respective obligations.

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Further, the seat of arbitration in Indian concessions is usually within India which could also allow intervention of Indian
courts while the dispute is pending the completion of arbitration proceedings. Lack of institutional arbitration leads to
further delay and complications. Private parties (especially the ones where the private party is held or controlled by
foreign investors) would however prefer the seat of arbitration in more evolved jurisdictions such as Singapore and the
United Kingdom. The Pre-New Exploration and Licensing Policy regime oil and gas production and sharing contracts
provided for foreign seat of arbitration.

Dispute resolution has been dealt with in detail in our chapter on ‘Dispute Resolution in Concession Agreements’.

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Renegotiatio n o f Co nc essio n A greements
Renegotiation of PPP contracts is a common feature across mature PPP markets. However, Indian authorities have been
resistant towards permitting such renegotiations despite numerous demands from the private sector as well as
recommendations by the DEA and other advisors.

There are several instances of renegotiation in relation to PPP contracts across the world. A snapshot of the instances of
renegotiation of PPP contracts across certain jurisdictions has been provided below as extracted from a report issued by
the Organization for Economic Co-operation and Development (OECD) in 2014 written by J. Guasch and Others68 (Guasch
Report):

Percentage of Renegotiated Contracts

Percentage of Renegotiated Contracts
92%
78%
73%
68%
50% 53%
41% 40%

Total Electricity Transport Water Highways Highways Parking All sectors

Latin America US France UK
Note: In South Korea, as of 2012, 168 projects were renegotiated

Although the DEA has published reports recommending adoption of renegotiation within pre-determined frameworks,
as mentioned in the previous chapters, presently there is no mechanism in India that would allow for such renegotiation.
This despite the changing risk profile of a concession agreement through the passage of time and the life cycle of a
project as well as their management. In the implementation of a concession agreement, the risk profile is only as good
as the management thereof by both the authority as well as the concessionaire. However, a heavier burden towards
such management should necessarily flow towards the authority. Where improper management puts the project at a
disadvantage, a potential mechanism to salvage the same could be through contract renegotiations.

Whilst currently there is no framework, the Kelkar Committee Report mentions that the model clauses based on
established thresholds for renegotiation were in the process of being drafted. However, the latest MCAs do not contain
any such clauses permitting renegotiation.

What is renegotiation?
Where there is any change in the contractual terms and conditions of an agreement other than revisions in payments in
accordance with a mechanism specified in the agreement, a renegotiation is said to have taken place. As per Gausch
Report a distinction would need to be made between changes that could be considered as renegotiation (that would
require careful consideration) and those that would not as being in consonance with and pursuant to the contractual
framework. A tabular summary of this is provided below:

68Guasch, J. et al. (2014), “The Renegotiation of PPP Contracts: An Overview of its Recent Evolution in Latin America”, International Transport Forum
Discussion Papers, 2014/18, OECD Publishing, Paris. https://www.econstor.eu/handle/10419/109159

© Economic Laws Practice 2021 Pa g e | 8 4

 Sr. Renegotiation Examples
No.

1. ▪ Reduce the level of services (airports, from IATA A to B)

A change in the risk matrix
assignment and/or in the ▪ Defer or advance investments for several years
conditions of the contract ▪ Extension of the contract term
▪ Reduction guarantees (financial bonds)
▪ Increase the guarantee of the government (to pay lenders)
▪ Delays in the reduction of tariffs (tolls)
▪ Reduce the thresholds of the economic equilibrium of the contract, etc.
2. ▪ Government requests new investments
A change in project scope
(if this was not regulated in ▪ Reduction of fees for the government
the contract). ▪ Avoid bankruptcy of the operator
▪ Changes on the contract scope, etc.

However, the following actions would not be considered as renegotiation:

▪ Tariffs are adjusted with a formula set it by the contractor indexed by inflation or another index

▪ Triggers are activated and eventual investments become mandatory

▪ Payments to operator if they are regulated in the contract, etc.

▪ Corrections of errors in the contract, which do not create obligations, commitments or contingencies (typos,
contradictions that affect the implementation for the PPP contract, etc.)

Need for renegotiation

Do not
contain
Issues arising due
adequate
to dynamic mechanisms
markets/rapid
for monitoring
technological
service levels
changes require
higher level of
service Renegotiations
These issues lead beyond terms of
to conflicts for contract should be
which Concession considered
Agreements have
standard Dispute
Long term Resolution
contracts Mechanisms
which are
complex

Typically, concession agreements tend to be long-term contracts with terms spanning 15-30 years. Further, concession
agreements tend to be complex and detailed. However, not all post-award scenarios are envisioned at the time of their
execution. Often concession agreements do not contain adequate mechanisms for monitoring of service levels. The
probability of issues arising due to the dynamic markets due to increases in demand/traffic, rapid technological changes
or requirements for higher service levels is certainly high. These issues lead to conflicts for which concession agreements

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contain standard dispute resolution mechanisms such as mediation and arbitration. However, renegotiation beyond
terms of the contracts is also an avenue that should be considered. This is to ensure that the benefits of the project
continue to be made available to the public as well as reduce the burden on dispute resolution apparatus.

Although the DEA in its reports has recommended renegotiation of contracts under a stringent framework, currently
there is no such renegotiation in process. However, even then, it is well recognized that there could be a moral hazard
in allowing for such renegotiation. The DEA Report 2015 contains an observation that typically such calls arise from the
private party and often such requests are premised towards maintaining a required return on investment or preventing
a default under financing agreements undertaken by the private party or avoiding certain risks and therefore
renegotiations may not be in the best interest of the public concession authority.

Potential perils and disadvantages

Some of the concerns relating to renegotiations are:

▪ Often such requests are opportunistic and geared towards ensuring certain financial outcomes for
the private party

▪ Renegotiations could eliminate the competitive effect of the bid process including transparency,
especially where they occur in a short time after bidding. This could result in questioning of the
credibility of the model/program

▪ There could be asymmetric information and lack of negotiation skills of public sector and lack of
competitive pressures to renegotiate the contract

▪ Renegotiations could result in the distortion in public tender, in that the most likely winner is not
the most efficient operator but the most expert/qualified in renegotiations

▪ Renegotiations could decrease the benefits/advantages of PPP and the welfare of users

▪ There would most likely be a fiscal impact by increasing liabilities to the Government

Certain competition law issues in relation to above are set forth in the chapter on ‘Competition Law Issues in Concession
Agreements’.

Proposed framework
The DEA in the DEA Report 2014 has suggested a certain framework for renegotiation of concession agreements. Further,
the Kelkar Report also contains certain guidelines for adopting such a mechanism. It is important to consider these
recommendations as they would likely inform the policy of the government in this regard. Certain key suggestions from
both the reports are set out below:

▪ Authority Approval. Given that the concession authority would be interested in the outcomes of a concession
agreement renegotiation, it would not be suitable for the same authority to decide on the necessity for
renegotiation or to oversee its negotiations or oversee the outcome. Therefore, an independent authority would
be better suited to undertake the process.

▪ Fiscal Oversight. As renegotiation can have significant financial outcomes, fiscal oversight commensurate to that
involved in the original contract award would be necessary.

▪ Technical Panel. Independent panels for each sector comprising technical sector experts empowered to hear
disputes relating to amendments to the concession agreements may be set up similar to existing regulatory bodies

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 such as the Telecom Regulatory Authority of India (TRAI) and the Central and State Electricity Regulatory
Commissions (CERCs and SERCs).
▪ Standardized Benchmarks. There should be standardized benchmarks to determine whether a case is worthy of
renegotiation to promote consistency. These benchmarks should include:
− Evidence that the project distress is material and likely to result in default under the concession
agreement at some future point should the default continue
− The project distress was not caused by the private party and likely to cause adverse outcomes for the
government and/or users of the project
− Evidence that it is likely that the direct cost implications for the government are less than the financial
outcomes of doing nothing if the concession agreement is being renegotiated
− The renegotiation is likely to have social benefits or avoided costs that provides better long-term
outcomes
− The renegotiation does not involve materially different terms of risk allocation to the Government
▪ Disallowed Grounds. There would be no renegotiation of contracts on the basis of the following grounds:
− Any event of distress that was foreseeable at the time of financial close
− Any event that would affect the concessionaire as any other company in its ordinary course of business
(for example general changes in law)69
− Any impact arising from assumptions made or risks taken by the concessionaire in preparing its bid
− Any impact arising directly or indirectly from any act or omission of the concessionaire
− Any failure of any associated party to the concessionaire to perform or provide finance to the
concessionaire
▪ Program Perspective. The DEA in the DEA Report 2014 recommends that a program-wide approach towards
renegotiations of concession agreements be adopted to enable the Government to monitor and manage
renegotiations across all sectors. Further, if certain issues appear to be widespread, the risk allocation in new
concession agreements may be altered from the beginning to obviate the necessity for renegotiation
subsequently. Therefore, for each sector, the Government may monitor:

− Number of projects in distress (so that if above a certain percentage, a program-wide approach rather
than a project-by-project approach can be taken)

− Causes of distress (so that systemic factors can be identified)

− Adequacy of contractual mechanisms to deal with such distress

− Adequacy of contract management systems to deal with or avoid such distress

69Although this is mentioned in the DEA Report 2014, typically concession agreements in India do have detailed provisions relating to the effects of
change in law and the sharing of such risk.

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B roader Issues in Infrastruc ture Projec ts
As has been discussed in the previous chapters, concession agreements suffer from several issues by reason of their
inflexibility and improper risk allocations. However, it has become increasingly clear that beyond the risks inherent in the
concession agreements and lacunae therein, there exist systemic issues that have led to implementation hurdles and
stagnation of infrastructure projects. It is evident that changes at an institutional level would be required apart from
changes to the concession agreements.

Some such changes are:

Legal framework
As discussed earlier, in India, there is no centralized legislative framework on PPPs, instead, the Ministry of Finance, has
issued various guidelines, policies and manuals on procurement of PPPs and other related aspects. PPP for procurement
of goods and services is governed by a combination of the Constitution and certain rules, procedures, and manuals as
set out below:

▪ General Financial Rules, 2017

▪ Delegation of Financial Powers Rules, 1978
▪ Manual on Policies and Procedures for Purchase of Goods, 2006
▪ Central Vigilance Commission Guidelines relating to certain matters, including guidelines on prequalification
criteria, increasing transparency in procurement process, integrity pact between the procurer and the
prospective bidders
▪ Specific PPP legislations in many states

It is often felt that the lack of an overarching legal framework for PPPs leads to institutional issues as currently PPPs
function under a patchwork of Central and State laws that do not always work cohesively. Very few States have specific
laws that address PPPs.

Although several policies have been put into place, the ability of a private party to actually enforce such policy is quite
limited. It may therefore be useful for a clear legal framework to be crafted for PPPs. However, it should be borne in
mind that the legislative process is long drawn out and far from certain, therefore any such law could end up bringing
inflexibility to the PPP process, if not carefully framed.

A screenshot of an article in Economic Times (August 29, 2019) on the centre pulling up state governments for not investing in the
upkeep of state roads, that have been given “in principle’’ approval to be declared as national highways

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Project preparation
A common complaint is that the projects are not well conceptualized from their inception. There is often no clarity on
issues around land availability and permissions or feasibility. Even when the Government employs resources to line this
up, given the lead time between bidding and awarding the contract, ground conditions may change, and developer’s
risk assessment may be skewed. The World Bank has made available a PPP toolkit to help government officials devise
PPP projects. The DEA has also issued a ‘PPP Guide for Practitioners’ in April 2016 recognizes the issue and states
“Practitioners of PPPs within the Government at its different
tiers across the country lack the competence and skill set to
conceptualize, structure and implement projects.” It aims to
serve as a manual for practitioners to develop projects
through appropriate PPP frameworks. However, each
project should be viewed individually, and authorities should
let go of their ivory tower approach at the inception stage of
the project.

Typically, the obligation of acquiring and providing land

required for the project, lies with the concession authority
(as it is better placed and equipped to do the same). The
concession agreements merely provide for extension of the
term of the concession agreement or very limited
compensatory damages in the event of delay by the
authority in acquiring the land. Consequently, the
implementation of projects is delayed, and the project suffers heavy cost overruns. This leads to disputes between the
concession authority and the concessionaire70. It would be preferable that the government acquires a substantial
portion of land required for the project before the project is put up for private participation. Also, prior to floating draft
contracts, it is advisable that the same be legally vetted to ensure that various conflicts existing within the terms of the
draft agreement are upfront addressed and the authorities are also sufficiently apprised of the possible legal risks before
committing to such arrangements.

The issue of ‘instrumentality of state’

This issue can be best described via the Flemingo Duty Free Case.

Case study
The Airports Authority of India (AAI) was established in 1994 and is the statutory organization responsible for the
management of airports in India. In the wake of privatization, the Airports Authority of India Act, 1994 (AAI Act) was
amended to foster private sector investments in airport projects. Pursuant to such amendment, the AAI was
empowered to make a lease of the premises of an airport, in public interest or in the interest of better management
of airports, to carry out some of its functions. Consequently, entities such as Mumbai International Airport Private
Limited (MIAL) were incorporated and entrusted with the operation and the management of airports.

Facts

In 2006, MIAL, the lessee of the Chhatrapati Shivaji International Airport, Mumbai (Mumbai Airport) made a public
announcement calling for expressions of interest for setting up duty free shops. Flemingo Duty-Free Shop Private
Limited (Flemingo) along with its partner Aer Rianta International submitted its expression of interest. However,
Flemingo was not informed about the short-listing of the applications or the issuance of the tender documents.

70A major number of disputes between a concession authority and the concessionaire in the road projects revolve around availability and handing
over of possession of the land by the authority to the concessionaire.

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 Aggrieved by this, Flemingo filed a writ petition before the High Court of Bombay (High Court) challenging MIAL’s
decision of non-issuance of the tender documents to Flemingo.

The primary issue considered by the High Court in this case was whether the MIAL is a ‘State’ for the purposes of
Article 1271 of the Constitution of India (Constitution) or even if it was not a ‘State’ was it amenable to writ jurisdiction
under Article 22672 of the Constitution. In the event either of these answers were to be held in the affirmative, the
High Court would have the power to issue directions to MIAL to enable the enforcement of any of the fundamental
rights conferred by the Constitution, which inter alia include the right to equality.

Contentions

The counsels for Flemingo contended that since MIAL is a JV company (with the AAI holding 26% of the shareholding
of MIAL) entrusted with the performance of the statutory functions of the AAI, such an entity would be an
instrumentality or an agency of the State. It was contended that the process of awarding the tender was arbitrary
and lacked transparency and as MIAL was an instrumentality of the State, the contract awarded to DFS Venture
Singapore (Pte) Ltd. was liable to be set aside as it was in violation of the right to equality under the Constitution.

It was argued that the procedure adopted by MIAL was against the prescribed and well-established principles of
awarding of tenders/contracts in public law. The core argument on behalf of Flemingo was that allotment of duty
free shops at airports was a public function which was being performed by MIAL and consequently MIAL was to act
fairly, reasonably, justly and in accordance with objective and clear norms in performance of such public function.

MIAL on the other hand rebutted Flemingo’s contentions on the grounds that it is a purely private company which is
financially, functionally and administratively independent of the AAI. MIAL was managed and controlled by its board
of directors, majority of which were nominees of MIAL’s private promoters. Accordingly, it was argued that MIAL was
not a ‘State’ or an instrumentality of the State as it failed the tests that have been judicially prescribed for an entity
to be classified as ‘State’. It was argued that MIAL was discharging private and commercial functions which were in
furtherance of the intent of distancing the state from commercial activities. As providing for duty free shops was a
purely commercial activity, it was contended that no public law element should be involved in awarding such a
contract.

Decision

The High Court observed that even if MIAL were justified in short listing the expressions of interest adopting the
criteria for short-listing at its sole discretion, such short-listing should have been on some rational and objective basis.
In this regard, the High Court relied on settled judicial principles that if a classification is founded on an intelligible
differential and such differential has a rational relation to the object sought to be achieved, it would not be violative
of the right of equality. Accordingly, the High Court held that the total absence of any reason in the document of
evaluation and the admitted non-communication of any reason to Flemingo inter alia indicate that MIAL acted in an
arbitrary manner in short listing the applicants.

As regards whether the High Court has the power to exercise writ jurisdiction in respect of the arbitrary action of
MIAL, the High Court held that since MIAL was performing a public duty in allotting duty free shops, it was under a
duty to act reasonably and fairly. The High Court observed that when MIAL chooses to give a contract for any activity
which is for the public benefit, it must choose a person by an open competition according to objects and clear norms
and its action should be transparent. Consequently, it was held that such actions could be examined by the High
Court in exercise of its writ jurisdiction on the touchstone of fairness and reasonableness.

71 Article
12 of the Constitution defines “the State” to, unless the context otherwise requires, include the Government and Parliament of India and
the Government and the Legislature of each of the States and all local or other authorities within the territory of India or under the control of the
Government of India
72 ThisArticle empowers High Courts to issue to any person or authority, including in appropriate cases, any Government, directions, orders or writs,
including writs in the nature of habeas corpus, mandamus, prohibition, quo warrantor and certiorari, or any of them, for the enforcement of any of
the fundamental rights conferred by the Constitution and for any other purpose.

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 Based on the following observations about MIAL (i) being a JV company supported by the GOI in operating, managing
and developing the Mumbai Airport on property that is owned by the AAI and is public property; (ii) performing
statutory functions and exercising statutory powers; (iii) not being a simple lessee of public property; (iv) having the
power to use a summary procedure to evict unauthorized occupants on the area leased to it, the High Court observed
that MIAL is ‘State’ for the purposes of the Constitution.

Implications

In the events entities such as MIAL are considered as ‘State’ and their actions are amendable to judicial review, the
same may defeat the intent of the amendment to the AAI Act made in 2003. The intent of such amendment was to
provide for an effective legal framework which would encourage private investments and ensure that investors have
operational and managerial independence. If any action by private entities can be challenged on the grounds of
violation of the fundamental rights, the same may hamper operations and be counterproductive to the primary intent
of preserving public interest.

Whilst currently there is a stay on the decision of the High Court, it would be interesting to see how this issue is
judicially settled by the Supreme Court as this may have far reaching implications on contracts across all infrastructure
sectors. If, private entities involved in implementing one aspect of an infrastructure project in partnership with a
public entity are regarded as an instrumentality of the State, this may possibly jeopardize public-private partnerships
as private entities may consequently need to conduct their business in a manner that an instrumentality of the State
is required to do.

Private entities which are declared as ‘State’ may inter alia be required to adhere to principles of fairness, natural
justice and equal treatment in conduct of their business. Such entities would be required to adhere to judicially
propounded principles for awarding of contracts. Further, employees of such entities may be able to challenge
dismissals and seek to be re-instated, if the dismissal can be proven to be in violation of the principles of natural
justice. In Sirsi Municipality by its President, Sirsi v. Cecelia Kom Francis Tellis, AIR 1973 SC 855, the Supreme Court
held that where a State or a public authority dismisses an employee in violation of the mandatory procedural
requirements or on grounds which are not sanctioned or supported by statute or contrary to rules of natural justice,
the courts may exercise jurisdiction to declare the act of dismissal to be a nullity.

Importantly, accounts of such entities could potentially be subject to audit by the Comptroller and Auditor General
of India. In United RWAS Joint Action and Others vs Union of India 73, the High Court of Delhi observed that the words
‘body or authority’ in Article 149 of Constitution are of wide amplitude and not confined to ‘body or authority’ which
satisfy the test of 'State' within the meaning of Article 12, but extend to ‘private body or authority also’. Accordingly,
it held that the Comptroller and Auditor General of India would inter alia have a right to audit the books of such
authority.

Further, on the basis of the findings of the High Court in the Flemingo case, it may also be contended that private entities
such as MIAL are ‘public authorities’ for the purposes of the Right to Information Act, 2005 and are therefore subject to
the disclosures prescribed under such statute. In 2011, the Central Information Commission (CIC) had vide an order
dated May 30, 2011, declared that the MIAL is a ‘public authority’. Subsequently MIAL challenged the order in the High
Court of Delhi. The Delhi High Court vide an order dated May 17, 2019 set aside the CIC’s order and remanded it back
to CIC for fresh consideration since the CIC in an earlier case of Satya Prakash Rathee v. Delhi International Airport Ltd.
& Ors, which related to Delhi International Airport Limited (DIAL) held that DIAL did not come under the purview of
‘public authority’ under the Right to Information Act, 2005. Considering the MIAL was similarly placed to DIAL, the
matter was remanded for fresh consideration.

All of the above may impact the ability of private entities such as MIAL to take decisions on a purely commercial basis
and may result in them making choices that may not be the most effective, efficient or economic.

73 Writ Petition 895 of 2011 decided on October 30, 2015.

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Capacity building
Connected with the above, capacity creation in both the public and private sector for implementation of projects through
a PPP scheme is lacking. The Kelkar Committee specifically recommends that the Government undertake capacity
building measures including by preparation of knowledge modules for different stakeholders.

Knowledge building
The Kelkar Committee recommends that a mechanism for collation of data to help with decision making be developed.
Currently, there is no accessible database of projects, issues therein and the manner in which they are/were addressed.
Such data would definitely help in identifying systemic issues, making available solutions that worked in earlier projects
and gradually introduce consistency in approach.

Unrealistic bidding
Aggressive bidding by bidders has led to a lot of stagnancy in the sector. Projects often undergo cost overruns with the
developers ending up borrowing greatly from banks and financial institutions, tying up money due to inadequate risk
assessment by the developer. Demands for renegotiations also arise from such projects. Although, in some cases
renegotiations may be justified, in such cases such asks should be discouraged.

Dispute resolution
Long drawn-out dispute resolution processes. Although a Public
Utility (Resolution of Disputes) Bill was mooted, it has yet not been
introduced in the Parliament. Usually, concession agreements
provide for dispute resolution through arbitration. Although
arbitration is mooted as a method to avoid a lengthy court dispute,
due to jurisprudence developed in India, many awards end up being
challenged and unfortunately, arbitration ends up often as a step
prior to litigation rather than finally resolving a dispute.
Interestingly, the Commercial Courts, Commercial Division and
Commercial Appellate Division of High Courts Act, 2015 provides
that disputes relating to infrastructure contracts would be
considered as commercial disputes.

Further, a welcome change has been incorporated in the

Amendment Act, 2015 which mandated that the arbitrator must be
independent and impartial. This would bring a lot of confidence in
private developers considering that it was not uncommon for the
concession authority to mandate that its own employees or officers would act as arbitrators in the case of disputes. Also,
changes to the regime of enforcement of awards has ensured that if a party is desirous of challenging an arbitral award,
it may be called upon to deposit part or the whole of the sum under the award to stay the enforcement thereof pending
such challenge. However, an exception has now been created through the Arbitration and Conciliation (Amendment)
Act, 2020 (Amendment Act, 2020) whereby this requirement of deposit is dispensed with if there is a prima facie case
of fraud or corruption in respect of the arbitration agreement or the award. Also, a recent amendment to the Specific
Relief Act, 1963 prevents courts from granting injunctions in respect of infrastructure projects i.e. transport, energy,
communication, water and sanitation, and social and commercial infrastructure and such other projects notified in the
schedule of the Specific Relief Act, 1963 where such injunctions would cause impediments or delays in the progress
completion of such infrastructure project.

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3P India
PPPs in India face a plethora of challenges ranging from low equity participation, poor project preparations, limited
lending etc. To address many such challenges, the government in its Union Budget 2014-2015 proposed to set up a
mechanism to provide support to mainstream projects. This commonly came to be known as the ‘3P India’. An initial
fund of INR 500 crores was also allocated for the purposes of 3P India. News articles reported that 3P India would have
no regulatory powers, but will look at a whole gamut of issues obstructing the growth of PPPs in India such as facilitating
nuanced and sophisticated MCAs, bidding process, dispute resolution mechanism, project appraisals, looking into
finance structure and management contracts etc. However, 3P India has not yet been established.

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25 Issues to be Co nsidered in M&A Transac tio ns in the
Infrastructure Sec to r
While the general issues pertaining to concession agreements have been discussed in the earlier chapters, set forth
below are some issues that have been encountered/may be relevant to consider in M&A transactions in the
infrastructure sector. The list of issues below is merely indicative and not exhaustive.

Vires versus Concession Terms

▪ One would assume that a concession agreement is fully enforceable against the relevant authority. Please do
consider the legal framework from which the rights to the relevant authority and that to the concessionaire flow.
For example, national highways in India vest in the Union and the enabling statute 74 gives a limited set of powers
to the NHAI. Hence, there may be limitations on the powers of NHAI itself to delegate the function of developing,
maintain and managing the national highways. Similarly, if the highways are merely ‘entrusted’ and do not ‘vest’ in
the NHAI, there could be limitations on the delegation to a concessionaire.

Change in control

▪ Private sector involvement in infrastructure projects has helped bridge the gap between the available public
resources and the required investment. Amongst the numerous considerations taken into account by a private
player whilst investing in an infrastructure project, the prospects of exiting from the project is a crucial issue. SPVs
are usually floated for investments in the infrastructure sector, either as subsidiaries of a single promoter group or
in collaboration with a JV partner (who could be a foreign investor). As projects are allocated to pre-qualified bidders
having the requisite financial and technical expertise, change in control provisions in concession agreements seek
to discourage divestment of stakes in infrastructure projects typically until the project is up and running. Such
restrictions (which could be restrictions on change in equity interest, control or management of the project
company) usually continue to apply at least up to 18 months from the Project COD.

▪ In many cases such as the Hyderabad Metro Rail

Project, the restriction applies throughout the term of
the concession agreement. For instance, under the TOT
NHAI MCA of 2017, the aggregate holding of the
selected bidder together with (its/their) associates, in
the issued and paid-up equity share capital of the
concessionaire is prohibited to decline below 51%
during the first 2 years of the concession period (which
commences from the date of satisfaction of the
conditions precedent). Each member of the consortium
whose technical and financial capacity was evaluated for the purposes of prequalification, and short-listing is
required to hold at least 26% (along with its associates) of such equity during the first 2 years of the concession
period. Identical restrictions are prescribed in the 2018 MCA for major ports in India with an additional obligation
on the successful bidder/consortium members to also maintain the ‘Management Control’75 of the project company
until expiry of 2 years from the COD. Certain concession agreements (such as the Hyderabad Metro Rail Project)

74 National Highways Act, 1956 and the National Highways Authority of India Act, 1988.
75Under the 2018 Major Port MCA, “Management Control” means the possession, directly or indirectly of the power to direct or cause the direction
of the management and policies of the Concessionaire, whether through the ownership of voting securities, by contract or otherwise or the power
to elect or appoint more than 50% (fifty percent) of the directors, managers, partners or other individuals exercising similar authority with respect to
the Concessionaire.

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 recognize a mere change of 15% in the direct and/or indirect shareholding as change in control/ownership of the
project company.

▪ In most concession agreements, the ‘change in control’ concept is linked to control as defined under the Securities
and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. However, the
concept of ‘control’ has not yet clearly evolved under Indian jurisprudence. In Subhkam Ventures (I) Private Limited
vs. The Securities and Exchange Board of India76, the Securities Appellate Tribunal (SAT) delved into whether
protective provisions in a shareholders’ agreement (i.e. affirmative vote items) amounted to ‘control’. The SAT
observed that ‘control’ is a positive power and not a negative power and accordingly held that a person having the
power to appoint majority of the directors, control the management or policy decisions, or exercise day to day
operation control over the business of a company would be in ‘control’ of that company. On the other hand,
provisions meant solely to ensure standards of good corporate governance and to protect the interests of the
shareholders were held to fall short of ‘control’. However, upon an appeal by SAT, the Supreme Court 77 ruled that
the aforesaid decision would not be a precedent.
▪ Subsequently, in the matter of acquisition of shares of Jet Airways (India) Limited78, the Securities and Exchange
Board of India (SEBI) held that the acquisition of shares of Jet by Etihad did not amount to a change in ‘control’ as
both tests, namely right to appoint majority of the directors and the right to control management or policy decisions
were not fulfilled. In 2016, SEBI also came up with a discussion paper on ‘Brightline Tests for Acquisition of ‘Control’
under the SEBI Takeover Regulations’. Vide the aforesaid discussion paper, SEBI proposed to distinguish between
protective rights (i.e. veto rights not amounting to control) and participative rights (i.e. rights which would amount
to control). Thereafter, SEBI observed that covenants enable the exercise of certain checks and controls on the
existing management for the purpose of protecting the interest of the investors rather than formulating policies to
run the company would not amount to ‘control’. In the latest of the series of decisions on ‘control’, the Supreme
Court79 relied on the observations of the SAT in the Subhkam Ventures case regarding positive and negative ‘control’,
albeit in the context of insolvency law. Accordingly, the issue has still not been put to rest.

▪ The lack of clarity on the concept of ‘control’ and ambiguous exit provisions in concession agreements often gives
rise to an uncertainty. For instance, concession agreements usually prescribe restrictions on changes in
shareholding, control and management of a concessionaire. However, such agreements are silent on whether any
approval of the concession authority is required if there is a change in shareholding or management of the holding
company (effectively leading in the indirect change in control and/or holding of the concessionaire).

In such a scenario, the selling shareholders of the holding company could argue that since the concession
agreement does not expressly restrict the change in shareholding and/or control of the holding company, no prior
consent of the authority would be required. On the other hand, investors while taking a cautious stand could argue
that the concession was awarded to the project SPV based on the technical and financial credentials of the bidding
consortium/holding company of the concessionaire. Thus, transfer of the stake of existing shareholders of the
holding company to a new investor could be construed effectively as the change in control thereby requiring prior
consent of the authority. Although, the investors would desire that prior approval of the authority be obtained
before investment in the holding company, (i.e. for the proposed indirect investment in the concessionaire), the
selling shareholders of the holding company may not want to approach the authority. This is due to the fear of
refusal and/or unreasonable delay in receiving response from the authority. Further, once the concessionaire has
approached the authority for seeking the approval for an investment, the concessionaire/selling shareholders may
be compelled to seek approval from the authority for subsequent investments as the concessionaire/selling
shareholder would have set a precedent of approaching authority prior to investments.

76 Appeal No. 8 of 2009 decided on January 1, 2019.

77 Securities and Exchange Board of India vs. Subhkam Ventures (I) Private Limited, Civil Appeal No. 3371 of 2010 decided on November 16, 2011.
78 WTM/RKA/CFD-DCR/17/2014 decided on May 8, 2014
79 ArcelorMittal India Private Limited vs. Satish Kumar Gupta and Others, 2018(13)SC ALE381

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▪ In due diligences, we often observe that the shareholding and management of the concessionaire changed multiple
times over the years without any approvals from the authority (despite the concession agreement expressly
requiring the same). More often than not, the selling shareholders do not want to go back to the authority to
regularize the non-compliance as the same could be construed by the authority as a breach of the concession
agreement and consequently a default thereunder.

▪ If the selling shareholders are unwilling to approach the authority for seeking its: (i) prior consent for the
investment; and (ii) post facto regularization of past non-compliances (as discussed above), the parties may
consider intimating the authority of the proposed changes in shareholding and/or control of the project SPV, after
execution of the investment agreements. The intimation may also incorporate details of the change in the
shareholding and management of the concessionaire from time to time until date. It may be agreed in the
investment agreement that the closing of the investment transaction would take place after a mutually agreed
period has passed since the intimation to the authority and no objection and/or show cause has been received from
authority until the scheduled date for undertaking closing actions. Although this will not be a fool proof mitigation
to the issues in question, parties may derive some comfort if the authority has not issued any objections until the
date on which the closing actions were to take place.

Pricing of shares and assured returns

▪ The Foreign Exchange Management Act, 1999 (FEMA) prescribes guidelines for pricing of shares in case of: (i)
issuance of shares by Indian companies to persons resident outside India; and (ii) transfer of shares between
persons resident in India and persons resident outside India 80. While parties to a transaction may have certain
pricing for investments or exit in mind, the same cannot be agreed upon unless they are in accordance with the
pricing guidelines prescribed under Indian foreign exchange laws.

▪ An obvious expectation of an equity investor would be a post-tax assured return on its investments at the time of
exit. However, Indian counter parties have often attempted to avoid their obligations to provide assured returns to
non-resident investors despite agreeing for the same under commercial contracts. This is because assured returns
on investments in India under the guise of equity investments are not permissible under FDI policy of the GOI and
under the Indian foreign exchange laws. The principle laid down under FEMA is that a person resident outside India
should not be guaranteed any assured exit price at the time of making an investment and should exit at the price
prevailing at the time of exit. The GOI and the RBI have always discouraged arrangements that even hint of assured
returns as the same would otherwise be akin to a debt transaction which is regulated differently under Indian laws.
In the past, Indian courts have also struck down innovative investment structures viewing them as colourable
devices to circumvent the prohibition of assured returns.

▪ However, recent judgments of Indian courts seem to have significantly impeded the ability of counter parties to
avoid assured payment obligations, by allowing payouts in the form of damages for contractual breach. Indian
courts have also held that parties cannot be permitted to derogate from their contractual obligations merely by
alleging violation of exchange control regulations at a belated stage.

80Issuance of shares of an Indian company to a non-resident or transfer of shares from a resident to a non-resident shall not be lower than the fair
market value (FMV) arrived at internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a Chartered
Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant. Cannot be lower than the FMV to be determined in accordance
with pre-approved valuation norms. Similarly, any transfer of shares of an Indian company held by a non-resident to a resident Indian cannot be at a
price which is more than the FMV to be determined in the same manner. In case the issuance or transfer is of shares of a listed company, the
valuation is to be done in accordance with the guidelines prescribed by the Securities Exchange Board of India.

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 Case Study
For instance in Docomo vs. Tata (2017) 142 SCL 252
(Del) the shareholders’ agreement executed
between the parties in respect of investments by
Docomo in Tata Tele Services Limited (TTSL)
provided that if TTSL fails to meet certain
performance indicators, upon request of Docomo,
Tata will find a buyer for Docomo’s shares in TTSL at
a price which is the higher of: (i) 50% of the price at
which Docomo purchased the shares; or (ii) the FMV
of those shares as on March 31, 2014 81. Tata could
not find a buyer at the desired price as a result of
which Docomo exercised its ‘put option’ requiring
Tata to acquire its shares at the desired return. The
acquisition of shares of Docomo by Tata was
disallowed by RBI. This led to arbitration between
the parties. The arbitration tribunal held that Tata
was in the breach of the terms of the shareholders’
agreement as it did not perform its alternate obligations. Hence as per the arbitral tribunal, Tata was liable to pay
damages to Docomo. The Delhi High Court allowed enforcement of the arbitral award observing that the award
was in the nature of damages and therefore there was no violation of the exchange control regulations. The High
Court observed:

“The first part of that clause imposed on Tata an unqualified obligation to find a buyer of the Sale Shares
on the terms that Docomo received the Sale Price by 3 rd December 2014. Tata has admittedly failed to
perform this obligation. Tata cannot rely on its purported performance under the second part of the
Clause 5.7.2. The alternatives provided for in the second part were only available to Tata if it was able to
perform in fact and in law. The FEMA Regulations do not excuse non-performance. It is common ground
that there were methods of performance of obligation in question which were covered by general
permissions under FEMA.”

“It was held that the promise was valid and enforceable because sub-regulation 9(2)(i) of FEMA 20
permitted a transfer of shares from one non-resident to other non-resident at any price. The AT held that
Tata could have lawfully performed its obligation to find a buyer at any price, including at a price above
the shares’ market value, through finding a non-resident buyer. Its failure to do so was, according to AT,
a breach entitling Docomo to damages.”

81 The shareholders’ agreement between Tata and Docomo was executed in 2009.

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 In another case of Cruz City 1 Mauritius
Holdings vs. Unitech Limited 239 (2017) DLT
649, the Delhi High Court in April 2017, has
upheld the enforcement of foreign award in
India, notwithstanding the FEMA
restrictions. It held that violation of FEMA is
not a violation of the ‘public policy of
India’82 in so far as the question of
enforceability of foreign award is
concerned.

Cruz City was entitled to exercise a ‘put

option’ on its shares on one of the
shareholders of the Joint Venture company
(JVC) at a price that yielded a post – tax IRR of 15%, in the event of delay in commencement of construction of an
Indian real estate project. It was also separately agreed that in case such shareholder was unable to honor the
‘put’, Unitech will infuse the required monies in the JVC. The project was delayed, and Cruz City exercised its put
option. Upon failure of the shareholder and Unitech to pay, Cruz City invoked arbitration and procured a favorable
order. The London seated arbitration tribunal passed awards against Unitech companies to pay an amount of
nearly USD 300 million in exchange for Cruz City’s shares in the JVC with Unitech. Part of the award was sought
to be enforced in India which was challenged by Unitech on many grounds. The Delhi High Court rejected all the
objections against enforcement, thus paving the way for Cruz City to take steps to execute the award in India.

Unitech argued that the award as well as the monetary reliefs granted thereunder, were allegedly in violation of
the FEMA, the enforcement of the foreign award would result in a violation of the exchange control laws of India
(i.e. FEMA). Violation of a national law (FEMA) would be contrary to the public policy of India. The court found
that FEMA does not render foreign exchange void in case of any procedural non-compliance (such as failure to
seek Government/RBI approval). In fact, FEMA itself permits non-compliance to be addressed through
compounding (i.e. monetary penalties) as well as granting of permissions/approvals after the execution of
transactions.

Unitech further contended that given the violation of the FEMA, the RBI is not likely to grant its approval for
remittance under the award and therefore the enforcement should be declined. The court therefore held that
the necessity to seek prior RBI approval before remitting funds offshore from India, is insufficient to refuse the
enforcement of a foreign award. In a passing the court observed “notwithstanding that Unitech may be liable to
be proceeded against for violation of provisions of FEMA, the enforcement of the Award cannot be declined”.

The court also observed:

“Unitech’ s contention that structure contemplated under the Keepwell Agreement read with the SHA
provided an assured return at a pre-determined rate to Cruz City and this was a flagrant violation of FEMA
and Regulations made thereunder, is also bereft of merit. The Put Option provided to Cruz City under the
Keepwell Agreement could be exercised only within a specified time and was contingent on the Santacruz
project not being commenced within the prescribed period. This was not an open-ended assured exit
option as is sought to be contended by Unitech. Cruz City had made its investment on a representation
that the construction of the Santacruz Project would commence within a specified period. Plainly, if the
construction of the Santacruz Project had commenced within the specified period – that is, by 17.07.2010
– Cruz City would not be entitled to exercise the Put Option for exiting the investment. Further, the Put

82Enforcement of international arbitration awards in India, can be challenged on the ground that the same is against the ‘public policy’ of India.
However, Indian courts have restrictively interpreted ‘public policy’ in the context of enforcement of international arbitral award in India.

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 Option could only be exercised within a fixed time period of 180 days and the said option would be lost
thereafter.

The reliance placed by Unitech on the RBI circulars dated 09.01.2014 and 14.07.2014 is also misplaced.
In terms of RBI’s circular dated 09.01.2014 optionality clauses granting assured returns on FDI are
proscribed. However, it is doubtful whether the said circular would be applicable to cases where a foreign
investor founds its claim in breach of contract. Plainly, if an investment is made on representations which
are breached, the investor would be entitled to its remedies including in damages. The aforesaid circulars
proscribe assured return instruments brought in India under the guise of equity. However, in the present
case, Cruz City is only seeking to enforce its obligations against Burley, an overseas entity.”

It should however be noted that the above precedents have their own peculiar facts. The investor will need to
demonstrate to the courts that the investment terms were not merely a colorable device to circumvent legal
restrictions but adequate grounds and bona fides exist for the claim of such damages.

Additionally, it is important to note that Section 67 of the Companies Act, subject to three specified exemptions,
prohibits a public company from giving, whether directly or indirectly and whether by means of a loan, guarantee,
the provision of security or otherwise, any financial assistance for the purpose of, or in connection with, a purchase
or subscription made or to be made, by any person of or for any shares in the company or in its holding company.

Bidding for Projects and Black Listing

▪ RFPs issued by Government authorities such as the NHAI usually require bidders of projects to confirm whether the
bidder or any constituent of the consortium/ JV has been barred by the Central/ State Government, or any entity
controlled by it, from participating in any project (regardless of the mode of implementation of the project). Entities
who are so disbarred aren’t eligible to submit bids, whether individually or as a member of the consortium.
Accordingly, at the time of submission of bid documents, it would be important for entities applying for the project
to ascertain whether any of them are prohibited from participating in the project as envisaged in the RFP.

▪ RFPs also indicate that bidders (including all of their JV members) failing to physically submit the original documents
would be unconditionally debarred from bidding in NHAI projects for a specified period (which can go upto 5 years
from the date of issue of debarment notice). In this regard, questions have arisen as to the authority of NHAI to
blacklist or debar entities from bidding in projects.

Case Study
In Patel Engineering vs. Union of India and Others (AIR 2012 SC 2342), the Supreme Court delved into the
question whether it was legally permissible for the NHAI to blacklist a company on the ground that it declined
to enter into a valid contract after it had been declared as the successful bidder. In this case, the Supreme Court
observed that though the NHAI is a statutory body, its authority to blacklist is not based on any express statutory
provision. The Supreme Court noted that blacklisting has the effect of preventing a person from the privilege
and advantage of entering into lawful relationship with the Government for purposes of gains.

As regards the validity of a debarment by the NHAI on grounds which were not expressly stated in the bid
document, the Supreme Court observed as follows:

“The 2nd Respondent, being a statutory Corporation, is equally subject to all constitutional limitations,
which bind the State in its dealings with the subjects. At the same time, the very authority to enter into
contracts conferred under Section 3 of the NHA Act, by necessary implication, confers the authority not
to enter into a contract in appropriate cases (blacklist). The 'bid document' can neither confer powers,
which are not conferred by law on the 2nd Respondent, nor can it subtract the powers, which are
conferred by law either by express provision or by necessary implication. The bid document is not a
statutory instrument. Therefore, the rules of interpretation, which are applicable to the interpretation
of statutes and statutory instruments, are not applicable to the bid document. Therefore, in our opinion,
the failure to mention blacklisting to be one of the probable actions that could be taken against the

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 delinquent bidder does not, by itself, disable the 2nd Respondent from blacklisting a delinquent
bidder, if it is otherwise justified. Such power is inherent in every person legally capable of entering
into contracts.”

Generally, as regards the State’s power to blacklist, the Supreme Court held that the State can decline to enter
into a contractual relationship with a person or a class of persons for a legitimate purpose. The authority of State
to blacklist a person is a necessary concomitant to the executive power of the State to carry on the trade or the
business and making of contracts for any purpose, etc. There need not be any statutory grant of such power. The
only legal limitation upon the exercise of such an authority is that State is to act fairly and rationally without in
any way being arbitrary - thereby such a decision can be taken for some legitimate purpose. The Supreme Court
further observed that the legitimate purpose that is sought to be achieved by the State in a given case could
vary depending upon various factors.

Renegotiation of contracts by the Government

▪ Indian PPP contracts do not allow re-negotiation

of concession agreements. A project is vulnerable to
changes/cancellation if a new government sets different
priorities from those set by the previous government.
There have been instances in the past where the
government has sought to unilaterally amend contracts
to safeguard public interest much to the detriment and
dismay of the private developers. This could have direct
impact on the cash flows and projected revenues of the
private developers (who have already made significant
investments in the project) leading to defaults under the
financing documents and other contractual defaults.
Also, given the financial and operational stress in Indian
projects space currently, lenders would be apprehensive
in providing cushion to the developer under stress.

▪ During diligences therefore, investors must engage with industry experts to apprise themselves of existing as well
as potential policy and regulatory risks affecting the concerned industry. The investor may also consider if
seller/promoter should also obtain adequate insurance against political risk events (such as the one mentioned
above) to insulate the investor of the losses arising out of such risks.

Case Study
One of the examples of the instances where the Government has sought unilateral change in the terms of a contract
include the attempt of the newly elected Andhra Pradesh Government to re-negotiate renewable PPAs executed
with private developers. The AP Government’s viewpoint was that compared to other states, the price at which the
Government was procuring power from the private developers was steep. The AP Government was also of the view
that the actual costs incurred/being incurred by private developers in implementing the project was substantially
lower than the parameters considered in fixing tariffs. Thus, citing a loss to the public exchequer, the Government
sought to revise the terms of the PPAs.
A similar issue has been faced by a large number of solar power developers in the State of Gujarat (the initial outcome
of which has been in favor of the developers) the outcome of which is pending disposal of an appeal before the
Supreme Court.

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Change in scope of work
▪ Disputes between a concessionaire and the concession authority on change in scope of work 83 could have a
considerable impact on the developer’s financials and consequently on the purchase price modelling of the
investor. Obligations of the concessionaire are often broadly worded in the concession agreements thereby creating
ambiguity on what would amount to change in scope of work of the concessionaire. Consequently, the concession
authority and the concessionaire end up disputing whether a work that the authority has asked the concessionaire
to undertake (irrespective the likely cost), is within the scope of the work envisaged at the time of grant of
concession or is a change in scope. If determined that such work is within the scope of work of the concessionaire,
the concessionaire will need to implement the same at no extra cost to the concession authority. Change in scope
related disputes are common in road projects in India.

Case Study
For instance, in a road project in Andhra Pradesh, there was a substantial
damage to the road project due to floods. As a result, the concession
authority required the concessionaire to repair the damage and bring
the project up to speed in accordance with the latest standards of repair
and design. The concessionaire argued that the road project has been
following earlier prescribed standards and that if the project was to be
repaired as per the latest standards the same would be work outside its
scope of work and would entail additional costs. While the authority
argued that the repair and upgradation of the project as per the latest standards was within the scope of work of the
concessionaire, the concessionaire argued that the concession agreement was not specific on whether the same
standards were to be applied (as existed at the time of commencing the project by the concessionaire) while
undertaking repairs or the latest standards were to be applied. This led to a long-drawn dispute between the
authority and the concessionaire. The matter was finally resolved with the concession authority agreeing to
separately bid the requirement of upgradation of the project as per the latest standards, provided the concessionaire
would waive its right to claim damages against the authority for certain defaults by the authority including with
respect to delay by the authority in providing the required land for the project to the concessionaire within the
timelines stipulated in the concession agreement.

In another case, the authority required the concessionaire to create additional toll lanes to ensure faster clearance
of the congestion at the toll (as faster clearance of the congestion was one of the responsibilities of the
concessionaire). The concessionaire argued that the data provided to the concessionaire by the authority at the time
of bidding did not envisage such heavy flow of traffic and thus creation of additional toll was not within the scope of
work of the concessionaire and it also involved heavy costs.

It is advisable to assess the merits of a change of scope of work dispute (if any) between the concessionaire and the
authority and its likely impact on the financial position of the concessionaire. Communications among various
stakeholders such as the concession authority, IE and the concessionaire should be also be reviewed for better
understanding of the dispute and evaluation of merits of the dispute (a general scope of legal due diligence may not
cover review of such internal communications. Much reliance is usually placed on the seller representations).

Further, at the pre-bid stage, detailed discussions with the concession authority at pre-bid meetings regarding any
doubts and ambiguities should be undertaken. Written queries should be submitted in order to receive a written

83 Concession agreements (such as in road sector) may allow concession authority to require the concessionaire to undertake additional work which
is beyond the scope of work originally agreed with the concessionaire, provided that such changes / additions do not require expenditures
exceeding a certain percentage (usually 5 %) of the total project cost and do not adversely affect the COD. Upon determination that a particular
work is beyond the scope, the concessionaire is required to draw a plan and apprise the authority of the likely cost for
implementation of such additional work. Post this, the authority may formally issue a change of scope order to the concessionaire for carrying out
such additional work.

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response. However, even where the bid documents contemplate such processes, concession authorities may not be as
forthcoming as may be desired by the confused bidders.

Sub-contracting of key obligations and approval of key contracts

▪ Key obligations under concession agreements such as engineering, procurement and construction, O&M are usually
completely sub-contracted by concessionaires to a sister/group company (Related Party). While the concessionaire
remains accountable to the concession authority for performance under the concession agreement, the terms and
conditions of the sub-contracts do not pass the concessionaire’s liabilities (in connection with the sub-contracted
work) towards the authority through to its sub-contractor(s). Often the sub-contracts with Related Parties do not
impose any obligations on the sub-contractor to provide any performance security or pay liquidated damages to
the concessionaire for delay or failure of performance of the part of the sub-contractor.

▪ It is also seen that the terms of the sub-contracts with related parties are inadequately drafted with minimal checks
and balances that one may otherwise typically see. For instance, payments to sub-contractors are not linked to the
progress and performance of the sub-contractor during the term of the sub-contract. This allows unrestricted cash
flows out of the concessionaire despite delayed and/or poor performance on the part of the related party sub-
contractor. This obviously leads to cash shortfall thereby causing additional financial stress on the concessionaire.
Consequently, it directly and adversely affects the ability of the concessionaire to complete and operate a project.

The investor may require re-negotiation of the terms of the sub-contracts to ensure that the agreement is
watertight, and the performance of the sub-contractor is adequately secured. The same should be a condition
precedent to investment by the investor.

▪ Further, usually the terms of the concession agreements require that any proposed alterations to project
agreements pertaining to the project (which may include sub-contracts) and financing documents of the
concessionaire, shall be submitted to the concession authority for its review and comments prior to their execution.
In our experience, the concession authority would not normally intervene unless the terms of the revised
contracts/financing documents, increase the obligations of the concession authority.

Case Study
In the case of Delhi Gurgaon Expressway, one of the 3
reasons why the NHAI terminated the concession
agreement of the toll road project was because the
concessionaire fraudulently obtained a loan of INR 1597
crores in 2010, after the project was completed from
IDFC and 4 other banks without seeking prior approval
from NHAI. These lenders objected that in terms of the
process set forth in the concession agreement, the NHAI
should have intimated its intention to terminate the
concession to the lenders and afforded an opportunity
to the lenders to exercise their substitution rights.
However, NHAI was of the view that it did not recognize such lenders as the loans were provided without NHAI’s
approval and hence NHAI was under no obligation to coordinate with the lenders.

Indian laws prescribe that contracts executed with related parties should be at arms-length terms. It is therefore
advisable that the investor should also seek the review of at least the key project agreements/sub-contracts by industry
experts to understand if the sub-contracts are compliant with the above-mentioned requirements.

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Regulatory approvals and non-compliances

▪ Establishment and operation of infrastructure projects entails procurement of wide range of licenses, approvals,
consents, registrations and no objection clearances (Approvals) from various agencies and authorities at the
federal, state and local levels in India. Failure to obtain the required Approvals and/or to comply with the terms
and conditions thereof would usually constitute offences under Indian law. Such offences are usually punishable
with fines or imprisonment or both. However, violations in respect of some Approvals may have far reaching and
severe consequences than what could be commercially assumed in investment transactions. Regularization of
serious legal violations such as with respect to environmental clearances would likely be a non-negotiable pre-
condition for the investor to put its pen to paper.

▪ For instance, setting up and/or operations of identified projects without prior environmental clearance is prohibited
under Indian law. While the Environment Protection Act, 1986 prescribes fines up to INR 1 lakh or imprisonment of
5 years (of the officials responsible for the affairs of the defaulting company) or both for violations, the Government,
judicial and quasi-judicial authorities have wide powers to take all necessary actions for protection and restoration
of environment including suspending or shutting down projects.

▪ Courts in India have adopted a strong activist stand on tackling environmental issues. The Supreme Court has
widened the scope of Article 21 of the Constitution (the Right to Life) by stipulating that a clean environment is
essential to human survival.

Case Study
In Indian Enviro-Legal Action vs Union of India, the Supreme Court also included the ‘Polluter Pays’ principle into
Indian jurisprudence. The court held that

“the absolute liability of harm to the environment extends not only to compensate the victims of pollution,
but also to the cost of restoring environmental degradation. Remediation of damaged environment is a part
of the process of sustainable development.”

Thus, in exercise of their powers under the Constitution, there are many instances where courts have imposed
exemplary damages on corporations for serious environmental violations.

In a landmark judgment, the High Court of Himachal Pradesh

asked Jaiprakash Associates Limited (JAL) to pay INR 100
crores for flouting environmental laws for setting up its
cement plant in Himachal Pradesh. The environmental
clearance granted to the 25 MW thermal power plant of JAL
was cancelled and JAL was asked to dismantle the same within
3 months from the date of the judgment. As per the court, JAL
wrongly showed the project cost as INR 100 crores to
circumvent the requirement of environment impact studies
under the Environment Impact Assessment Notification, 2006
(under which the environmental clearance for projects are issued). The court found that the actual cost of the project
was upwards of INR 500 crores. The court also found that the power plant had been set up without prior
environmental approvals from the Government. While imposing damages based on ‘polluter pays’ principle, the high
court allowed the functioning of the cement plant, as in its view the closing of the cement plant would affect the
livelihood of the people in local area. However, the high court said that it would not hesitate in recalling the order if
JAL does not comply with the conditions prescribed by the expert appraisal committee of Union environment
ministry, while granting environmental clearance or is guilty of causing pollution. The damages were to be used in
improving the ecology and improvement of the area concerned and to ameliorate the suffering of the people by
creating hospitals, schools and other facilities.

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▪ Procuring critical Approvals such as environmental clearance from the MOEFCC, approval for use of forest land for
non-forest purposes are usually the obligations of the concession authority in some PPP projects but compliance of
the terms and conditions of the same and maintenance of the same during the concession period is the obligation
of the Concessionaire. Having said that, we have also seen projects (such as incase of power projects) where the
obligation of procurement, maintenance and compliance of the terms and conditions of all Approvals, is that of the
concessionaire.

▪ Following key issues with respect to Approvals are often noted in conducting legal due diligences:

− Certain approvals have not been obtained

− The approvals that have been obtained in connection with the project are inadequate i.e. the approvals are
not commensurate with the extent of project infrastructure created by the concessionaire or the activities
being undertaken by the concessionaire at the project

− The concessionaire is in default of compliance of the terms and conditions of the approval which often
includes failure of the concessionaire in reporting the compliance of the terms and conditions of the approval
by the concessionaire with the appropriate authority

− Show cause notices have been issued by the governing agency to the concessionaire citing non-compliance
of the terms and conditions of the approval by the concessionaire and seeking clarifications as to why such
approval shall not be cancelled/rescinded

▪ Unless the above issues are such which if not resolved upfront, are likely to or will adversely impact: (i) the ability
of the concessionaire to carry on its business; and/or (ii) interests of the investor, parties would ideally like to go
ahead with the envisaged investments while finding solutions to mitigate such risks. Thus, regularization of such
violations may be incorporated in the investment agreements as a condition to closing of the investment
transaction.

It should be borne in mind that a legal due diligence would normally not involve an exhaustive compliance review
and on ground investigation of whether the project is actually being implemented/operated in accordance with the
terms of the Approvals. Serious contraventions (especially environment and forest related) of the terms of the
Approvals are often revealed during site visits and asset investigations which could have a material impact on the
project. It is advisable to undertake environmental compliance and technical investigations through relevant
experts to understand project risks and their likely impact on the proposed investments by the investor.

Appropriate warranties and indemnification (backed by insurance if possible) should also be taken.

Change in Law and Force Majeure

▪ Typically, concession agreements provide for amendments if, as a result of ‘change in law’, the concessionaire
suffers an increase in costs or reduction in returns or any other identified financial burden in excess of certain
amount and/or percentage of concessionaire’s realizable fee in an accounting cycle. Such provisions are
incorporated to bring the concessionaire into same financial position as it would have been, should there have been
no ‘change in law’. In most concessions, relief is available only if such ‘change in law’ event has occurred during the
construction phase of the project.

▪ The definition of what constitutes ‘change in law’ may be limited and/or ambiguous in concession agreements. This
often leads to disputes among parties as to whether an incident is a ‘change in law’ incident or does not qualify to
be. The recent case of Adani Power’s ultra-mega power plant is a good example of this issue.

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 Case Study
Adani had through its SPV, set up a power plant for supply
of power to various state governments/utilities at
competitive prices determined through competitive
bidding process. Substantial amount of coal was imported
from Indonesia and other territories outside India.
However, subsequently the Indonesian government said
that any export of Indonesian coal could be done only at
prices linked to international prices instead of what
previously existed in the last 40 years (i.e. any higher
realization of price than local, would have to be retained in the country). As a result, the import price of coal turned
higher then envisaged and considered by the power producers in submitting their financial bids/tariff leading to
higher costs to Adani. Adani argued that such an event is a ‘change in law’ and ‘force majeure’ within the terms and
conditions of the PPAs and needed to be accordingly addressed including by providing for additional compensatory
tariffs in accordance with the terms of the power purchase agreements ( being a result of changing regulations in
Indonesia).

The Supreme Court however decided otherwise and said that Adani cannot raise preset tariffs if fuel becomes costlier
due to changes in laws overseas. The court further held that change in law in Indonesia would not qualify as change
in law under the applicable guidelines read with the executed PPAs, change in Indian law, certainly would 84.

The investor should therefore identify the applicable legal, regulatory and political risks concerning the project (and its
various stages) which may not qualify as a change in law or a force majeure event and for consequent reliefs thereof
under the concession agreement. Safeguards against commercial and legal implications of such risks would therefore
need to be adopted by the investor to insulate itself of such risks/events. For instance, assets such as airports, mines,
power have their own specific regulations. A small expected change to permissible noise levels, water discharge and
quality requirements can have a huge negative impact on revenues and costs. However, the same may not necessarily
qualify as a change in law under the concession agreement. To mitigate this risk, the investor may not be able to lay any
claim on the promoter or the concessionaire, however the same can be mitigated by seeking appropriate political risk
insurance at the cost of the promoter.

84Although in early April 2019, the Central Electricity Regulatory Commission has offered much respite to Adani by allowing revisions in the terms
and conditions of the power purchase agreements, the developers and the procurers had to face long drawn battle before the courts and
uncertainties around the power project

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Payment delays and defaults by Government counter parties

▪ The terms and conditions of

concession agreements do not
usually prescribe adequate
provisions that deter the concession
authority from delaying payments
to the concessionaire. Any delay in
making payments attracts only
minimal liquidated damages which
allow such delays to continue
inordinately without censure. Also,
the authorities often fail to provide
payment guarantees (which also
exposes a risk) to the concessionaire
despite requirements under the
concession agreements. For
instance, PPAs for procurement of power executed by Government distribution companies of India (DISCOMs)
require the government to provide payment securities to private developers in the form of letters of credit of an
amount equivalent to average monthly invoice amount. However, DISCOMs invariably do not provide such securities
to the developers and default in payments are persistent.

▪ Further, concession agreements envisage inordinately long timelines for payment by the Government to the
concessionaire after the invoice has been raised by the concessionaire. The payment receipt cycle of the
concessionaire and the above defaults by the authority should be borne in mind by the investor while determining
the projected cash flows and receipts of the investee company/concessionaire.

Changes in investment structure of Captive Power Plants

▪ Captive power plants (CPPs), i.e. power plants established by certain industries primarily for self-consumption, were
encouraged by the Government, so as to reduce the burden on the public sector for provision of electricity and
freeing up generation and transmission capacities. The growth of CPPs has been broadly attributed to: (i) need for
backup power arrangements (ii) requirement of continuing supply (iii) the co-generation benefits of steam and
electricity from production process of industries and (iv) need to generate electricity at costs lower than the high
industrial tariffs set to cross subsidize other categories of consumers 85.

▪ No license is required for the construction, maintenance and operation of CPPs (with the dedicated transmission
lines, if any). To support captive power supply and consumption, the law allows a CPP the right to open access for
the purposes of carrying the electricity to the captive user. An additional advantage of captive consumption of
electricity is that cross-subsidy surcharge (CSS)86 is not payable by the captive power consumer to state DISCOMs

85Section 9 of the Electricity Act read with Section 2(8) regulates captive generating plants. A captive generating plant has been defined to mean “a
power plant set up by any person to generate electricity primarily for his own use and includes a power plant set up by any co-operative society or
association of persons for generating electricity primarily for use of members of such cooperative society or association.”
86
Under section 42 (2) of the Electricity Act, the concerned state electricity regulatory commission is under obligation to introduce open access
which are subject to certain conditions such as payment of CSS by a consumer as per the rates prescribed by the concerned commission. The idea
behind CSS is to provide a favourable price of power to one set of customers at the expense of other categories of customer although the cost of the
DISCOM for supplying electricity to all consumers is the same. In India for instance, industrial consumers of electricity pay higher tariff for power
compared to rural customers. As per the Electricity Act, CSS were to be gradually reduced and done away with. But the same are so far applicable.
The GOI has in its latest union budget mentioned that the tariff policy will be revised and the requirement of payment of CSS may be completely
done away with.

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 for availing open access87 of the DISCOM’s distribution network for supply of electricity to the captive consumer’s
premises.

▪ For a power plant to qualify as a captive generating plant, the captive user(s) is/are required to: (i) hold not less
than 26% of the ownership in the power plant and (ii) consume not less than 51% of the aggregate electricity
generated in such plant, determined on an annual basis. Ownership in relation to a generating station or power
plant set up by a company or any other body corporate has been defined as the equity share capital with voting
rights. In other cases, ownership means proprietary interest and control over the generating station or power plant.
Therefore, any person that holds equity shares of a captive generating company with voting rights, could, if he
availed electricity from such power plant, be considered as a captive user, provided that, other requirements as
necessary are also fulfilled. It should also be noted that holding of preference shares or equity shares without voting
rights, would accordingly, not be considered as holding for the purpose of captive usage.

▪ However, an amendment to the current captive power related regulations are likely. The Ministry of Power, GOI
have proposed certain amendments in this regard on October 6, 2016 and May 22, 201888. The aim of the proposed
amendments is to fix a loophole in the current law pertaining to ownership of CPPs. The proposed amendment
mandates captive consumers to hold at least 26% of the equity base of 30% of the capital employed in the form of
equity share capital with voting rights (excluding preference/equity share capital with differential voting rights).
Existing rules for recognizing a group captive company involves ownership accounted by way of number of shares
and this has generally been achieved by issuing another class of shares/through shallow equity investments with
limited voting rights. The requirement for bringing in the equity in proportion of project cost/capital employed will
be onerous as it involves a high upfront commitment. Thus, the aim of the proposed amendments is that economic
ownership of shares of the user should commensurate the economic value of the ownership of the plant (which is
not the case in the law as it stands today).

▪ Given the captive status of power plants has to be determined on an annual basis, it remains to be seen how certain
existing CPPs which are already commissioned, with alternate structures on capitalization, where project capital
and equity have been already deployed, will rework their equity and shareholding structure by the time the draft
amendment is implemented89. Thus, in the event an investment is envisaged in infrastructure projects with captive
power generation plants, or solely in CPPs, the above sensitivity should be borne in mind by the investor.

87 ““Open access” means the non-discriminatory provision for the use of transmission lines or distribution system or associated facilities with such
lines or system by any licensee or consumer or a person engaged in generation in accordance with the regulations specified by the Appropriate
Commission” - Section 2 (47) of the Electricity Act
88https://powermin.nic.in/sites/default/files/webform/notices/Draft_Amendments_in_the_provisions_relating_to_Captive_Generating_Plant_in_El

ectricity_Rules_2005_0.pdf
89We note that the Government is considering further revisions to the proposed amendments. However exhaustive details of the same are not
available online.

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Renewable Purchase Obligations

▪ With an aim to promote generation and purchase of electricity from renewable energy sources, Indian electricity
laws require certain
designated entities to
purchase a certain
percentage of their total
electricity needs from
renewable power sources.
These designated entities are
distribution companies,
captive power consumers
and other open access
consumers (i.e. consumers
using the network of
distribution licensees for
procurement of energy).
Applicable regulations also
provide for purchase of renewable energy certificates (RECs) in lieu of purchasing renewable power by obligated
entities from the National Load Dispatch Centre90. The terms of the PPAs executed between the state procurers
and private developers in the renewable sector often prescribe that in the event the state procurer is unable to
draw electricity from the power plant, the developer can sell such power to any third parties. In the recent past, to
arm-twist power developers to renegotiate power tariffs, the State Government of Andhra Pradesh refused to draw
electricity from the renewable power plants. In such an event sale of power to designated entities (so as to fulfill
their renewable purchase obligations) could be an alternate solution to the power developer. However, the issue
lies in the fact that the supply of power from the power plant to such designated entity would be dependent on
availability of bandwidth on distribution/transmission networks connecting the power plant and the premises of
the designated entities. Further, such arrangements for supply of power from the power plant to the designated
entities would be intermittent as the moment the state procurers demand the electricity from the power plant, the
power developer is required to oblige in terms of the PPA executed with the state procurer.

▪ There are often disputes between designated entities and the government implementation agencies whether
renewable purchase obligations are applicable when the power is sourced by a captive consumer or any third-party
consumer from co-generation plants using non-renewable fuel for generation of electricity. In a number of
instances, State DISCOMs have argued that purchase of power from co-generation plants using non-renewable fuel
for generation of power need to comply with renewable purchase obligations prescribed by the concerned state
electricity regulatory commission. However, there seems to be some clarity on this aspect where the
courts/Appellate Tribunal for Electricity (APTEL) have held that in addition to generation of power through
renewable sources, the function of the state electricity regulatory commissions is also to promote generation of
power from co-generation sources. Hence, where the power has been sourced by a designated entity from co-
generation power plant, renewable purchase obligations are inapplicable. However, state regulations on this
subject may expressly provide otherwise, thus necessitating a review of local laws as applicable.

Inadequate stamping of project contracts

▪ Stamp duty is a type of tax and an important source of revenue for the government. Indian stamp laws require
payment of stamp duty on instruments executed for a transaction. Simply speaking, any document by which any

90RECs are issued by the National Load Dispatch Centre towards green power generated by registered developers. The RECs are issued on monthly
basis and can be traded over power exchanges by the registered developer.

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 right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded, is an
instrument. Depending upon their jurisdiction the Central Government and the State Governments prescribe the
rate of stamp duties to be paid on various instruments. The rate of stamp duties may either be fixed amount or ad
valorem (i.e. in proportion of the estimate value of the goods involved, consideration or the transaction concerned).

▪ Contracts for infrastructure projects such as EPC contracts, O&M Agreements, Project Implementation and
Management Agreements, Guarantees, Share Purchase Agreements, etc., when executed in certain states attract
ad valorem duty. Hence the amount of stamp duty payable on such instruments is substantial. However, during
legal due diligences we often see that such agreements are either under stamped or not stamped at all. Failure to
pay required stamp duty on the contract attracts substantial penalties. Failure to adequately stamp instruments
does not render a contract invalid, however such inadequately stamped documents are inadmissible as evidence
before Indian courts until the shortfall in duty and penalty for such shortfall is duly paid. Under section 34 of the
Maharashtra Stamp Act, such penalty can be up to 4X the amount of deficient stamp duty. Inadequately stamped
instruments can also be impounded by the concerned revenue authority.
▪ For an investor, it would be ideal that defaults in payment of stamp duties on the instruments of the investee
company are regularized by the selling shareholders/investee company as a pre-condition to investment by the
investor. However, negotiations witness a hard push from the sell side to avoid approaching the revenue authorities
as the stamp duty that may be adjudicated and penalties that may be imposed by the stamp authorities may be
considerably high.

In order to insulate themselves from any loss or liability as a result of default in payment of stamp duty, investors
seek specific indemnities from the selling shareholders. An estimate of the likely penalties for the stamp duty
defaults is also drawn by the investor and the same or a portion thereof is also usually considered by the investor
in financial modelling for determination of the purchase price.

Given high stamp duties parties are also seen executing investment agreements outside India as the incidence of
tax (i.e. the liability of stamp duty) arises after such document is brought in India. The duty will be payable even if
a copy of such document is brought into India physically or electronically.

Latent defects in construction contracts

▪ According to Section 16 (2) of the Sales of Goods Act, 1930, if a seller deals in goods of a description and the buyer
purchases such goods, then there is an implied condition that the goods will be of merchantable quality. However,
the act also provides that if the buyer had also examined the goods, then there shall be no implied condition as
regards defects which such examination ought to have revealed. Courts in India have defined ‘merchantable quality’
at various instances. The Madras High Court has held “goods are of merchantable quality if they are of such a quality
and in such condition that reasonable man acting reasonably would after a full examination accept them under the
circumstances of the case in performance of the offer to buy them, whether he buys for his own use or to sell
again91”.

▪ As regards the liability of a seller under Section 16(2) of the Sales of Goods Act, the Bombay High Court has held
that in case goods of a particular description are sold by a seller who deals in such goods, he is always, in the absence
of agreement to the contrary, responsible for the latent defects in the goods which render them non merchantable,
whether the buyer examined them or not for all such defects, whether latent or discoverable, on examination in
cases where the buyer has not in fact examined the goods. Hence contractors seek a limited defects liability period
upon the expiry of which the risks in respect of defects and remedying the same would be borne by the owner.
However, latent defects which are inherent in material or construction of the project may not be apparent during
the initial operations of the project and may surface after the expiry of the defects liability period. This aspect
becomes important where the EPC contracts have been given by a concessionaire to a related party company as

91 Sorabji H. Joshi and Co. vs. V.M. Ismail, AIR 1960 Mad 520.

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 such contracts would normally not provide for any defects liability period or even if they provide so, the same would
be substantially smaller than the industry standards. Thus, as a part of investment negotiations, the investor may
therefore consider if the EPC contracts executed by the concessionaire needs to be re-negotiated to adequately
allocate the risks in respect of defects to the EPC contractor.

Exchange Control – repatriation of award proceeds

▪ While Indian foreign exchange laws have been relaxed over the last decade, a full capital account convertibility is
not permitted. FEMA is the primary legislation dealing with the law applicable to transactions in foreign exchange.
Foreign exchange transactions under FEMA are categorized into 2 broad divisions: (i) capital account transactions,
and (ii) current account transactions. Payments for all current account transactions can be freely remitted outside
India, unless specifically restricted. Conversely, all capital account transactions are restricted, unless specifically
permitted.

▪ A capital account transaction is defined under FEMA to mean a transaction which alters the assets or liabilities,
including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons
resident outside India. Current account transaction means a transaction other than a capital account transaction
and includes, without limitation, the following:

− Payments due in connection with foreign trade, other current business, services and short-term banking
and credit facilities in the ordinary course of business

− Payments due as interest on loans and as net income from investments

− Remittances for living expenses of parents, spouse and children residing abroad; and

− Expenses in connection with foreign travel, education and medical care of parents, spouse and children

▪ Proceeds of decrees of Indian courts may be considered ‘capital account transactions’. Consequentially, repatriation
of such proceeds outside India may be restricted under the FEMA regulations. Thus, one typically takes a view that
the RBI’s prior approval is required for such repatriation of proceeds. The Delhi High Court in the case of Cruz City
supra., nevertheless allowed the remittance of award money. The court stated, “notwithstanding that Unitech may
be liable to be proceeded against for violation of provisions of FEMA, the enforcement of the Award cannot be
declined”. The Court further held India’s exchange control policy was designed to facilitate flow of foreign exchange
subject to reasonable restrictions and not to prohibit the flow of exchange. The court therefore held that the
necessity to seek prior RBI approval before remitting funds offshore from India, is insufficient to refuse the
enforcement of a foreign award.

Indemnity obligations

▪ Indian acquisition transactions are never complete without protracted debates and negotiations on indemnification
obligations of the parties. Section 124 of the Indian Contract Act, 1872 (Contract Act) defines a contract of
indemnity as, “A contract by which one party promises to save the other from loss caused to him by the conduct of
the promisor himself, or by the conduct of any other person, is called a “contract of indemnity”. The provisions
relating to indemnity are not exhaustive under the Contract Act and the law around indemnity has developed in
India through judicial precedents. It should also be noted that apart from the provisions of indemnity, Section 73
of the Contract Act provides right to parties to claim damages in case of breach of contract (i.e. compensation for
loss or damage caused due to breach of contract).

▪ In negotiating indemnity provisions in acquisition transactions, it therefore becomes imperative that the investor
should have a clear understanding of the key differences between the right of indemnification and the right to
damages under Indian laws as the parties often confuse the two rights as one. This is because indemnity rights are
often found to coincide with the measure of damages. In such cases, whether the right is called a right to indemnity
or a right to damage, the result is the same. The 2 concepts are quite distinct from one another and the same should

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 be borne in mind in negotiating indemnity obligations in infrastructure contracts and investments agreements in
infrastructure acquisitions.

▪ For damages, it is essential that there is a breach of contract. However, for a right of indemnification, breach of
contract is not essential. It is for this reason that ‘specific indemnities’ are negotiated for certain events which do
not constitute breach of contractual obligations. A comparison of section 73 (damages) and section 124 (indemnity)
seems to suggest that while statutory constraints are placed on the right to claim damages such as: (i) the loss
should be direct and immediately foreseeable (ii) the party claiming the loss should have taken the measures to
limit the loses (iii) the loss is not a consequential loss, etc.; indemnification rights may not be subject to such
constraints. However, parties usually require that the aforesaid limitations are incorporated under the contract
whilst negotiating indemnity provisions.

▪ Under the Contract Act, indemnity claims can be brought against third parties. Courts in India stipulated that section
124 deals only with one particular kind of indemnity which is an indemnity arising from loss caused to the
indemnified by the conduct of the indemnifier or by the conduct of any other person. It has been clarified that
Section 124 does not deal with those classes of cases where the indemnity arises from loss caused by events which
do not depend upon the conduct of the indemnifier or any other person, or by reason of liability incurred by
something done by the indemnified at the request of the indemnifier 92. However, courts have also observed that
since the Contract Act is not the exhaustive law of indemnity, equitable principles that have been applied by Courts
of England could be applied by Indian courts. Further, an indemnity can be enforced without the occurrence of an
actual loss (while a suit for damages lies upon occurrence of loss/damage) in cases wherein the promisor incurs an
absolute obligation/liability, and the contract of indemnity covers that obligation/liability. Thus, on the happening
of an indemnification event, a party (indemnified party) can compel the indemnifying party to set aside a fund for
meeting its indemnity liabilities or to pay the indemnity amounts directly to a third party.

▪ While a court may order damages more than the actual loss that has been incurred (in the form of special or pre-
estimated liquidated damages), and in some instances less than the actual loss incurred, indemnification generally
puts a person in the same position as he was before the loss.

Case Study
Although the above position in case of indemnities have been reiterated by Indian courts from time to time, the
Supreme Court in the case of State Bank of Saurashtra vs Ashit Shipping in 2002, held whilst considering an
indemnity bond that the question of making good a loss arises only when there is proof that the loss is suffered.
In another case of insurance (which is an indemnity in a broader sense) the Supreme Court held that it is only
upon the proof of actual loss, that the assured can claim reimbursement of loss to the extent it is established.
This is quite important from the perspective of indemnity insurance (indemnifying the acquirer) in acquisition
contracts.

The observations in these cases raise a concern whether in the event of enforcement the effect of indemnification
right would be procedurally or substantially different from the contractual right to damages.

▪ The advantages of right of indemnification cannot however be ignored particularly where a party wishes to seek
recourse from the indemnifying party for losses beyond a breach of contract. Also, even in cases of a breach of
representations and warranties, or other breaches of contract, the right to indemnification can potentially be more
advantageous, given the prospective scope of claiming an amount which is higher than what would be claimed as
damages. However, as stated above, it is quite possible that in cases of breach of contract, a court may view the
right to indemnity as coinciding exactly with the right to claim damages.

▪ Clarity is also required on few questions surrounding right of recourse of the acquirer, such as: (i) does the limitation
on liability in an indemnity clause preclude a party from claiming damages for breach in excess of the indemnity

92 Gajanan Moreshwar Parelkar vs. Moreshwar Madan Mantri, AIR 1942 Bom 302

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 limits, outside of the indemnification clause? (ii) does a loss to the investee company always amount to a loss to
the investor for the purposes of seeking indemnification? and most importantly (iii) where damages and indemnity
coincide, to what extent are the limitations relating to damages claims relevant to indemnification claims?

Non-compete provisions

▪ Restrictive non-compete provisions are fairly common in definitive investment documents in India (such as share
purchase agreements and share subscription agreements). Standard provisions would include restriction on
promoters and shareholders in engaging from business activities which directly or indirectly compete with the
business of the target company after acquisition. From a legal standpoint, enforcement of the same is problematic
as Section 27 of the Contract Act provides that every agreement by which anyone is restrained from exercising a
lawful profession, trade or business is void. However, such restrictions are permitted where the transaction involves
sale of goodwill provided such limits are reasonable (including in respect of period and area/location of operations).

▪ Typically, a share acquisition transaction does not give an acquirer the interest in goodwill of a company. Since
there is no sale of goodwill, it can be argued that non-compete provisions in investment agreements are
unenforceable under section 27 of the Contract Act 93.

▪ Additionally, the Competition Commission of India (CCI), vide a non-binding note titled ‘Guidance on Non-Compete
Restrictions’ (Guidance) recognized that non-compete restrictions may arise in various types of combinations,
including the acquisition of a business or an enterprise, formation of a JV or acquisition of controlling/ non-
controlling interest in an enterprise. Under the Guidance, the CCI indicated that the necessity of a non-compete
restraint indicates that in the absence of such restrictions, the combination could not be implemented or could only
be implemented under more uncertain conditions, at substantially higher cost, over an appreciably longer period
or with considerably higher difficulty. Further, as per the Guidance, the geographical scope of a non-compete clause
in case of acquisitions is to be limited to an area in which the seller has offered the products or services before the
transfer. Such protection from competition may also extend to those territories that the seller was planning to enter
at the time of the transaction, provided that the seller has already invested in such a move. It is pertinent to note
that the Guidance stipulates that an acquirer does not need to be protected against competition from the seller in
other territories where the latter had not previously operated.

▪ The jurisprudence on the non-compete issue seems to be evolving in India with certain courts adopting a much
liberal outlook on enforceability of non-compete provisions (although conflicting views are also present).

Case Study
In one case of share purchase transaction94, the seller sold his company at a huge premium to the buyer. The
seller also agreed to not undertake any business that competes with the target’s business in India and abroad
for a period of 5 years. The single judge bench of the Delhi High Court held that Indian law prescribes complete
embargo on such restrictions (with the sole exception of sale of goodwill). The court held that the sale of the
shares did not tantamount to the sale of business and goodwill. The court further held that even if the parties
intended to sell goodwill, the non-compete restrictions were very wide as they imposed a complete embargo
on seller’s employment and were therefore unreasonable.
However, a single judge bench of the Delhi High court disagreed with the above decision in another case95.
In this case, 2 doctors (pathologists and radiologist) sold their entire shareholding in their diagnostic business.
The investment agreement prohibited these sellers in engaging in any business which competes directly or
indirectly with the business of the target. While the term and geographical limit of the non-compete were not
specified in the investment agreement, the seller did agree in the agreement that the non-compete restrictions

93Bacha F. Guzdar v. CIT AIR 1955 SC 74 - An acquirer who buys shares of a company does not buy interest in the property (and hence, goodwill) of
the company.
94 Le Passage to India Tours & Travels (P) Ltd. v. Deepak Bhatnagar (2014) 209 DLT 554.
95 Lal Pathlabs (P) Ltd. v. Arvinder Singh 2014 SCC OnLine Del 2033.

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 were fair and reasonable, and their experience would enable them to work gainfully in a non-competing
business. Despite being retained in the target, the sellers started undertaking competing business in the same
city during the term of their retainership. The single judge bench of the Delhi High Court held that non-compete
restrictions are enforceable where the transaction involves sale of all shares of a company as with the shares,
the goodwill of the company also passes to the acquirer. Although the transaction documents were silent on
the term and location for non-compete, the court held that 5-year restriction within the city would be a
reasonable restriction. The above judgement was affirmed by a Division Bench of the Delhi High Court with one
disagreement from the view of the single judge. The Division Bench held that the sellers cannot be restrained
from carrying out their activities as professionals. As per the Divisional Bench restriction would however prevent
the doctors from corporatizing their business.
A decision of the European Commission (EC)96 indicates that the duration of post-JV non-compete is not more
than 3 to 5 years in Europe. In this case, Siemens and Areva created a full-function JV, Areva NP (Areva JV). The
shareholders' agreement included a non-compete clause which covered not only the lifetime of the Areva JV but
also, a period of 8 to 11 years after loss of joint control by Siemens over the Areva JV. The post-JV duration was
later reduced by an arbitral award to 4 years.
In assessing the post-JV non-compete, the EC found that the 4 year duration could not be justified and the parties
committed to reduce it to 3 years. The EC primarily relies on the duration for which confidential information
acquired by the parent would continue to be relevant. The EC order clarifies that the assessment of permissible
duration of the non-compete will vary across sectors. Impact of access to confidential information, duration of
customer/supplier contracts and customer loyalty are some factors which would be relevant to determine
duration of non-compete.
The aforesaid decision is largely consistent with CCI’s Guidance which also clarifies that, “Where the transfer
includes both goodwill and know-how, the non-compete clause is justified only for a period of up to 3 years and
up to 2 years if the transfer of goodwill only is involved. Longer durations may still be justified in a limited range
of circumstances where, for example, in certain industries and sectors, customer loyalty to a seller will persist
longer durations or the nature of the know-how transferred justifies an additional period of protection.”

Although, the first two examples go to show that some courts are of a view that the non-compete restrictions would be
enforceable as goodwill passes where there is a 100% sale of shares, other High Courts may opine otherwise. The
ambiguity around non-compete clauses in acquisition transactions will remain until the issue is finally laid to rest by the
Supreme Court.

Another issue that arises as regards non-compete provisions is whether payment of a non-compete fees by a person
resident in India to a person resident outside India would amount to a ‘current account transaction’ or a ‘capital account
transaction’ under FEMA. Such determination may also vary on the manner in which the non-compete fees is payable.
If the non-compete fee is treated as a ‘capital account transaction’, then prior approval of the RBI would be required in
such case.

Taking cues from the observations, non-compete restrictions in share acquisition transactions should be carefully
drafted with specific considerations in mind that: (i) the restrictions should be reasonable in terms of their duration and
geography (ii) the investment agreements should clearly set out that goodwill is pertinent to the investment transaction
and (iii) the post-closing restrictions should be linked to sale considerations instead of employment agreements with
individuals.

96 EC decision dated June 18, 2012 addressed to Areva SA and Siemens AG.

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Subsistence of representations and warranties
▪ Acquisition transactions have protracted negotiations on the representations and warranties that an investor would
like the seller to provide. To limit their liabilities, sellers often negotiate provisions to limit their exposure to
liabilities against breach of representations and warranties. As such, the seller would seek to incorporate:

− Timelines within which an investor may bring a claim for breach of representations and warranties; and/or

− Period after which identified representations and warranties may fall

▪ From a careful reading of Section 28 (b) of the Contract Act 97 one can note that clauses which seek to extinguish
the contractual rights of any party or discharge any party from any liability under a contract on the expiry of a
specified period so as to restrict any party from enforcing his rights are void .
▪ There are numerous judicial precedents which confirm the position. The Madras High Court in Oriental Insurance
Co Ltd v Karur Vyasya Bank Ltd reported in AIR 2001 Mad 489 held

“… its is clear that by the Indian Contract (Amendment) Act, 1997, the original Section 28 has been replaced by
a new paragraph in which such extinction of right unless exercised within a specified period of time, if not
beyond the period of limitation, is also rendered void. As observed earlier, in the absence of any specific
reference in the amended Act, it is prospective in nature and the same cannot affect the contract made earlier.
However, the law as it now stands after this amendment not only the curtailment of limitation period is
impermissible, but also the extinction of right, if sought to be brought by the agreement within a specific period,
which period is less than the period of limitation prescribed for the suit under the contract in question is also
rendered void"98 .

▪ It should be noted that Section 28(b) seems to prohibit only extinguishment of contractual rights or liabilities after
a specified time period so as to restrict any party from enforcing his right i.e. restricting the right to sue. It still needs
to be analyzed as to whether this should be read to mean that clauses in a contract which limit the validity of
representations and warranties to a specified period are also invalid under Section 28(b). While Section 28 (b)
prohibits the restriction on extinction of right of the aggrieved and of the liability of the breaching party if the former
does not bring a claim within a specified period, there is nothing in Section 28(b) which prohibits parties from
restricting the tenure of representation or warranty i.e. period for which the warranty subsists.

▪ In Pearl Insurance Co v Atma Ram reported in AIR 1960 Punj 236, the Punjab and Haryana High Court had held that
a contract which did not limit the time within which the insured could enforce his rights, but only limited the time
during which the contract would remain alive was not hit by section 28.

97 “Section 28 – Agreements in restraint of legal proceedings, void-

Every agreement,
(a) by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal
proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights; or
(b) which extinguishes the rights of any party thereto or discharges any party thereto, from any liability, under or in respect of any contract
on the expiry of a specified periods so as to restrict any party from enforcing his rights,
is void to that extent.
Exception 1: Saving of contract to refer to arbitration dispute that may arise. This section shall not render illegal contract, by which two or more
persons agree that any dispute which may arise between them in respect of any subject or class of subject shall be referred to arbitration and that
only and amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.

Exception 2: Saving of contract to refer question that have already arisen – Nor shall this section render illegal any contract in writing, by which two
or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the
time being as to reference to arbitration
Exception 3- Saving of a guarantee agreement of a bank or a financial institution:
This section shall not render illegal a contract in writing by which any bank or financial institution stipulate a term in a guarantee or any agreement
making a provision for guarantee for extinguishment of the rights or discharge of any party thereto from any liability under or in respect of such
guarantee or agreement on the expiry of a specified period which is not less than one year from the date of occurring or non-occurring of a specified
event for extinguishment or discharge of such party from the said liability.
98Another precedent is Union of India (UoI) through Textile Commissioner v Bhagwati Cottons Ltd, G P B Fibres Ltd And Indusind Bank Ltd reported
in 2008 (5) Bom CR 909.

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▪ Clauses which require a claim for breach of representations and warranties to be asserted in a specified period of
time or which prescribe a period for the operation of the contract have to be distinguished from conditions imposed
in a contract which put an embargo on the right of enforceability of the claim after a specified time period. The
former can utmost be construed as a condition precedent for filing of the suit – that violation of right should be
asserted within the period agreed to between the parties 99. Whereas, in the latter case, if agreements provide for
a time period for filing suit (after occurrence of the cause of action within the validity of the contract) lesser than
that in the Limitation Act, 1963 (Limitation Act), the same would be void.

▪ Thus, if the cause of action arises during the validity of the contract, the right to bring a claim cannot be restricted
to a time period lesser than that prescribed under the law of limitation. However, there is nothing in law to prohibit
a contract which prescribes a time period for its validity after which all rights and liabilities thereunder stand
extinguished if no cause of action arises during such time.

▪ Accordingly, although it may not be possible to restrict the time period within which a claim for breach is to be
brought, it may be possible to restrict the tenure of a representation or warranty under a contract and avoid claims
which arise after the expiry of the same. This should be borne in mind by the investor during its negotiations of
representations and warranties.

Difficulties of borrowers vis a vis bank guarantees

▪ From the above, one may note that the

first part of Section 28 i.e. sub-section (a)
deals with restriction on enforcement of
rights or limiting the time of enforcement
of rights while second part of Section 28
i.e. sub-section (b) deals with
extinguishment of rights or discharge of
liability leading to restriction on
enforcement.

▪ Section 28 of the Contract Act provides

for certain exception to the above
restriction. One of these being Exception 3
which was introduced vide Banking Law
(Amendment) Act, 2012 which came into force on 18th January 2013. The said Exception 3 deals with guarantee
agreements of a bank or a financial institution.

▪ As per the said Exception 3, a contract in writing by which any bank or financial institution stipulate a term in a
guarantee or any agreement making a provision for guarantee for extinguishment of the rights or discharge of any
party thereto from any liability under or in respect of such guarantee or agreement on the expiry of a specified
period which is not less than one year from the date of occurring or non-occurring of a specified event for
extinguishment or discharge of such party from the said liability, shall not be illegal under Section 28 of the Contract
Act.

▪ Due to the said Exception 3 and in view of Circular dated 10.02.2017 (IBA Circular) issued by Indian Bank’s
Association, banks in India are:

− Incorporating a minimum claim period of one year in bank guarantees even in case of bid bonds or
performance guarantees where the underlying contract/transaction is valid for a much shorter period

− Demanding payment of guarantee commission for the entire claim period of one year

99 The Food Corporation of India v. The New India Assurance Co. Ltd., AIR 1994 SC 1889

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 − Not releasing the cash margin/security until the expiry of claim period of one year

▪ The aforesaid action of the banks is leading to various difficulties being faced by borrowers/applicants, viz:

− Based on commercial and business requirements, bank guarantees are issued for various tenors. Bid-bond
guarantees for example requires a small tenor of few days such as 7-15 days. The IBA circular and the issuing
bank’s interpretation now makes it mandatory for the borrowers/applicants to keep their liability open for
one year.

− This causes severe hardships as the borrowers/applicants are forced to keep the bank guarantees alive for
such period. In this regard, the issuing banks are charging guarantee commission till the expiry of the claim
period.

− The government, government entities and many other beneficiaries neither return the original bank
guarantees nor issue a release letter to discharge the guarantee obligations of the issuing bank. This in turn
keeps the underlying obligations of the borrower/applicant open till such time the beneficiary does not return
the original bank guarantees or issue a release letter.

− This limits the borrowing powers as the liability of the borrower/applicant continues to show as a contingent
liability in the books of both the bank and the borrower/applicant, though in reality the
performance/payment obligations no more subsist under the bank guarantee.

− Further, security offered by the borrower/applicant by way of cash or collateral also get stuck thereby
creating a huge stress on the liquidity.

▪ Investors must take into consideration the above practical difficulties while investing in a project concessionaire.

Deemed Public Companies

▪ Under Indian corporate law, a private company which is a subsidiary of a public company is a ‘deemed public
company’. Consequently, all exemptions otherwise available to a private company under the Companies Act
(including in respect of various compliances) would not apply to such deemed public companies.

▪ This is relevant where an investor proposed to ultimately invest in a private company and intends to benefit from
private company exemptions. If, pursuant to such investment, there is a change in control/shareholding of such
investee private company at its holding company level, basis which it becomes a deemed public company, such a
deemed public company would no longer be entitled to any private company exemptions.

▪ To illustrate, under the Companies Act, from a financing perspective, companies are restricted from financing a
purchase of their own/holding company’s shares. While private companies are exempt from such restriction, this
exemption would cease to be available once the investee company becomes a deemed public company. Likewise,
from a corporate governance perspective, interested directors of public companies are not permitted to vote on
matters while in private companies, ‘interested directors’ can vote so long as they disclose their interest in a
particular transaction. This exemption would not be available to a deemed public company. Investors should be
conscious of these provisions given the key impact on their investment from governance, administration, financial
and investment structuring perspective.

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Employee Claims: Non-compliance of social security legislations

▪ Employee claims, especially those that arise from non-

compliance of social security legislations such as the
Employees’ Provident Funds and Miscellaneous Provident Act,
1952 (EPF Act), continue to expose the target company to
risks, which should be adequately addressed by the investor
in the definitive documents in any M&A transaction.
Generally, the investor would seek representations relating to
the target company being in compliance of, and having paid,
all statutory contributions fully and regularly.

▪ In terms of the EPF Act read with the Employees' Provident Funds Scheme, 1952, employers are required to
contribute, depending on the nature of the establishment, 10% or 12% of the ‘basic wages’ of the employees to the
employees’ provident fund (Fund) maintained by the Employees Provident Fund Organisation. It is not uncommon
for employers in India to structure the compensation package of their employees by segregating the compensation
into various heads, in addition to ‘basic wage’ (such as education allowance, conveyance allowance, medical
allowance etc.), with a view to reducing their liability to make contributions to the Fund (which is required to be
determined on the basis of ‘basic wages’).

Case Study
In the recent judgment of The Regional Provident Fund Commissioner (II) West Bengal vs. Vivekananda Vidyamandir
& Ors (the Vivekananda Decision), the Supreme Court reiterated the test laid down in its earlier decisions in Bridge
and Road Co Ltd [(1963) 3 SCR 978] and Manipal Academy of Higher Education vs. Provident Fund Commissioner
[(2008) 5 SCC 428], and held that ‘basic wages’ would not take within its ambit any special incentive or production
bonus given to more meritorious workmen who put in extra output which has a direct nexus and linkage with the
output by the eligible workmen. However, wage which is universally, necessarily and ordinarily paid to all across the
board, are basic wages, and should therefore be included in the calculation of contribution to be made to the Fund.
A review application which was filed in relation to the Vivekananda Decision was dismissed by the SC on August 29,
2019.

Higher period of limitation for the Government/Concession Authority

▪ The Indian law of limitation viz. the Limitation Act prescribes the time limit which is given for different suits, appeals
and applications to an aggrieved person within which it can approach a court for redress or justice. It has a very
wide range, considerably, to include almost all the court proceedings. However, where any special or local law
prescribes any period of limitation for any suit or proceedings other than what is prescribed under the Limitation
Act, the limitation prescribed under such local or special law will prevail.

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▪ A limitation period commences when the cause of action arises, that is, when a party becomes entitled to make a
claim100. The Limitation Act prescribes a higher period of limitation for Government for pursuing a claim as
compared to a private party. The fact that the government is given 30 years to bring certain claims against private
parties as opposed to private parties who are given usually 3 years under the Limitation Act, is a legal testimony of
the fact that government machinery moves very slowly. The same may apply in case of a concession agreement
enabling the Government/concession authority to bring in a claim against the concessionaire after the passing of a
considerably long period since the occurrence of the cause of action.

▪ Delay in referring a claim is not curable and can result in its dismissal unless such delay is condoned by the court
having required jurisdiction. The court may condone the delay if it is convinced that there was a ‘sufficient cause’
in referring of such claim. Determination whether there exists sufficient cause, is subject to discretion of the courts.
Traditionally, the Indian courts have been lenient in condoning delays by the Government in preferring claims.
However, in some instances, the courts have expressed that delay in preferring a claim by the Government due to
procedural red tape should not be a sufficient cause.

Case Study
Section 120 of the MPTA provides that no suit or other proceeding can be commenced against a Board of Trustees or
any member or employee thereof, for anything done, or purporting to have been done, in pursuance of the MPTA,
until expiration of 1 (one) month after notice in writing has been given to the Board of Trustees or him stating the
cause of action, or after 6 (six) months after the accrual of the cause of action.

As per Section 79 of the Mines Act, 1952 (Mines Act) no court can take cognizance of any offence under the Mines
Act unless the complaint has been made:
(i) within 6 months from the date on which the offence is alleged to have been committed, or
(ii) within 6 months from the date on which the alleged commission of the offence came to the knowledge of the
Inspector (as defined under the Mines Act), or
(iii) in cases where the accused is or was a public servant and previous sanction of the Central Government or State
Government or of any other authority is necessary for taking cognizance of the offence under any law for the
time being in force, within 3 months from the date on which the sanction is received by the Chief Inspector (as
defined under the Mines Act), or
(iv) in cases where a court of inquiry has been appointed by the Central Government under Section 24 of the Mines
Act within 1 year after the date of the publication of the report.

Liquidated damages and penalty

▪ As is common practice worldwide, construction contracts provide for contractor to pay liquidated damages to the
employer for various non-performances such as the failure of the contractor to perform its obligations within the
time prescribed in the agreement. In India, provisions for contractual damages are enshrined of the Contract Act.
Section 73 and 75 deal with compensation for loss or damage arising on account of breach and compensation for
damage that a party suffers on account of non-fulfilment of a contract after such party rightfully rescinds the
contract. Section 74 on the other hand, is available when the contract provides for a pre-determined amount as
compensation, or where there is any other stipulation by way of penalty101.

▪ Often in contractual disputes one is forced to delve into the questions such as the extent of jurisdiction of Indian
courts to award compensation on a clause on liquidated damages; the measure of damages under section 74 of the

100The question as to when a cause of action has arisen may vary from case to case and has been a matter of judicial interpretation in numerous
cases.
101While liquidated damages are such damages as have been agreed upon and fixed by the parties in anticipation of breach, un-liquidated damages
(such as under Section 73) are such damages as a required to be assessed.

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 Contract Act; and when the clause provides for a genuine pre-estimate of loss or damages is there still a need to
prove it?

▪ Firstly, it would be prudent to understand that there is a stark difference of the position in English law in respect of
liquidated damages vis a vis Indian law which was clarified by the Supreme Court in Fateh Chand v. Balkishan
Dass102. In this case, the Supreme Court considered section 74 as it stands and contrasted it with the position under
English common law. It found that under English common law, a mutually agreed genuine pre-estimate of damages
is considered by courts as liquidated damages and claims thereon are sustained. Stipulations in a contract in
‘terrorem’ are treated as penalty and courts refuse to enforce such clauses, awarding only a reasonable sum as
compensation103. According to the Supreme Court, section 74 is a conscious attempt by the legislature to move
away from complex rules and presumptions under English common law, to distinguish between stipulations
providing for liquidated damages and those in the nature of penalty. Section 74 provides uniform principle which
apply to named sums as well as any other stipulation in the nature of penalty. Thus, if a stipulation is found to be a
genuine pre-estimate of the damages, the court shall award the amount decided by the parties. However, if the
stipulation is found to be in the nature of a penalty then, unlike the English Law, where the clause becomes void
and irrecoverable, as per the Indian law, the court shall assess the extent of the loss or damage suffered by the
aggrieved party and shall award reasonable compensation to it. The focus of the section thus is on reasonable
compensation. Compensation is said to be reasonable if it is awarded in accordance with settled principles of law.
Though, the court has unqualified jurisdiction to award such compensation as it deems reasonable, it is subject to
the maximum amount that has been stipulated by the parties within the contract.

▪ While the principles laid down in the case of Fateh Chand supra. have endured for over half a century, the latest
precedent is the 2015 decision of the Supreme Court in Kailash Nath Associates v Delhi Development Authority and
Another104.

▪ In India, the clear principles that emerge from the line of precedents on the subject can be summarized as:

- legal injury is an absolute essential for award of compensation under section 74;

- section 74 merely dispenses with the proof of ‘actual loss or damage’, it does not justify award of compensation
when no legal injury results as a consequence of breach;

- the party complaining of a breach can receive a named amount as compensation in instances where exact loss
or damage is difficult to prove, provided it is a genuine pre-estimate of damage, fixed by both parties and found
to be so by court;

- in other instances, the measure for damages is ‘reasonable compensation’, subject to the limits set out in the
clause on liquidated damages. Such compensation is to be fixed on settled principles found, inter alia, in Section
73;

- while awarding compensation due regard is to be given to conditions existing on the date of breach;

- jurisdiction of courts to award compensation is unqualified except as to the limit stipulated; and

102
AIR 1963 SC 1405
103In English Law if the stipulation in the contract specifying the amount of money required to be paid by a defaulting party to the other for breach is
a genuine pre-estimate of damages likely to be caused, it is called liquidated damages and are recoverable under law. If there is no genuine pre-
estimate of loss, the same will be termed penalty and the said penal clause would be considered void. The enforceability of penalty i.e the detriment
imposed in the provisions of the contract is disproportionately excessive in comparison with the legitimate interest of the innocent party (such as
monetary loss) is not recognized under English Law. The House of Lords in Dunlop Pneumatic Tyre Co., Ltd. v. New Garage and Motor Co., Ltd. 1915
AC 79 had laid down that if a stipulation is such that it operates “in terrorem” of the offending party to secure the performance of contract and if
such sum is extravagant, unconscionable and disproportionately large then it shall operate as a penalty. Penalty clauses are void and irrecoverable in
nature. Though the penal sum operates as a form of punishment on the defaulter irrespective of any loss, the liability of the defaulter is restricted
only for those damages which can be proved against him. The English Law thus is said to impose the requirement of proving actual damage in case a
stipulation is by way of a penalty.
104 (2015) 4 SCC 136

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 - the provision applies with equal force to amounts already paid or those payable in future.

▪ The bone of contention in almost all cases has been the use of the expression ‘whether or not actual damage or
loss is proved to have been caused thereby’ in section 74. The question uppermost in the minds of people dealing
with clauses on liquidated damages is: ‘What is the reason for courts to delve into the issue of reasonable
compensation when an amount, which is termed as a “genuine pre-estimate” is already stated in the contract?’
This is usually followed by: ‘Is it not counterintuitive to seek to fix compensation by reference to section 73 despite
there being a named sum in the contract?’

▪ In Maula Bux v Union of India 105, the Supreme Court explained that the expression is intended to cover different
classes of contracts. In case of breach of some contracts it may be impossible for the court to assess compensation
arising from the breach. It is in these circumstances that the sum named by parties may be taken into consideration
as the measure of reasonable compensation, provided it is a genuine pre-estimate and not in the nature of a
penalty. Where loss in terms of money can be determined, the party claiming compensation has necessarily to
prove the loss suffered and, in such instances, the courts are bound to assess the reasonableness of compensation
claimed. It is while doing so that the courts will apply the principles under section 73. It is important to understand
that the courts are reluctant to countenance a position that is predicated on making a windfall out of a contractual
breach. Therefore, unless damage or loss is shown to have been suffered, and the extent thereof measured and
assessed, the courts will refuse to enforce a clause on liquidated damages. What also needs to be borne in mind is
that this principle applies to both named amounts in contract as liquidated damages as well as any other stipulation
in the nature of a penalty. Further in either case, the liquidated amount or penalty is the upper limit and the courts
cannot grant compensation beyond that amount.

▪ One of the other tests to sustain a clause on liquidated damages is to ascertain whether it was mutually agreed
upon by the parties possessing equal bargaining power. In Phulchand Exports Limited v O O O Patriot106, the
Supreme Court considered section 74 of Contract Act and held that the clause for reimbursement for the seller’s
failure to deliver the shipment and of the amount paid by the buyer, was neither in the nature of threat, nor was it
in the nature of penalty and even in the absence of such a clause, where the seller has breached their obligation
at the threshold, the buyer is entitled to the return of the price paid plus damages. The seller sought to set aside
the arbitral award granted earlier on the grounds that it was punitive and, therefore, contrary to public policy, to
which the court held that when experienced business people enter into commercial contracts and have equal
bargaining power, the agreed terms of contract must be respected as the parties may have taken into regards,
matters of their knowledge. Further, in ONGC vs. SAW Pipes Ltd.107, the Supreme Court further held that that if the
parties knew when they made the contract that a particular loss is likely to result from such breach, they can agree
for payment of such compensation. In such a case, there may not be any necessity of leading evidence for proving
damages, unless the court arrives at a conclusion that no loss is likely to occur because of such breach. However,
when the terms of the contract are clear and unambiguous, then its meaning is to be gathered only from the words
of the contract. The Supreme Court also stated that where an agreement is executed by experts in a field, it would
be difficult to hold that the intention of the parties was different from the language used. In such a case, it is for
the party who contends that the stipulated amount is not reasonable compensation to prove the same.

▪ Parties committed to reducing litigation and providing commercial certainty opt for a liquidated damages clause in
commercial contracts, particularly when the sector is subject to regulatory regimes such as telecommunications.
While determining the nature and enforceability of liquidated damages clause contained in an interconnect
agreement, the Supreme Court in Bharat Sanchar Nigam Limited v Reliance Communication Limited 108, clarified that
before demarcating a damages clause as liquidated damages or penal, the loss was measured based on costing,

105 (1969) 2 SCC 554

106 (2011) 10 SCC 300
107 (2003) 5 SCC 705
108 (2011) 1 SCC 394

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 pricing and maintenance of a level playing field. Since the amount represents a pre-estimate of reasonable
compensation, section 74 was not violated. Moreover, when the damage is difficult to calculate, it enhances the
presumption that the agreed sum is a genuine attempt to estimate the loss and overcome difficulties of proof at
the time of trial.

▪ Another point of consideration is with the implications of Goods and Service Tax (GST) on the payment of such
damages under a contract, and that among other factors, contractual terms are relevant to judge whether the
payment of liquidated damages would attract taxation. It is relevant to consider the decision of the Appellate
Authority for Advance Authority in the case of Maharashtra State Power Generation Company Limited109, where it
was held that liquidated damages falls under clause 5(e) of Schedule II attached to CGST Act liable to payment of
GST at the rate of 18% payable as per Section 13 of CGST Act, when the same is imposed on the defaulting
subcontractor by the principal.

▪ In conclusion, to ensure that an enforceable claim of liquidated damages arises at the end of a hard-fought
litigation, it is necessary to spend some time on the clause on such damages when it is being drafted. The principles
outlined above, come from some of the most important decisions on this point in the jurisdiction and, if followed
assiduously, will assist in ensuring enforcement of a decree/award of amount as liquidated damages before the
Courts in India.

Enforceability of Take or Pay Provisions

▪ Take or pay contracts/clauses110 are common in the energy industry and in particular for gas sales. Take or pay
provisions are also common in electricity sales agreements in India particularly because they were permitted in the
context of supply of electricity under Indian electricity laws. However, take or pay clauses which fall outside the
scope of a prescribed law (such as in a contract for gas sales/supply), have not been often litigated and the law on
such clauses is therefore not yet certain in India. In the case of ONGC v. Association of NGC Industries of Gujarat AIR
1990 SC 1851, the Supreme Court briefly seems to have approved a take or pay clause in a gas purchase agreement,
despite the absence of a statutory provision of law. However, the Supreme Court did not examine or opine on the
rationale for upholding the same. Thus, the law relating to take or pay is not free from doubt.

▪ There is a risk that a take or pay clause may not have its intended effect under Indian law as the payments for the
deficiencies towards taking a product could be construed by the Indian courts as liquidated damages and the
payments to be made under a take or pay clause could be taken to be an upper limit of the amounts actually to be
paid and could therefore be subject to the challenge of reasonable approximation in courts (kindly refer our
comments in the section on liquidated damages). Further, one may also argue before the courts that the amount
of damages are not commensurate to the actual damage that may have been suffered by the supplier on account
of failure of the buyer to take the product. This is because, upon payment of the damages, the product remains in
the hands of the supplier and may not be available for supply to the buyer at a future date. In such case, sale of the
product by the seller to a third party would be an unjust enrichment on the part of the seller.

▪ It however seems that internationally, take or pay does not necessarily qualify to liquidated damages – particularly
in the oil and gas industry. We note that courts in USA have found that so long as the purchaser either buys the gas
or makes the deficiency payment no breach has occurred and therefore there are no liquidated damages because
the payment of the deficiency amount is not a remedy but instead a second alternative means of performance.
Failure to take and pay for gas merely constitutes a decision not to perform the first alternative obligation and is
not a repudiation of contract. Repudiation of contract does not occur until the buyer refuses to make the required
deficiency payments. Hence the deficiency payment obligation is not a provision designed to provide the measure
of damages when the buyer fails to take or pay for the gas under the contract. We also note that courts in England

109 2018 (17) GSTL 451

110Broadly, in a take of pay contract/ clause, a company either takes the product from the supplier or pays the supplier for the deficiency. Typically,
upto an agreed upon ceiling, the company has to pay the supplier even for the products it did not take. This payment is usually lower than the usual
price for supply of gas.

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 have maintained that the rule in respect of penalties will only apply where there is a breach of contract. If a sum
has to be paid (under take or pay) for making service available, the same would be regarded as a primary obligation
(debt) and not a secondary obligation (damages).

▪ Thus, contrary to the argument to liquidated damages, it could be argued that the take or pay amount is merely a
pre-determined amount payable by the buyer to the seller on a specific omission and is not in the nature of damages
clause/penalty provision. However, in the absence of any decided case law, the ability of the Seller to recover the
entire contracted take or pay amount (refuting Section 74 of the Contract Act) is not free from doubt.

▪ Although we have not come across any case law where the courts have upheld the obligation for payment of
minimum fixed charges in long term agreements for supply of goods/services (as a primary obligation and not as
an amount payable on breach within the meaning of Section 74 of the Contract Act), some relevant decisions (in
addition to the NGC Industries case supra.) may be worth highlighting:

- The obligation for payment of minimum guaranteed amounts pursuant to long term electricity supply contracts
has been upheld by the courts. In Amalgamated Electricity Co. v. Jalgaon Borough Municipality 111, the
respondent contested the validity of an obligation for consumption of an agreed minimum quantum of
electricity, pursuant to a five-year electricity supply agreement. Under the agreement, the respondent had
agreed to a minimum consumption of electricity for 16 hours a day. The Supreme Court held that such
obligation embodies “what is known in common parlance as the doctrine of minimum guarantee i.e., the
Company112 was assured of a minimum consumption of electrical energy by the Municipality 113 and for the
payment of the same whether it was consumed or not. That was the reason why the Company was prepared to
charge a minimum rate of … (which was) was actually the consideration for the minimum guarantee allowed
to the plaintiff …”

- The Supreme Court largely based its decision on the proviso of Section 22 114 of the Indian Electricity Act, 1910
which states as follows:

“Obligation on licensee to supply energy: Where the energy is supplied by a licensee, every person within the
area of supply shall, except insofar as is otherwise provided by the terms and conditions of the licence, be
entitled, on application, to a supply on the same terms as those on which any other person in the same terms
as those on which any other person in the same area is entitled in similar circumstances to a corresponding
supply.

Provided that no person shall be entitled to demand, or to continue to receive, from a licensee a supply of energy
for any premises having a separate supply unless he has agreed with the licensee to pay to him such minimum
annual sum as will give him a reasonable return on the capital expenditure, and will cover other standing
charges incurred by him in order to meet the possible maximum demand for those premises, the sum payable
to be determined in case of difference or dispute by arbitration.”

- The Supreme Court further justified the levy of the minimum charges by observing that in order for the
electricity supplier to supply electricity to the consumer at the concessional rates “it had to lay down lines and
to keep the power ready for being supplied as and when required. The consumers could put their switches on
whenever they liked and therefore the plaintiff had to keep everything ready so that power is supplied the
moment the switch was put on. In these circumstances, it was absolutely essential that the plaintiff should have

111 AIR 1975 SC 2235

112 i.e. the Electricity Supplier
113
i.e. the Consumer
114Section 22 stated as follows: “Obligation on licensee to supply energy : Where the energy is supplied by a licensee, every person within the area
of supply shall, except insofar as is otherwise provided by the terms and conditions of the licence, be entitled, on application, to a supply on the same
terms as those on which any other person in the same terms as those on which any other person in the same area is entitled in similar circumstances
to a corresponding supply.”

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 been ensured the payment of the minimum charges for the supply of electrical energy whether consumed or
not so that it may be able to meet the bare maintenance expenses.”

- The above observation appears to lay down some rationale for a prima facie justification of the levy of a
minimum charge under a long-term supply contract involving the establishment of some infrastructure and
facilities and keeping them in a state of readiness for performance de hors a statutory backing for such levy.
The Supreme Court has relied on this case while giving its decision on the NGC Industries case supra – which
did not have any applicable statutory legislation analogous to the aforementioned Section 22. It stated that “If
any authority regarding the rationale of such a clause is needed, it is to be found in the decision of this Court in
Amalgamated Electricity Co. Ltd. V. Jalgaon Borough Municipality”.

- Another case that may of relevance is Mahavir Khandsari Sugar Mill v. MSEB115. The purchaser agreed to
consumption of a minimum guaranteed power from MSEB in a long-term electricity supply agreement of 7
years. The value of the same was pre-determined pursuant to which minimum monthly charge was payable.
The agreement also provided that the purchaser will, inter alia be “additionally liable to continue to pay the
minimum charges and the minimum guarantee payable thereunder” in the event of suspension of supply by
MSEB due to breach or default of the purchaser.

- MSEB discontinued electricity supplies due to recurring defaults by the purchaser in payment of its electricity
dues and claimed payment equivalent to charges the minimum guaranteed amount for the prior periods and
for the residuary unexpired period of the contract. The purchaser contended that the obligation to pay the
minimum guaranteed amounts was in the nature of a penalty and therefore unenforceable. The Court upheld
the obligation to pay the minimum charges on the basis of the decision of the High Court in Gujarat Electricity
Board v. Shree Rajaratna Naranbhai Mills Co. Ltd.116 wherein the court had apparently held that : “… the
provision of minimum charge in the agreement between a consumer and a licensee is but one of the modes of
providing for reasonable return to the licensee for the investment that it has made and on the capital outlay
that it has made and merely because the agreement provides for a minimum charge, it cannot be said that the
terms are unreasonable or that a monopoly concern has taken undue advantage over the consumer in the area
of supply … the agreement did not come to an end nor was the Board disentitled to levy minimum charges
during the period of discontinuance of supply.”

Similar arguments were raised by the purchaser that the MSEB had not spent a large amount in installing the
supply lines and therefore the minimum charges are unconscionable. The court rejected this argument and
said there may be other arrangements required to be undertaken by MSEB which may also be of a recurring
nature.

- The Court further upheld the levy of the minimum guaranteed charge for the unexpired period of the contract
and stated that MSEB “expected some reasonable profit from the investment it was making and from the facility
that it was giving to defendant No. 1. Plaintiff bound itself to supply energy for a period of 7 years and in
consideration of its commitment expected the 1st defendant to consume a certain minimum of units … Where
the parties themselves fixed the liquidated damages payable in the event of a breach of the agreement, Court
will be slow to interfere with the terms of the agreement reached between them.”

▪ From an investor’s perspective, take or pay contracts provide a degree of certainty of revenue and hence are
protective of its investment. Therefore, the enforceability of such obligations is significant.

NET Metering
State governments have adopted Model Net Metering Regulations, 2013 which were framed by the GOI with few or no
changes in the respective regulations framed by the them to provide for Grid Connected Rooftop Solar PV plants (GRPV).
However, implementation of the same has not been robust for many reasons. While sale of power to the grid by

115 AIR 1993 Bom 279

116 (1975) 16 Guj LR 90

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residential and commercial customers is permitted, the policies for the same differ from state to state. Implementation
of net metering has not been effective, given that the state promotion of grid interactive rooftop solar generation
adversely affects DISCOM’s business as the grid interactive rooftop projects are able to offer competitive tariffs. Net
metering policies across states are inconsistent and seem to restrict the development of rooftop solar based on system
size, connection type, metering type, developer model (OPEX/CAPEX) and approval time and procedure. For instance:
▪ in Gujarat, consumers are not allowed to choose a third party owned installation;

▪ approvals in states like Maharashtra, Karnataka and Tamil Nadu for developers could take between three to six
months, while in some other states the timelines are between 25 and 30 days;

▪ certain states do not allow industrial net metering (e.g. Tamil Nadu). Even though there is enough roof space to
increase capacity, the industries would be forced to consume the same;

▪ in some cases, electricity transmitted to the grid is not recognised by the meter and the same is read as energy
consumed rather than supplied; and

▪ certain states cap net metering only up to 1 MW, despite the availability of space to generate more.

The forum of regulators has identified the following gaps in the net metering systems in India and have made
recommendations to resolve the gaps:

Technical aspects

▪ Restrictions in terms of individual capacity based on sanctioned load and maximum GRPV capacity.

▪ Different limits on GRPV capacities connected to direct transformer.

▪ Limited provisions on real time monitoring of solar generation and participation in system operations, required for
large penetration of GRPV systems.

Commercial aspects

▪ Limited business models options available to consumers and developers.

▪ Absence of additional clauses related to change of ownership and overall flexibility in existing PPAs and connection
agreements.

▪ No remuneration for excess generation in present energy accounting and commercial settlement principles.

Further, many states have forced the existing connections to move from net metering to gross metering which has put
project developers/ rooftop owners in a dilemma as it is difficult for them to renegotiate the commercials of the PPAs
that have been executed by them keeping the net metering requirements in mind.

Curtailment of Power
The above has been a long pending issue where the government owned DISCOMs have arm twisted power producer by
curtailing the procurement of power under the terms of their PPAs. There has been limited acknowledgement from
central and state governments about the commercial motives behind such curtailment. Although PPAs do allow the
producers to sell the power to third parties in the event of curtailment of power, it is difficult to find procurer on
immediate basis to be able to utilize the available capacity of the power producers. Also, uncertainty over demand
schedules by the DISCOMs is another pain point for the producers as they are not able to commit and negotiate supply
to third parties in the event of curtailments.

However, we have seen certain activism from regulatory commissions towards the issue. For instance, the Tamil Nadu
Electricity Regulatory Commission, for the first time, pulled up the state load dispatch centre (SLDC) for curtailment in
an April 2019 order issued in response to a 2017 petition of the National Solar Energy Federation of India. The SLDC was
asked to submit a quarterly report of curtailed renewable energy / RE generation with clearly documented reasons for

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each back down order and told that “any whimsical backing down instruction would attract penal action under section
142 of the Electricity Act 2003 on concerned officials.”

The Ministry of New and Renewable Energy has time and again asked states to refrain from curtailment. It has decided
to increase the compensation for curtailment to up to 100 per cent of the average generation per hour during the
month, under the latest amendment introduced to the solar competitive bidding guidelines. However, whether a power
producer will be able to enforce such penalties on the DISCOMs is another question given the dominance of the
government owned procurers under the terms of the PPAs.

Having said the above, the government has also attempted to focus on measures to increase grid flexibility to improve
renewable energy penetration such as increasing flexibility of coal-based power plants, enlarging geographic and
electrical balancing areas, expanding transmission in strategic locations, and installing grid-scale storage systems. Grid
management techniques are also being contemplated by introducing better forecasting and scheduling mechanisms
and deviation settlement mechanism across states.

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Insolvency and Bankruptcy
Before financing of infrastructure project (PPPs or otherwise), it is important to understand insolvency laws by all parties
concerned especially the lenders.

Key issues that will need to be considered when financing an infrastructure project are:

▪ What happens if the project company becomes insolvent?

▪ Whether it is possible to revive the project prior to liquidation and appoint administrators/resolution professional
(RP) to try and get the business back to being viable?

▪ Are there clear procedures for appointment of liquidators?

▪ Is there a clear prioritization between different creditors?

▪ What will happen to project assets?

The Insolvency and

Bankruptcy Code, 2016
(IBC) was introduced and
enforced in December
2016. The IBC answers the
above questions and is
intended to assist lenders
by providing a uniform,
comprehensive and
efficient insolvency
legislation, with an
emphasis on revival as a
first avenue for debt
recovery.

Under IBC, both operational creditors and financial creditors (in addition to the debtor company (Corporate Debtor)
itself) have been allowed to file an application, on occurrence of a ‘default’, with the adjudicating authority, i.e., National
Company Law Tribunal (NCLT). In case the NCLT approves the application, a corporate insolvency resolution process
(CIRP) is initiated and moratorium is imposed over inter-alia proceedings and alienation of assets of the Corporate
Debtor.

Prior to initiation of the CIRP, the Company should have committed a default117 for a minimum amount of INR 1,00,000
prior to March 24, 2020118. The Central Government by way of notification has increased the threshold in the minimum
amount of default from INR 1,00,000 to INR 1,00,00,000 with effect from March 24, 2020. With respect to any default
arising on or after 25th March, 2020, the GOI has decided to extend the suspension of the Insolvency and Bankruptcy
Code (IBC) till March 31, 2021, to help businesses cope with the lingering difficulties posed by the COVID-19 pandemic.

The board of the Corporate Debtor is suspended and a RP takes over the responsibility to run the company. There is a
330 day period within which the committee of creditors (COC) has to approve a resolution plan and the corporate
insolvency resolution process shall mandatorily be completed within the said period including any extension of the
period of corporate insolvency resolution process granted under Section 12 of IBC and the time taken in legal
proceedings in relation to the resolution process of the corporate debtor. In case no resolution plan is approved or in

117A default would mean non-payment of debt when whole or any part or instalment of the amount of debt has become due and
payable. A debt includes a financial debt and operational debt.
118 On account of COVID-19, applications for defaults post March 25, 2020 are suspended.

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case the same is rejected, then the Corporate Debtor is to be mandatorily liquidated. In case of liquidation, clear
provisions are incorporated in the IBC as to order of priority for distribution of proceeds from the sale of liquidated
assets.

The COC may approve a resolution plan by a vote of not less than 66% of voting share of the financial creditors, after
considering its feasibility and viability. The manner of distribution proposed, may take into account the order of priority
amongst creditors as laid down in sub-section (1) of section 53 of IBC, including the priority and value of the security
interest of a secured creditor and such other requirements as may be specified by the board.

Therefore, COC can only consider “the manner of distribution proposed”. The proposal however has to be made by the
resolution applicant. Therefore, the resolution applicant can propose distribution, including the priority and value of the
security interest of a secured creditor and also the priority amongst creditors as laid down in sub-section (1) of section
53 of IBC.

So, priority to each secured financial creditor is based on the value of security interest of the creditor. Even if such
creditor enforces his/her right in a liquidation, he/she may only get relief to the extent ad value of security interest
created in its favor.

In case of liquidation, the liquidator may sell-:

▪ An asset on a standalone basis

▪ The assets in a slump sale

▪ A set of assets collectively

▪ The assets in parcels

▪ The corporate debtor as a going concern

▪ The business(s) of the corporate debtor as a going concern

An asset shall not be sold under any of the clauses (a) to (f) unless the security interest therein has been relinquished to
the liquidation estate.

As per sub-section (1) of section 53 of IBC, the proceeds from the sale of the liquidation assets are required to be
distributed in the following order of priority, namely: -

▪ The insolvency resolution process costs and the liquidation costs paid in full

▪ The following debts which shall rank equally between and among the following

− workmen’s dues for the period of 24 months preceding the liquidation commencement date

− debts owed to a secured creditor in the event that such secured creditor has relinquished his security in the
manner set out in IBC

▪ Wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding
the liquidation commencement date

▪ Financial debts owed to unsecured creditors

▪ The following dues ranking equally between and among the following: -

− any amount due to the Central Government and the State Government including the amount to be received
on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the
whole or any part of the period of 2 years preceding the liquidation commencement date

− debts owed to a secured creditor for any amount unpaid following the enforcement of security interest

▪ Any remaining debts and dues

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 ▪ Preference shareholders, if any; and

▪ Equity shareholders or partners, as the case may be.

It may be noted that Insolvency and Bankruptcy Board has sought for special a regulatory regime for PPPs. However,
there is no such regime notified yet.

IBC process

I B C f r o m t h e l e n s o f t h e i n f ra s t r u c t u r e s e c t o r
Under IBC, debt is defined to mean a liability or obligation in respect of a claim which is due from any person and includes
a financial debt and operational debt.

Financial Debt is defined to mean a debt along with interest, if any, which is disbursed against the consideration for the
time value of money and includes:

a. Money borrowed against the payment of interest

b. Any amount raised by acceptance under any acceptance credit facility or its dematerialized equivalent

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 c. Any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock
or any similar instrument

d. The amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or
capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed

e. Receivables sold or discounted other than any receivables sold on non-recourse basis

f. Any amount raised under any other transaction, including any forward sale or purchase agreement, having the
commercial effect of a borrowing

For the purposes of this sub-clause, - (i) any amount raised from an allottee under a real estate project shall be
deemed to be an amount having the commercial effect of a borrowing; and (ii) the expressions, “allottee” and
“real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2
of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016)

g. For calculating the value of any derivative transaction, entered into in connection with protection against or
benefit from fluctuation in any rate or price only the market value of such transaction shall be taken into account
h. Any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or
any other instrument issued by a bank or financial institution

i. The amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in
sub-clause (a) to (h) of this clause

Operational Debt is defined in the IBC as, “Operational Debt” means a claim in respect of the provision of goods or
services including employment or a debt in respect of the payment of dues arising under any law for the time being in
force and payable to the Central Government, any State Government or any local authority.”

A screenshot of an article in Money Control (May 11, 2019). The above quote is by the CEO of Srei Infrastructure on how the delay in
decision making during the IBC process is a cause for concern

Key considerations
Having dealt with IBC from a lenders perspective, it is also important to consider that in an infrastructure project apart
from the project company or project SPV other parties are also involved such as contractors for (i) EPC, (ii) operation and
maintenance (O&M), (iii) supply of capital goods and raw materials, etc., depending on the nature of an infrastructure
project.

In this background following question may crop up from IBC perspective:

▪ Whether advance money paid by the project company or project SPV to the contractor would be considered as a
financial debt or operational debt in case the contractor becomes subject of proceedings under IBC before
completion of the work (or a portion of work for which advance money is paid)?

The opening words of the definition of financial debt (given above) would indicate that a financial debt is a debt
along with interest which is disbursed against the consideration for the time value of money and it may include any
of the events enumerated in sub-clauses (a) to (i) which are self-explanatory. Therefore, the first essential
requirement of financial debt has to be met viz, that the debt is disbursed against the consideration for the time

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 value of money and which may include the events enumerated in various sub-clauses. The current definition of
‘financial debt’ under IBC uses the words “includes”, thus the kinds of financial debts illustrated are not exhaustive.

The phrase “disbursed against the consideration for the time value of money” has been the subject of interpretation
only in a handful of cases under the IBC. The words “time value” have been interpreted to mean compensation or
the price paid for the length of time for which the money has been disbursed. This may be in the form of interest
paid on the money or factoring of a discount in the payment.

The concept of time value of money is that money available at the present time is worth more than the identical
sum in the future due to its potential earning capacity. This core principle of finance holds that, provided money
can earn interest, any amount of money is worth more the sooner it is received. In Black's Law Dictionary (9th
edition) the expression “time value” has been defined to mean "the price associated with the length of time that
an investor must wait until an investment matures or the related income is earned".

Case Study
In Nikhil Mehta v. AMR Infrastructure119 the claim of the applicants was made in pursuance of various
agreements/memorandums of understanding entered into with the corporate debtor, whereby the applicants
had agreed to purchase certain units in a real estate project against the payment of substantial portion of the
total sale consideration upfront and the corporate debtor had undertaken to pay a particular amount to the
applicants each month as “committed returns/assured returns” till the time the actual physical possession of the
units was handed over to the applicants.

The corporate debtor had in turn started to make payments of such amounts for a while before it defaulted on
payment of the “committed returns/assured returns” to the applicant, as per the memorandum of
understanding. In the light of the factual matrix, National Company Law Appellate Tribunal (NCLAT) vide an order
dated July 21, 2017 observed that ‘’since the corporate debtor had agreed to pay ‘monthly committed returns’ to
the applicants, the amount disbursed by the applicants was ‘against the consideration of the time value of the
money’’ .

From the above analysis it could be concluded that advance money paid by the project company or project SPV to
such contractors (as mentioned above) would not amount to be a financial debt since no interest or return is paid
for such advance payment (though it was paid against the consideration that the contractor would perform its
contract). Consequently, it would not pass the test of ‘time value of money’.

It is also important to analyze whether advance money paid by the project company or project SPV to the
contractor (as mentioned above) would be considered as an operational debt.

Case Study
In Overseas Infrastructure Alliance (India) Pvt. Ltd. Vs. Kay Bouvet Engineering Ltd 120., the Hon’ble NCLAT, New
Delhi held that “there should be no difficulty in holding that the Tripartite Agreement provided for supply for
goods and rendering of services and the Appellants claim was in respect of such provision of goods and services.
Viewed in this perspective, it can be stated without any hesitation that the Appellant having advanced 10% of
the contract value to Respondent – sub-contractor as advance payment had a claim in respect of provision of
goods or services bringing him within the definition of ‘Operational Creditor’, to whom an ‘Operational Debt’ was
owed by the Respondent – ‘Corporate Debtor’’.
In the above case Overseas Infrastructure Alliance (India) Pvt. Ltd. was awarded an engineering construction
contract by Mashkour Sugar Mills, Sudan for a sugar plant in the state of Sudan. This project was to be financed
under the GOIs line of credit through Export-Import Bank of India in two tranches. Kay Bouvet Engineering Ltd.

119 (Company Appeal (AT) (Insolvency) No. 07/2017), NCLAT, New Delhi.
120 (Company Appeal (AT) (Insolvency) No. 582 of 2018 )

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 was appointed as sub-contractor. Thereafter, the parties entered into a tripartite agreement whereby Overseas
Infrastructure Alliance (India) Pvt Ltd. subcontracted the whole of the works in relation to the said project to Kay
Bouvet Engineering Ltd.
In furtherance of the same, Overseas Infrastructure Alliance (India) Pvt. Ltd. advanced a sum equivalent to 10%
of the contract value to Kay Bouvet Engineering Ltd. as advance payment. However, since Exim Bank did not
release the second tranche of the payment, Mashkour Sugar Mills, Sudan terminated the contract with Overseas
Infrastructure Alliance (India) Pvt Ltd. Consequently, the tripartite agreement came to an end. Overseas
Infrastructure Alliance (India) Pvt Ltd. demanded the refund of the sums advanced to the Kay Bouvet Engineering
Ltd. under the tripartite agreement. Subsequently, the Overseas Infrastructure Alliance (India) Pvt Ltd. sought
to initiate insolvency proceedings against the Bouvet Engineering Ltd for the refund of the advance paid pursuant
to the tripartite agreement.

From the above order of Hon’ble NCLAT, New Delhi, it may be concluded refund for the advance paid as
consideration for the goods and services will fall within the definition of the Operational Debt and a person claiming
the same will be an operational creditor under IBC. However, it may be noted an appeal (being Civil Appeal No(s).
1137/2019) against the above order of Hon’ble NCLAT, New Delhi has been filed and pending in Hon’ble Supreme
Court.

▪ Whether retention money that a project company or project SPV keeps from such contractors would be
considered as a financial debt or operational debt in case such a project company or project SPV becomes subject
of proceedings under IBC?

Retention money is an amount held back from a payment made under a construction contract. It is generally held
to ensure that a contractor performs all of its obligations under the contract and is then released either on practical
completion or after the end of a notification period. Hence, if the contractor has performed all his obligations under
the contract then the retention money held back by project company or project SPV would be a claim against such
a project company or project SPV in respect of the provision of services. Consequently, such retention money
would amount to be an operational debt under IBC. It will not amount to a financial debt for the reasons
discussed/mention in reply to the above question.

▪ Whether the use of retention of title clauses is one option to mitigate loss for a supplier of capital goods and raw
materials?

A ‘retention of title’ clause is a clause that allows the supplier to retain ownership over the goods supplied until
such time as certain conditions are met (e.g. receipt of full price/consideration in case the price/consideration is
agreed to be paid in instalments).

As per section 4 (Sale and agreement to sell) of Sale of Goods Act, 1930 — (i) A contract of sale of goods is a
contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There
may be a contract of sale between one part-owner and another. (ii) A contract of sale may be absolute or
conditional. (iii) Where under a contract of sale, the property in the goods is transferred from the seller to the
buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future
time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. (iv) An
agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the
property in the goods is to be transferred.

As per Section 19 of Sale of Goods Act, 1930, where there is a contract for the sale of specific or ascertained goods
the property in them is transferred to the buyer at such time as the parties to the contract intend it to be
transferred. Further, as per this section, for the purpose of ascertaining the intention of the parties, regard shall
be given to the terms of the contract, the conduct of the parties and the circumstances of the case.

The distinguishing feature between ‘an agreement to sell’ and a ‘sale’ is that in the former the property in the
goods is transferred from the seller to the buyer at some subsequent time or subject to some conditions thereafter

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 to be fulfilled, while in sale the property in the goods passes to the buyer the moment the sale is made. Section
4(3) of the Sale of Goods Act, 1930 states that “Where under a contract of sale the property in the goods is
transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the
goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called
an agreement to sell”; and Section 4(4) of the Sale of Goods Act, 1930, states that “an agreement to sell becomes
a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be
transferred.”

It follows that until the property in goods has been transferred from the seller to the buyer there is no sale. The
contract of sale remains merely executory till then; and it becomes executed the moment the property has passed
to the buyer. The section recognizes the rule that in case of an agreement of consideration; whether the
consideration consists in some actual performance, as the payment of the price, or in a promise, express or implied,
the time of the transfer of property (wherever such transfer is possible) depends upon the intention of the parties,
however indicated. And the word `intention' means expressed intention. The governing principle which should
determine as to the passing of the property in the goods must be to find out what is the intention of the parties.
The question of passing of property is normally a question of intention and the intention of the parties must be
gathered from the terms of the contract.

Case Study
In Amies v. Jal121 an agreement for the sale of a motor-car, of which the price was paid in monthly instalments,
contained, amongst others, a term that in default of payment of any one instalment the seller should be at liberty
to terminate the agreement and take possession of the car without being liable to refund to the buyer the
instalments paid by him. It was held that intention of parties, as expressed in the conditions, was that the
property in the car should not pass until full price is paid.

In view of the above, retention of title clause may be incorporated in the contract of sale of goods allowing the
supplier to retain ownership over the goods supplied until such time as certain conditions are met (e.g. receipt of
full price/consideration in case the price/consideration is agreed to be paid in instalments). However, until such
condition (e.g. receipt of full price/consideration in case the price/consideration is agreed to be paid in instalments)
is met such contract will not amount to be a sale but will be considered as an agreement to sell.

As already mentioned above, under IBC operational debt is defined to mean a claim in respect of the provision of
goods or services including employment or a debt in respect of the payment of dues arising under any law for the
time being in force and payable to the Central Government, any State Government or any local authority.

Hence, if the price or consideration amount of a supplier of capital goods or raw materials is not paid by the project
company or project SPV then such unpaid price or consideration amount will be an operational debt under IBC and
such unpaid supplier will be an operational creditor under IBC. In such a case, if a corporate insolvency resolution
process has been initiated against such project company or project SPV, the operational creditor can submit claim
with proof to the interim resolution professional in person, by post or by electronic means in Form B of the
Schedule to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons)
Regulations, 2016. The said Form B also requires the operational creditor to provide details of “any retention of
title arrangements in respect of goods or properties to which the claim refers”.

Further, if a corporate insolvency resolution process has been initiated against such project company or project
SPV then the interim resolution professional is required to, inter-alia, take control and custody of any asset over
which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with
information utility or the depository of securities or any other registry that records the ownership of assets.

121 AIR 1924 BOM 41

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 Further, for the purpose of liquidation, the liquidator is further required to form an estate of assets (called as
liquidation estate) in relation to the corporate debtor. Such assets include any assets over which the corporate
debtor has ownership rights, including all rights and interests therein as evidenced in the balance sheet of the
corporate debtor or an information utility or records in the registry or any depository recording securities of the
corporate debtor or by any other means as may be specified by the board, including shares held in any subsidiary
of the corporate debtor.

In view of above, if the considerations or price of the supplier of capital goods or raw materials is not paid by the
project company or project SPV then such supplier may claim its title over and return (as long as the goods or
material is in possession of project company or project SPV or are not converted into finished product e.g. raw
material converted into finished product) of the goods or raw material supplied in case the supplier is not paid in
full after filing its claim under the IBC regime.

Snapshots of various news articles on IBC in recent times

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Dispute Resolutio n in Co nc essio n A greements

Tr i g g e r p o i n t s f o r d i s p u t e s
For the purposes of this section, we have considered the key issues that give rise to disputes in road projects.
Disputes arising out of concession agreements in road projects are fairly complex and high stakes. Some of the factors
that give rise to such disputes are:

▪ Delays in Land Acquisition and in providing ROW

▪ Construction delays by concessionaire

▪ Rejection of price escalation claims

▪ Rejection of change orders pertaining to scope of work

▪ Rejection of time extension claims

▪ Withholding of amounts payable to the concessionaire

▪ Premature termination and offloading of work to third party

▪ Faulty construction

Ty p i c a l c l a i m s
Continuing with the case study on road projects in India, the following claims are usually raised:

Claims raised by a concessionaire

a. Amounts withheld or not realized

b. Interest on amounts paid belatedly

c. Interest on debt taken by concessionaire (From SCOD to COD) provided the delays in completion are
attributable to the authority

d. Interest on additional promoter funding (From SCOD till date of arbitration notice)

e. Financial/administrative costs (From SCOD till date of arbitration notice)

f. Direct costs (From SCOD till date of arbitration notice)

g. Expenses incurred on additional rental of plant and machinery (From SCOD till Actual COD)

h. Price escalation
i. Claim for change of scope

j. Maintenance cost (From SCOD till Actual COD)

k. Expenses incurred for rectification of damage to works

l. Liquidated damages for delay

m. Interest on various heads, pendent lite interest and post award interest

n. Costs

This is also seen in the draft shelf prospectus filed by NHAI122.

122https://www.sebi.gov.in/filings/debt-offer-document/nov-2018/national-highways-authority-of-india-draft-shelf-prospectus_41047.html

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It is observed that:

▪ Claims under heads (a) to (c), (g), (j) and (l) are generally awarded if there is proof of delay caused in acquiring
land or providing ROW to the concessionaire, supplemented with supporting proof of claim amounts under
these heads

▪ Claim under heads (d) to (f) are generally not awarded as they are either barred by the contract or overlap with
claims made in other heads

▪ Claims under heads (h), (i) and (k) are awarded if there is substantial proof of the same and more so if there is
certification by the IE in this regard

▪ Claims under head (m) and (n) are awarded on a discretionary basis

Claims raised against a concessionaire

a. Liquidated damages for delay

b. Difference in cost of getting work completed by third party

c. Recovery of advance

d. Revenue loss

e. Interest

f. Costs

From our experience, we observe that:

▪ Claims under heads (a), (b) and (c) are awarded if there is evidence buttressing the same

▪ Claims under head (e) and (f) are awarded on a discretionary basis

▪ Claim under head (d) is not awarded unless permitted by the contract or by way of an implied term

Modes of dispute resolution

Dispute resolution in the infrastructure sector has always been a multi layered mechanism with a wide array of options
often made available, including negotiation, mediation, conciliation, arbitration, dispute adjudicating boards,
commercial courts, etc.

Negotiation, mediation and conciliation

Parties to a concession agreement are often required to undertake negotiation, i.e. good faith high level talks, before
resorting to other modes of dispute resolution. In some model agreements there is also the requirement of mediation
or conciliation, involving the Independent Consultant/Engineer as pre-arbitration process for resolving disputes.
Conciliation is statutorily recognized in India under the Act. Mediation has recently picked up traction considering the
legislative encouragement offered in this regard through the Commercial Courts Act, 2015. India has also recently signed
the United Nations Convention on International Settlement Agreements Resulting from Mediation, indicating a strong
intent towards this mode of dispute resolution.

Interestingly, the model agreement in respect of ports even provides for reference of disputes for purposes of resolution
to experts, provided parties agree to the same.

Perhaps, the single largest successful mechanism pre-arbitration has been conciliation. In recent times, it is noticed that
the government, its agencies and PSUs have been keen to push towards conciliation, with or without expert committees.

Majority of the contracts which involve private and public interest, provide for pre-arbitration clauses which indeed is
even more necessary in the Indian scenario where the resolution of a commercial dispute can be a prolonged process.

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It may, however, be more advisable to have only a single round of amicable discussions towards resolving disputes,
presided over by a pre-designated authority and with specific timelines, as opposed to the tiered clause which can be
both time consuming and expensive as parties will invariably take legal advice right from the inception of any dispute.

Dispute resolution boards

Dispute Resolution Boards or Adjudicatory Boards have been quintessential part of dispute resolution mechanisms in
infrastructure sector. Theoretically, they are supposed to comprise of independent, impartial experts who are appointed
specifically for the given project and are given regular reports and access to the project so that they provide early
resolution to issues. However, it is seen that the findings of such boards are invariably challenged 123. This has led to
serious doubts on the efficacy of this mode of dispute resolution, although it is possibly the most suitable mechanism
to nip issues in the bud and lead to successful project completions. The courts have often reprimanded recalcitrant
parties in failing to abide by the findings of such authorities which are often upheld by the arbitral tribunal and by the
courts. Recently, the Delhi High Court124 inter alia stated that a policy level decision deserves to be taken at the highest
quarters in the NHAI to ensure that recommendations of the Dispute Resolution Board are evaluated before matters
proceed to arbitration.

This inability of authority and/or concessionaire to abide by the findings of such boards has led to arbitration being the
preferred mode of dispute resolution.

Arbitration
If parties are unable to reach an amicable settlement through the modes mentioned above, the MCAs mandate that
parties shall resolve their disputes through arbitration.

Arbitration clauses are oft overlooked in infrastructure projects. Contractors must ensure that there is clear waterfall
mechanism for dispute resolution with civil courts’ jurisdiction being made subject to the arbitration clause except for
the purposes of any injunctive relief. Arbitrator appointment rights must be balanced or alternatively delegated to an
independent arbitral institution. As infrastructure projects in India are likely to have an Indian seat, and further since
the government is moving towards an institutional arbitration regime, it may be prudent to consider established Indian
arbitral institutions such as MCIA, ICA and NPAC. Although the rules of some of these institutions are not as advanced
as those of SIAC and other international arbitral institutions, for example in relation to complex issues such as joinder
of parties, consolidation of arbitrations, emergency arbitrations, etc., nonetheless, they are more efficacious than ad
hoc arbitration.

Arbitration is the preferred mechanism not being as time consuming as litigation and that which respects confidentiality.
Furthermore, it allows parties to nominate adjudicators who have the expertise, skillset and technical knowhow of the
subject matter of the dispute unlike civil courts. It endows such adjudicators the liberty to determine the procedure for
resolution of disputes without strict adherence to rules of evidence and court procedure.

While the Arbitration Act was enacted with the aim of achieving expeditious resolution of disputes, a brewing cause of
concern for litigants was the surge in court intervention in arbitration proceedings in India, particularly ad hoc
arbitrations. These concerns were eventually addressed by the legislature through the Amendment Act 2015 and indeed
over the past few years there have been catena of pro arbitration judgments passed by the various High Courts and the
Supreme Court of India which further complement the legislative intent behind the amendment act. Take for example,
that it was not uncommon for the authority to mandate that its own employees or officers would act as arbitrators in
the case of disputes. However, with amendments to the Arbitration Act125, courts have now held that this is no longer

123 Second Report of The Committee under the Chairmanship of Shri B K Chaturvedi, Member, Planning Commission Government of India
124 OMP 265 of 2009, Delhi High Court, decided on 2 July 2019
125 Fifth Schedule, entry 1 read with section 12 of the Act

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permissible126. While a decision with respect to unilateral right appointment of arbitrators is pending before a larger
bench of the Supreme Court 127, it is likely that the current position of law in this regard will not be disturbed, namely,
there has to be mutuality in the appointment process 128, The courts are also proactively implementing provisions such
as deposit requirements129 before permitting challenges to arbitral awards, even though under the provisions130 of Code
of Civil Procedure, 1908 (CPC) the government had pled exemption from such requirements 131. This evolving law on
arbitration in India has led to more equitable dispute resolution provisions being incorporated into government
contracts.

Further changes have been recently brought in through the Arbitration and Conciliation (Amendment) Act, 2019
(Amendment Act, 2019). However, these changes, while brought in with good intentions have the potential of upsetting
the balance that was achieved through the Amendment Act 2015. One, they loosen the timelines that had tightened
the otherwise lax approach often taken by ad hoc arbitrations. Second, while they give a major stimulus to institutional
arbitration, they also set up an oversight body in the form of Arbitration Council of India which is to comprise of
governmental officials. This seems antithetical as the government is one of the major litigants in India. Nonetheless, the
exact impact of such a council can only be determined in due course of time. By virtue of the latest Amendment Act,
2020, one major concern of the previous amendment has been addressed, i.e. the restrictive qualifications of arbitrators
have been done away with. This permits the continuation of foreign specialists to be appointed as arbitrators in complex
infrastructure disputes.

As can be seen, the move towards institutionalized arbitration seems to be gathering steam. The MCA for road projects
envisages arbitration under the Rules of Arbitration of the Indian Council of Arbitration (ICA). Additionally, arbitration
may also be conducted in accordance with the arbitration rules of SAROD-PORTS. In the ports sector, a similar
institutional arbitration model has been mooted.

Although, arbitration itself is conducted in a time bound manner, with the easing up of timelines by the Amendment
Act 2019, our view is that the arbitral process will take between 12 months to 24 months to complete, considering that
the documentation and expert evidence in relation to the arbitral proceedings is extensive. Ensuing court proceedings
that drag the resulting award through various stages of appeals before the issues are finally concluded makes dispute
resolution a long-drawn affair. In our experience and estimates, the disputes take anywhere between 2 to 6 years to be
finally resolved. Consider the case of NHAI, which is one of the largest highway contractors of the country with an
annual spend of almost INR 90,000 crore and has claims worth INR 38,000 crore against it. Reportedly, NHAI has agreed

126In TRF Ltd. v. Energo Engineering Projects Ltd., 2017 (8) SCC 377, the arbitration agreement between the parties provided for the appointment of
a party’s Managing Director as the sole arbitrator, and further provided that should the MD be indisposed, he could nominate another arbitrator to
adjudicate the disputes between the parties. The Supreme Court held that as per the Amended Act, the MD would be ineligible to act as an
arbitrator, and therefore he was consequently precluded from nominating another arbitrator.
127 Perkins Eastman Architects v HSCC (India) Ltd, AIR 2020 SC 59
128 Union of India v. M/s Tantia Constructions Limited: SLP (C) 12670/2020 decided on 11.01.2021
129 Section 36(3) of the Act –
Upon filing of an application under sub-section (2) for stay of the operation of the arbitral award, the Court may, subject to such
conditions as it may deem fit, grant stay of the operation of such award for reasons to be recorded in writing:
Provided that the Court shall, while considering the application for grant of stay in the case of an arbitral award for payment of
money, have due regard to the provisions for grant of stay of a money decree under the provisions of the Code of Civil Procedure,
1908 (5 of 1908)
130 Order XXVII, Rule 8A, CPC –
No such security as is mentioned in rules 5 and 6 to Order XLI shall be required from the Government or, where the Government has
undertaken the defence of the suit, from any public officer sued in respect of an act alleged to be done by him in his official
capacity.
131 PAM Developments Pvt. Ltd. v. State of West Bengal, CA No. 5432 of 2019, Supreme Court of India, decided on 12 July 2019

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to honor 67 out of 151 arbitral awards. The rest have been challenged in court and have been either upheld or set
aside132. As per NHAI’s own disclosure last year, 1014 arbitration cases were pending at various stages133.

For a concessionaire, this time spent in litigation could be a period fraught with financial instability. However, as
mandated by the CCEA, NHAI permits 75% of the arbitral award to be released in favor of the concessionaire, subject to
the outcome of any legal challenge to the award and which amount is to be secured by a bank guarantee 134. Also, as
highlighted hereinabove under the arbitration law, deposit requirements before challenge to awards, have given
financial flexibility to the award holder concessionaire who can draw upon such deposits subject to submission of a
solvent security into court,

Furthermore, with a view to reduce the costs involved

in arbitration, NHAI had been instrumental in setting
SAROD, essentially an arbitral institution for
inexpensive and expedited arbitral proceedings. NHAI
has also set up the Conciliation Committee of
Independent Experts to resolve disputes whether prior
to or at any stage of the arbitral proceedings.
Reportedly, this has picked up pace since 2017 135.
According to the most recent press release of 17 June
2020, over 108 cases have been referred to conciliation and claims worth INR 13,349 cr. have been settled for INR 3,743
cr.136.
Snapshot of an article in Business Standard, September 2019

The same seems to be becoming the preferred mode for speedy and amicable settlement of disputes, which would
expedite the completion of the affected projects.

It would also be relevant to note that the courts have also done their bit by deterring frivolous challenges to arbitral
awards and adopting a stricter approach to challenges. In Ssangyong Engineering & Construction Co. Ltd. v. NHAI 137
while setting aside the award that was issued in favor of NHAI cautioned that the ground of “public policy of India”
would be available only in very “exceptional circumstances, such as the fact situation in the present case. Under no
circumstance can any Court interfere with an arbitral award on the ground that justice has not been done in the opinion
of the Court. That would be an entry into the merits of the dispute which, as we have seen, is contrary to the ethos of
Section 34 of the 1996 Act, as has been noted earlier in this judgment”.

132
https://indianexpress.com/article/india/highway-dispute-resolution-committee-in-a-month-nhai-chief-4627921/ Last accessed on 18 August
2019
133
https://nhai.gov.in/writereaddata/Portal/NHAI/WhatsNew/123_CompressedNHAIAnnualReportEnglishcorrected.pdf Last accessed on 18 August
2019
134NITI Aayog’s office memorandum dated 5 September 2016 -
https://cpwd.gov.in/WriteReadData/NITIAyogDocuments/MeasurestoReviveConstructionSectorArbitration.pdf Last accessed on 18 August 2019
135
http://www.nhai.org/conciliation-mechanism-independent-expert.htm Last accessed on 27 August 2018
136 https://pib.gov.in/PressReleasePage.aspx?PRID=1632105
137 CA No. 4779 of 2019, Supreme Court of India, decided on 8 May 2019

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 A landmark case study: Hindustan Construction Company Limited and Anr. v. Union of India and Ors138
Background
On 27 November 2019, the Supreme Court of India (SC), delivered a seminal verdict in the case of Hindustan
Construction Company Limited & Anr. v. Union of India & Ors. wherein, inter alia139, the constitutional validity of
Section 87 of the Arbitration Act was challenged.

Award holders in India have historically had an arduous time realizing the proceeds of an award when awards are
challenged by award debtors and the enforcement proceedings are automatically stayed. By the present decision,
the SC, under the Act, has given means to an award holder to secure a part or whole of the award amount pending
the outcome of the petition to set aside the award under the Act. The award debtor, pending the outcome of the
challenge to the award, is compelled to file an application for stay against the enforcement of the award wherein it
may be required to deposit the award amount in court. This position which was made available through the
Amendment Act, 2015 has now been extended to even those matters which commenced prior to 23 October 2015.
1996
A key issue under the Act was that a petition for setting aside the award, filed under section 34 by an award debtor,
meant an automatic stay against the enforcement of the award 140. This seemed antithetical to the nature of
arbitration, i.e., a speedy and efficacious alternate dispute resolution mechanism. Therefore, an award holder could
not realize the amounts under an award, until the setting aside petition was finally disposed.

2015
The above dichotomy, amongst others, was sought to be rectified by 2015 Amendment Act whereby under section
36(3) the award debtor was now required to make a specific application seeking a stay against the enforcement of
the award. The said stay could be granted by the court subject to conditions including deposit of the award amount.
Soon after the 2015 Amendment Act came into force, questions arose as to the applicability of the 2015 Amendment
Act i.e. whether it was applicable retrospectively or prospectively. In the ensuing months companies that had
received arbitral awards in their favor were unsure if the awards were enforceable or would suffer the fate of an
automatic stay. Thus, section 26 of the 2015 Amendment Act, which dealt with the applicability thereof came under
judicial scrutiny in various courts across the country.

2017
In the meanwhile, the ambiguity was noted by the Srikrishna Committee Report 141 in 2017. The said report
recommended that certainty ought to be brought about by clarifying that the 2015 Amendment Act was prospective
in nature.

The Supreme Court’s decision in BCCI142

Before a legislative clarification on the applicability of the 2015 Amendment Act could be made, the SC in BCCI v.
Kochi Cricket Private Limited (BCCI) clarified that while the 2015 Amendment Act was prospective in nature, the
change brought about in the position vis-à-vis the erstwhile automatic stay against enforcement, was retrospectively

138 WP (Civil) No. 1074 of 2019

139
At the outset, this decision involved other facets including a challenge to the provisions of the Insolvency and Bankruptcy Code, 2016. However,
we will not venture into that realm in the present discussion.
140 National Aluminum Company Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd. and Anr., 2004 1 SCC 540 – While the judgment held that the mere
filing of an application under Section 34 of the Act operates as an automatic stay on the operation of the award, the judgment also observed that a
recommendation had been made by the relevant Ministry to the Parliament to amend the language of Section 34 because an automatic stay would
be against the principles of an efficient alternate dispute resolution system.
141Report of the High Level Committee to Review the Institutionalisation of Arbitration Mechanism in India – available at
http://legalaffairs.gov.in/sites/default/files/Report-HLC.pdf
142 BCCI v. Kochi Cricket Private Limited, (2018) 6 SCC 287

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 applicable. Thus, even for arbitrations pre-dating October 23, 2015, the award holder could not be simply shut out
by a pending setting aside petition against the award.

2019
Unfortunately, despite the observation of the SC in BCCI, the legislature, enacted the Amendment Act, 2019 repealing
section 26 of the 2015 Amendment Act and clarifying through section 87 that the 2015 Amendment Act was
prospectively applicable only. This meant that those companies which (in pending matters) had relied upon the BCCI
decision to claim benefit of the section 36(3) of the Act and the provisions for enforcement, were forced to reevaluate
their positions.

The Issue before the SC

These companies (Petitioners) hence moved the SC, by way of a writ, challenging the constitutionality of section 87
introduced by the 2019 Amendment Act, the repeal of section 26 of the 2015 Amendment, as also certain provisions
of IBC.

The SC agreed with the Petitioners that the reading of the unamended Act leads to the conclusion that there was a
conscious deviation from the UNCITRAL Model Law by not allowing two bites at the cherry to an award debtor, i.e.,
one during setting aside proceedings under section 34 and one during enforcement proceedings under section 36.
The SC read section 35 (which deals with finality of an award) along with section 34 and 36 to state that it was never
intended that a setting aside petition would automatically stay enforcement.

This obviously was a complete departure from the earlier position that had been stated by the SC itself. In NALCO143,
Fiza144 and National Buildings145 the SC had held that a setting aside petition would inherently stay the enforcement
of an award. Thus, in the decision under discussion, while coming to its conclusion as above, the SC expressly
overruled these decisions146 .

The SC also relied upon section 9, which enables a party to apply for interim reliefs after making of the award but
before it is enforced, in support of the conclusion that the award is enforceable and there is no automatic stay against
enforcement upon the filing of a setting aside petition. The SC clarified that even under the Act, there was never any
automatic stay intended and that the 2015 Amendment Act was merely clarificatory in this regard. By extension, the
SC implied that the 2015 Amendment Act was therefore retrospectively applicable.

The SC clarified that having held that there was no automatic stay under the unamended Act, the 2015 Amendment
Act was only introduced to clarify such position. Therefore, section 87 was contrary to the object sought to be
achieved by the 2015 Amendment Act as it sought to make the 2015 Amendment Act only applicable from 23 October
2015. Further, the legislature without referring to the BCCI decision which had pointed out the pitfalls of introducing
such a provision, had brought into play a provision that was manifestly arbitrary, without adequately determining
principle, and contrary to public interest. The SC agreed with the Petitioner that the introduction of section 87
resurrects the mischief sought to be corrected by the 2015 Amendment Act and was therefore unconstitutional. The
SC hence found the introduction of section 87 and the repeal of section 26 of the 2015 Amendment Act to be violative
of Article 14 of the Constitution of India.

The SC then clarified that the position in BCCI continues to hold good as on date, i.e., by filing a setting aside petition
there would be no automatic stay against the enforcement of any arbitral award, irrespective of when the arbitration
was commenced.

143 National Aluminum Company Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd. and Anr., (2004) 1 SCC 250
144 Fiza Developers and Inter-trade Pvt. Ltd. V. AMCI (India) Pvt. Ltd., (2009) 17 SCC 796
145 National Buildings Construction Corporation Ltd. V. Lloyds Insulation India Ltd., (2005) 2 SCC 367
146 The SC clarified that the said decisions were only overruled on this limited aspect.

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 Conclusion
It is well known that over INR 38,000 crores is held up in litigation in the roads sector itself as the sums due under
arbitral awards have not been deposited on account of automatic stay available to the award debtor by simply filing
a setting aside petition under section 34. This malady is spread across various other sectors as well and not just
limited to cases where the governmental agencies are award debtors. The decision of the SC will therefore provide
much needed relief to award holders who no longer need to wait the average six to seven years before realizing the
awarded amounts. In the short term, this would perhaps inject much needed liquidity in strained sectors and alleviate
the balance sheets of several companies. However, the key takeaway is the paradigm shift in the attitude and
approach of the judiciary towards arbitration in India which bodes well for the future of arbitration in India.

However, with the Amendment Act, 2020, an exception has been introduced to this deposit requirement, i.e. it will
be dispensed with if there is a prima facie case made out of fraud or corruption in respect of the arbitration
agreement or award.

Other case studies

In Gammon India Ltd. v. NHAI147 the Delhi High Court recently observed as under:

… there is a need for NHAI to not mechanically and casually challenge arbitral awards, especially
where objections to the award are not strong or substantial. The challenge being raised to
awards in this manner also results in derailment of infrastructural projects. On the one hand
NHAI deprived the Contractor of timely payments and added to that additional amounts are
payable on account of interest, that too compounded monthly.
…
There is an urgent need for the NHAI to take a policy decision on the manner in which disputes
with contractors need to be resolved. The entire mechanism of DRB and Arbitral Tribunal would
be set at naught if every recommendation of the DRB and every award of the Tribunal is
challenged. The large number of NHAI disputes pending before the Court are evidence of the
fact that most awards are challenged.
…
In 2018, the Delhi Court had in the case of NHAI vs M/S. BSC-RBM-PATI Joint Venture148 while dismissing NHAI’s
appeal and upholding the award against NHAI observed as under:

“…factual findings, in respect of which the learned Arbitral Tribunal is the final authority, are
being successively challenged, under Section 34 and thereafter, under Section 37 of the Act. This
has effectively reduced the exercise of arbitration to the civil trial, and petitions under Sections
34 and 37 of the Act to first appeals and second appeals. In fact, while second appeals under
Section 100 of the CPC, would lie only on questions of law, we find that arbitral awards are being
challenged, even on facts, under Section 37 of the Act. Despite wealth of judicial authority on
this point, and repeated disapproval voiced by the Supreme Court and as well as several High
Courts including this Court thereon, it is almost invariably seen that every award passed by the
arbitrator/Arbitral Tribunal, especially, where the awards are commercial in nature, are
challenged, first before the Single Judge and thereafter before the Division Bench merely
because the “aggrieved party” possess the financial wherewithal to do so. It is a matter of
concern that the majority of such challenges are by public sector undertakings, the appellant
before us being one of the main contributors thereto. Such attempts contribute, in a great deal

147 OMP 265 of 2009, Delhi High Court, decided on 2 July 2019
148 Case No - FAO (OS)(COMM)--107/2017, Delhi High Court, decided on 24 January 2018

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 to the menace of “docket explosion”, which plagues our Courts and consumes valuable time
which could be used for settling more important disputes. We unhesitatingly deprecate this
practice.

In infrastructure projects, while entering into a contract with the relevant authority, it is important to
understand the scope of the dispute resolution clause. There have been several decisions in the past on the
subject wherein excepted matters have not been permitted to be referred to arbitrations. Take for example
the line of decisions wherein “non-notified claims” were excluded from the scope of arbitration. Recently,
the Supreme Court of India in Mitra Guha Builders (India) Company v ONGC recognized that where a clause
specifically excluded the issue of levy of Liquidated Damages from the arbitration agreement, a dispute in
relation thereto could not be referred to arbitration. In the aforesaid matter the Superintending Engineer’s
decision on Liquidated Damages was to be final and binding and was carved out from the scope of the
arbitration agreement. Contractors must therefore examine these microscopic details while negotiating
dispute resolution clauses as the same are often overlooked.

Statutory Adjudication
The concept is quite well established in countries such as the UK 149, Malaysia150 and New Zealand151. It is akin to a court
litigation but involves expedited decision making minus the strict procedural formalities. Also, because it is sector
specific, the adjudicating authority has the necessary expertise and legal know how to enable efficient adjudication.

Recently, the government has thrown open for discussion, the provision of a statutory Adjudicatory Board in the
proposed Major Ports Bill, 2019. The same has thrown concessionaires in a tizzy as the MCA provides for an option to
proceed with arbitration or have disputes adjudicated by such statutory Adjudicatory Board. The current preference to
submit disputes to arbitration is not wholly out of place as the concessionaires’ reservations on the composition of the
Adjudicatory Board, the extent of its jurisdiction and non-appealable character of its decision are not put to rest by the
government. However, in its current form as mooted in the MCA, reference of disputes to the Adjudicatory Board is
optional and only to be made on a mutually acceptable basis.

In conclusion, the Indian infrastructure sector is well endowed with various dispute resolution mechanisms which are
built into the MCAs. However, there is no common tenor in the dispute resolution clauses in the agreements prescribed
for the various sub-sectors. Invariably, it is a medley of modes of dispute resolution that are deemed suitable for that
particular sub-sector. Perhaps it is time that a thorough analysis is carried out and a simpler common dispute resolution
mechanism be adopted, one which enables early resolution of disputes and the product of which is honored by both
parties.

There is enough and more discussion in the corridors of the various ministries for the need of a legislation along the
lines of the Housing Grants, Construction and Regeneration Act 1996 and to incorporate some of its key features such
as expedited mandatory adjudication. The urgency is evident as several concessionaires, contractors and developers
have been dragged before the National Company Law Tribunal under the IBC on account of inability to manage cash
flows on account of delay in realizing amounts payable by the authority under the awards. A remarkable astute few have
managed to tide over their immediate problems by resorting to third party litigation funding which we deal with in our
next section. However, the fact remains that there is a dire need for a concrete step towards resolving disputes in an
expeditious and efficient manner.

149 Housing Grants, Construction and Regeneration Act 1996

150 Construction Industry Payment & Adjudication Act 2012
151 Construction Contracts Act 2002

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Disputes arising o ut o f Disqualificatio n fro m Tendering
Proc ess – Develo pment o f the Law
Introduction
In the infrastructure space in India, the Government and its instrumentalities form one of the largest clients for the
plethora of contractors that compete in the said sector. When the Government or its instrumentality is the employer,
the mode of awarding the contract is invariably through a mechanism where the scope of the project is set out in a
detailed document called the Request for Quotations or Notice inviting Tenders, and bids are invited from the various
contractors. Generally, there are two parts to the bidding process; one involves a technical evaluation (often prefaced
by eligibility norms) and the second the commercial evaluation. As part of the selection process, bidders may find
themselves out of the reckoning at any of these stages. Often, such affected bidders are of the view that they have been
deprived of the opportunity unfairly. Thus, it becomes critical to analyze if there is any merit in such grievance.

Naturally, such analysis requires a deep dive into the factual matrix, the technical perspectives and the correspondence
at such stage, which are unique to each project. One constant though is the legal treatment by courts de hors such
peculiar facts and circumstances. We have compiled some of the key decisions of the courts hereinbelow and extracted
the commonalities in the said decisions to help better understand the positions taken by the courts in such matters.

Case Laws
1980s
In one of the earliest seminal decisions, Ramana Dayaram Shetty v International Airport Authority of India and Ors. 152
the Supreme Court was called upon to decide a writ challenge to the award of a contract by a Government
instrumentality. The appellant’s grievance was that the contract was awarded to a bidder who ostensibly did not qualify
as per the technical criteria. The appellant alleged that the decision to award the contract by seemingly relaxing the
eligibility norm was an arbitrary action that had the effect of denying equal opportunity to the appellant to submit a
tender. The Supreme Court held that the Government cannot give or withhold largess in its arbitrary discretion or at its
sweet will and will be subject to restraints, inherent in its position in a democratic society. It further held that the power
or discretion of the Government must be confined and structured by rational, relevant and non-discriminatory standard
or norm and if the Government departs from standard or norm in any particular case or cases, the action of the
Government would be liable to be struck down, unless it can be shown by the Government that the departure was not
arbitrary but was based on some valid principle which in itself was not irrational, unreasonable or discriminatory. It held
that merely because one person is chosen in preference to another, it does not follow that there is a violation of Article
14 of the Constitution, because the Government must necessarily be entitled to make a choice. But that does not mean
that the choice be arbitrary or fanciful. The choice must be dictated by public interest and must not be unreasoned or
unprincipled. The Supreme Court examined the facts of the case and held that eligibility norm, once laid down, could
not have been departed from as such arbitrary decision precluded others who would have participated had it not been
for such eligibility norm.

1990s
In G.J. Fernandez v. State of Karnataka and Ors. 153 the Supreme Court held that the minimum eligibility norms must be
adhered to equally by the Government in respect of all tenderers. While the Government may deviate from set norms,
the same should not result in arbitrariness or discrimination by prejudicing some tenderers and benefitting others.

152 (1979) 2 SCC 489

153 (1990) 2 SCC 488

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In Poddar Steel Corporation v Ganesh Engineering Works and Ors. 154, the Supreme Court was called upon to consider a
matter where the Government allowed the successful bidder to deposit the earnest money through cheque when the
two options provided for in the Notice Inviting Tenders were cash or demand draft. The Supreme Court held that the
requirements in a tender notice can be classified into two categories, (i) those which lay down the essential conditions
of eligibility and (ii) the others which are merely ancillary or subsidiary with the main object to be achieved by the
condition. In the first case the authority issuing the tender may be required to enforce them rigidly. In the other cases it
must be open to the authority to deviate from and not to insist upon the strict literal compliance of the condition in
appropriate cases.

In Tata Cellular v. Union of India155, the Supreme Court was called upon to examine the award of cellular licenses by the
Government. The Supreme Court held that the court should confine itself to whether a decision-making authority:

1. Exceeded its powers,

2. Committed an error of law,
3. Committed a breach of the rules of natural justice,
4. Reached a decision which no reasonable tribunal would have reached or,
5. Abused its powers.

The Supreme Court held that in its examination of the decision, the court must consider the principles of illegality,
irrationality, and procedural impropriety. Culling out the principles from various decisions, it held that:

1. There must be judicial restraint while interfering with an administrative action,

2. The court does not sit in appeal but merely reviews the manner in which the decision was arrived at,
3. The court cannot correct the administrative decision as it does not have the expertise to do so,
4. The terms of the invitation to tender cannot be open to judicial scrutiny as it is in the realm of contract,
5. The Government must have freedom of contract, but its actions are circumscribed by reasonableness and must
be free from arbitrariness, bias and mala fides.

The Supreme Court in Raunaq International Ltd. v. I.V.R. Construction Ltd. and ors. 156 was asked to intervene in the award
of a contract by the Government to the lowest bidder on the basis of an allegation that the lowest bidder, i.e. the
appellant, did not qualify under the eligibility norms. The Supreme Court held that the award of a contract, whether it
is by a private party or by a public body or the State, is essentially a commercial transaction and which can involve several
criteria including (i) price, (ii) ability of the potential bidder to perform the obligations, (iii) past experience, (iv) time and
quality of delivery, (v) ability to rectify defects and give post-contract services, etc. As such, when an evaluation
committee of experts is appointed to evaluate offers, the expert committee's special knowledge plays a decisive role in
deciding which is the best offer and the court must not substitute its decision for the decision of such committee. The
Supreme Court further held that a court must be satisfied that there is some public interest in the challenge brought
against Government action of awarding a contract as court intervention could result in delays in the proposed project
escalating the cost far beyond any savings the court could arrive at. In the facts of the case, the Supreme Court found
no reason to interfere with the award of the contract.

2000s
In Air India v Cochin International Airport Ltd.157, while the two rival bidders were found to be equally technically
competent and further while the evaluation committee recommended the award of the contract to one party, the
Government awarded the contract to the appellant. Before awarding the contract to the appellant, the Government
permitted the appellant to submit a revised presentation demonstrating the benefit that would be derived out
partnership with the appellant. The rival bidder challenged the award of the contract by stating that the action to allow

154 (1991) 3 SCC 273

155 (1994) 6 SCC 651
156 (1999) 1 SCC 492
157 (2000) 2 SCC 617

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a revised presentation was arbitrary and vitiated by mala fides and that they were themselves not given the opportunity
to submit a revised presentation. The Supreme Court rejected the argument and held that in a commercial transaction
of a complex nature what may appear to be better, on the face of it, may not be considered so when an overall view is
taken. In such matters the Court cannot substitute its decision for the decision of the party awarding the contract. The
Supreme Court found no mala fides and hence did not interfere with the award of the contract.

In Jagdish Mandal v State of Orissa and Ors. 158 the lowest bidder was not awarded the contract as it was discovered that
the earnest money deposit was invalid. The contract was awarded to the second lowest bidder. The Supreme Court inter
alia relied upon its decision in B.S.N Joshi and Sons Ltd. v. Nair Coal Services Ltd.159 and held that a contract need not be
given to the lowest tenderer but it is equally true that the employer is the best judge therefor; the same ordinarily being
within its domain, court's interference in such matter should be minimal. If the decision relating to award of contract is
bona fide and is in public interest, courts will not, in exercise of power of judicial review, interfere even if a procedural
aberration or error in assessment or prejudice to a tenderer, is made out. The Supreme Court went on to hold that the
power of judicial review will not be permitted to be invoked to protect private interest at the cost of public interest, or
to decide contractual disputes. The tenderer or contractor with a grievance can always seek damages in a civil court.
Attempts by unsuccessful tenderers with imaginary grievances, wounded pride and business rivalry, to make mountains
out of molehills of some technical/procedural violation or some prejudice to self and persuade courts to interfere by
exercising power of judicial review, should be resisted. On the facts of the case, the Supreme Court found the decision
of the employer to be appropriate.

2010s
In Michigan Rubber (India) Ltd. v. State of Karnataka and Ors. 160 a bidder challenged the eligibility norm itself stating
that it was unreasonable, arbitrary, discriminatory and opposed to public interest in general as it excluded the appellant
company and other similarly situated companies from the tender process on wholly extraneous grounds. The Supreme
Court held that in the matter of formulating conditions of a tender document and awarding a contract, greater latitude
is required to be conceded to the State authorities unless the action of tendering authority is found to be malicious and
a misuse of its statutory powers, interference by courts is not warranted. The Government and their undertakings must
have a free hand in setting terms of the tender and only if it is arbitrary, discriminatory, mala fide or actuated by bias,
the courts would interfere. The court cannot interfere with the terms of the tender prescribed by the Government
because it feels that some other terms in the tender would have been fair, wiser or logical. The Supreme Court found no
such ground to interfere in the eligibility norms as laid down in the subject notice inviting tenders.

A fairly common question that arose before the Supreme Court in Afcons Infrastructure Ltd. v. Nagpur Metro Rail
Corporation Ltd. and Anr.161 was whether the authority had disqualified a bidder arbitrarily or not. Here, one of the
bidders claimed that it had relevant experience in the execution of an inter-city high speed railway project. The authority
rejected the same stating that the eligibility norm required experience in metro civil construction work and the inter-
city high speed railway project could not be counted towards such experience. The Supreme Court refused to interfere
in the authority’s decision disqualifying the bidder stating that the owner or the employer of a project, having authored
the tender documents, is the best person to understand and appreciate its requirements and interpret its documents.
The constitutional courts must defer to this understanding and appreciation of the tender documents, unless there is
mala fide or perversity in the understanding or appreciation or in the application of the terms of the tender conditions.
It is possible that the owner or employer of a project may give an interpretation to the tender documents that is not
acceptable to the constitutional courts but that by itself is not a reason for interfering with the interpretation given.

158 (2007) 14 SCC 517

159 (2006) 11 SCC 548
160 (2012) 8 SCC 216
161 (2016) 16 SCC 818

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The same issue arose in Montecarlo Ltd. v. National Thermal Power Corporation Ltd. 162. Here, the authority found that
the bidder had not clarified in its experience criteria whether it had carried out drilling operations in respect of previous
mining projects. The authority requested the bidder to clarify the same and provide supporting documents. Although
the bidder did provide documents, the authority held that upon a perusal of the documents, the bidder did not have
the experience of drilling for blasting purposes. The decision of the authority, when challenged by the bidder, was not
set aside by the Supreme Court which held that where tenders are floated and offers are invited for highly complex
technical subjects, tenders are scrutinized by the technical experts and sometimes third-party assistance from those
unconnected with the owner’s organization is taken. It is because to check and ascertain that technical ability and the
financial feasibility have sanguinity and are workable and realistic. Where a decision is taken that is manifestly in
consonance with the language of the tender document or subserves the purpose for which the tender is floated, the
court should follow the principle of restraint. Technical evaluation or comparison by the court would be impermissible.

In Municipal Corporation, Ujjain and Anr. v. BVG India Limited and Ors. 163 the contract was awarded after taking into
account technical qualifications and commercial bid evaluation. There was weightage given to both processes and
although the winning bid was not the lowest commercial bid, it was as per the system of weightages, the winning bid.
The Supreme Court refused to interfere in the award of the contract stating that aggrieved the procedure envisaged that
the bid should be accepted not only based on the outcome of the financial bid, but also based on the evaluation of the
technical bid. The procedure laid down specified that the technical bid will have 80% marks whereas the financial bid
will have 20% marks. This clearly showed that the municipal corporation has given due importance to the quality and
not the financial aspect, keeping in mind the object for which bids are invited. The Supreme Court found no illegality,
arbitrariness, irrationality or unreasonableness on the part of the expert body while in action. It also did not find any
bias or mala fides either on the part of the corporation or on the part of the technical expert while taking the decision.
The Supreme Court also observed that the aggrieved bidder who was not awarded the contract had himself attempted
to rely upon documents purportedly supporting his experience when such documents were not submitted along with
the bid. The Supreme Court found that the aggrieved bidder had also suppressed information on pending litigation and
thus, the petition was liable to be dismissed.

In Caretel Infotech Ltd. v. Hindustan Petroleum Corporation Ltd. and Ors. 164 the notice inviting tender required the
bidders to disclose if they had been blacklisted or holiday listed / if any blacklisting / holiday listing action had been
initiated against them as on the due date of the tender. The successful bidder was issued a show cause notice by another
Government instrumentality before the due date of the tender, but the actual blacklisting occurred after the award of
the contract. When the award of the contract was challenged on the basis that the successful bidder had suppressed
that blacklisting action had been commenced against him, the Supreme Court found no reason to interfere with the
award. The Supreme Court held that the issuance of the show cause notice did not amount to initiation of the
blacklisting. The Supreme Court cautioned that the court ought not to sit in appeal over the authority’s decision. The
court held that the object cannot be that in every contract, where some parties would lose out, they should get the
opportunity to somehow pick holes, to disqualify the successful parties, on grounds on which even the party floating
the tender finds no merit.

The Supreme Court perhaps gave its most lay person explanation in Silppi Constructions Contractors v. Union of India &
Anr.165 when it stated that the authority which floats the contract or tender and has authored the tender documents is
the best judge as to how the documents have to be interpreted. If two interpretations are possible then the
interpretation of the author must be accepted. The courts must realize their limitations and the havoc which needless
interference in commercial matters can cause. In contracts involving technical issues the courts should be even more
reluctant because most the judiciary does not have the necessary expertise to adjudicate upon technical issues beyond
their domain. The courts should not use a magnifying glass while scanning the tenders and make every small mistake

162 (2016) 15 SCC 272

163 (2018) 5 SCC 462
164 (2019) 14 SCC 81
165 (2020) 16 SCC 489

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appear like a big blunder. In this case, the petitioner’s bids had been rejected by a non-speaking order. In the writ
petition, the authority took up the stand that the petitioner’s bids had been rejected for several grounds including the
fact that the petitioner did not qualify under the eligibility norm, that the petitioner’s sister concern was causing heavy
delays in another project and that the petitioner’s sister concern had abandoned another project. With respect to the
non-speaking order, the Supreme Court held that the authority’s decisions are neither judicial nor quasi-judicial. If
reasons are to be given at every stage, then the commercial activities of the State would come to a grinding halt. While
the Supreme Court agreed that perhaps there was some merit to the aggrieved bidder’s stand that actions taken in
relation to a sister concern cannot affect the authority’s decision-making process, it found that the authority’s decision
to take cognizance of such remarks as against the sister concern was appropriate. The Supreme Court found no reason
to interfere stating that it is obvious that the sister company having realized that it would not be awarded any contract
neither got its enlistment renewed nor tried to submit the tender. The directors of the sister company tried to get over
these insurmountable objections by applying for the tender in the name of the petitioner firm. Not only were the names
similar but as pointed above, all the directors of the sister company were partners in the petitioner firm. Therefore,
these adverse remarks passed against the sister company could not be ignored.

2010s
Recently, in Bharat Coking Coal Ltd. and Ors. v. AMR Dev Prabha and Ors.166 the Supreme Court revisited the issue albeit
in the modern context of an e-auction gone wrong. Here, the e-reverse auction was disrupted due to bandwidth issues
faced by the host platform. At the time when the auction was disrupted the aggrieved bidder had the lowest bid. The
auction was resumed after informing all bidders. Thereafter, the contract was awarded to the lowest bidder. Such award
was challenged by an aggrieved bidder. The Supreme Court found that there was no larger public interest involved in
the case. Perusing the facts of the case it held that the aggrieved bidder was only interested in private monetary benefit.
This was because the aggrieved bidder first took the stand that the resumed e-auction was illegal, which meant that it
would cost the exchequer more money if the higher bid prior to the resumed auction was to be taken. Later, the
aggrieved bidder adopted the stand that it was ready to submit a lower bid than the successful bidder. The Supreme
Court also held that the resumed auction put all bidders on equal footing and hence the decision to continue with the
auction was not tainted by mala fides and bias. Thus, the Supreme Court rejected the aggrieved bidder’s challenge.

Conclusion
As one can see, over the years, the courts have adopted a hands-off approach to these issues with only rare instances
of justifiable interference being made out. There is remarkable consistency in the judicial principles despite differing
factual circumstances. The threshold to invoke the court’s jurisdiction successfully is very high with the presumption
impliedly in favor of the authority. Thus, the burden is on the aggrieved bidder to prove that the authority’s action
deserves to be reviewed.

For an aggrieved bidder to discharge such burden, it is critical that it is able to demonstrate:

a) Arbitrariness in decision-making,
b) The decision-making is an abuse of the powers or against principles of natural justice,
c) Discriminatory conduct in decision-making,
d) Violation of the Wednesbury principle of reasonableness,
e) The decision-making process or the decision itself is vitiated by mala fides or actuated by demonstrable bias,
f) There is overwhelming public interest that warrants interference.

The aggrieved bidder should be able to demonstrate the same on the face of the petition and thus, the case must be
one that is ‘plainly arguable’. Towards this end, the aggrieved bidder must have cogent proof and prepare its
documentation impeccably, failing which the chances of succeeding are visibly poor and perhaps rightly so.

166 (2020) 16 SCC 759

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Third Party Litigatio n Funding (TPLF)
TPLF: An overview
Third-party Litigation Funding or TPLF, as the term suggests, is the financing extended by a non-disputant to a disputant
such that the disputant can litigate without having to pay for the whole or part of the costs of such litigation. Such third
person, who is not a party to the dispute, in consideration for providing funding, acquires a share in the proceeds, if any,
awarded to the disputant.

TPLF is not new. Its ancestry can be traced as far back as the Athenians and Romans, where if one habitually stirred up
quarrels, one was honored with the epithet of a sycophant. This transformed into the medieval concept of maintenance
which was considered an offence under common law as it was intermeddling in a suit in which the person has no
interest167 . An extension thereof, champerty, was considered to be an offence of greater atrocity, being a bargain to
divide the land or other subject in dispute, on the condition of the dispute being carried on at the champertor’s
expense168. The treatment of the same as an offence stemmed from the concern that if such disputes were permitted
to be funded by wealthy barons, who could with impunity push their ways through the corridors of justice, they could
pave the way for voluminous frivolous litigation. Another connected concept is that of barratry which, simply put, is a
serial maintaining of suits; in the event such serial maintainer is a lawyer, he is often termed, pejoratively, an ‘ambulance
chaser’. Champerty, maintenance and barratry were declared to be offences in England in 1275 169. However, with time,
maintenance and champerty drew criticism as the judiciary gained credibility as to its independence and its inherent
powers to administer justice.

In the words of Bentham170,

“A mischief, in those times it seems but too common, though a mischief not to be cured by such laws,
was, that a man would buy a weak claim, in hopes that power might convert it into a strong one, and
that the sword of a baron, stalking into court with a rabble of retainers at his heels, might strike terror
into the eyes of a judge upon the bench. At present, what cares an English judge for the swords of a
hundred barons? Neither fearing nor hoping, hating nor loving, the judge of our days is ready with
equal phlegm to administer, upon all occasions, that system, whatever it be, of justice or injustice,
which the law has put into his hands.”

Ty p e s o f t h i r d - p a r t y l i t i g a t i o n f u n d i n g

Public interest litigation/legal aid

In plain sight, but away from the blinkered understanding of TPLF, is the concept of Public Interest Litigation. The force
behind such litigation may be a person or an organization that is attempting to vindicate the infringed rights of a set of
impecunious litigants. While this may fall within the parameters of maintenance, it is judicially sanctioned, being a
philanthropic service aimed to protect and deliver prompt social justice. Furthermore, it finds widespread public
acceptance, being a not-for-profit enterprise. Nonetheless, courts do not permit frivolous litigations for pecuniary gains.
Even legal aid prima facie falls afoul of the literal interpretation of maintenance, and yet it finds judicial171 and legislative

167 BLACKSTONE’S COMMENTARIES ON THE LAWS OF ENGLAND: BOOK 4 – PUBLIC WRONGS, at 134.
168 BLACKSTONE’S COMMENTARIES ON THE LAWS OF ENGLAND: BOOK 4 – PUBLIC WRONGS, at 135.
169 Statute of Westminster (1275) (3 Edw. I, C 25, 28 and 33).
170J. Bentham, ‘A Defence of Usury, Letter XII, Maintenance and Champerty’, 3(1) THE WORKS OF JEREMY BENTHAM (Bowring ed., 1843) available at
https://oll.libertyfund.org/titles/bentham-the-works-of-jeremy-bentham-vol-3
171Alabaster v. Harness, [1895] 1 QB 339 at 343; “Maintenance is permissible if given by a man on behalf of a poor man, who but for the aid of his
rich helper could not assert his rights or would be oppressed and overbourne in his endeavour to maintain them”.

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approval172. Even legal aid prima facie falls afoul of the literal interpretation of maintenance, and yet it finds judicial 173
and legislative approval174.

Conditional fee agreements

In these agreements, the advocate charges a standard fee during the course of the proceedings. If the result is favorable
to the client, the advocate can charge a multiple of this standard fee. Strictly speaking, this model may be partly
champertous as the lawyer may get paid for his services in part, but a balance of his payment is dependent upon/
deferred pending the outcome of the case.

Damages based agreements/contingency fee agreements

These agreements tie the lawyer’s fees to the sum receivable by his client which in turn is dependent upon the outcome
of the litigation. Here, the advocate bears the risk of remaining unpaid in exchange for a percentage of the sums, if any,
received by his client from the other party. Damages-based arrangements can be said to be directly champertous, as
they involve the purchase of an interest in the outcome of the case and are profit driven.

Insurance
In several jurisdictions, insurance covers are provided to litigants to cover the costs incurred by them and/or the costs
payable if the litigation is unsuccessful. After-the-Event insurance typically involves the insurer entering into some form
of a damages-based agreement in order to recoup the premium, while taking on the risk of being out of pocket if the
outcome is unsuccessful. While this can be said to be champertous, it finds judicial and legislative endorsement even in
jurisdictions such as Ireland, where champerty is an offence. It may be noted that such defence costs are covered by
insurance provided that the insured is not convicted and challenges the charge not without admitting guilt.

Traditional third party litigation funding

Traditional TPLF involves an impecunious litigant or one who does not wish to pay for the litigation, the lawyers, and a
third-party funder that has no relation or connection with the dispute or the litigant. Here, the third party finances the
costs of the litigation and, in consideration thereof, takes a measure of the winnings. This is plainly champertous and
may even envisage a large amount of control by the funder over the litigation. However, this enables otherwise
disadvantaged persons to litigate their claims, and falls within the parameters of access to justice.

Third party litigation funding across jurisdictions

England
It was not until 1967, through section 13 of the Criminal Law Act enacted that year, that English law finally abolished
maintenance and champerty as offences. However, under English law, TPLF still needs to cross the threshold of public
policy requirements175. Thus, funding arrangements that tend to ‘undermine the ends of justice’ 176 may be hit by
maintenance and champerty. Following the judgments in Arkin177, Essar Oilfields178, and Excalibur Ventures179, TPLF has
received judicial sanction but to a circumscribed extent. Furthermore, the Court and Legal Services Act, 1990 permits

172 The Legal Services Authorities Act, 1987.

173
Alabaster v. Harness, [1895] 1 QB 339 at 343; “Maintenance is permissible if given by a man on behalf of a poor man, who but for the aid of his
rich helper could not assert his rights or would be oppressed and overbourne in his endeavour to maintain them”.
174 The Legal Services Authorities Act, 1987.
175 Section 14(2), Criminal Law Act, 1967.
176 R (on the application of Factortame and others) v. Secretary of State for Transport, Environment and the Regions, [2002] EWCA Civ 932.
177 Arkin v. Borchard Lines Ltd & Ors., [2005] EWCA Civ 655.
178 Essar Oilfields Services Limited v. Norscott Rig Management, [2016] EWHC 2361 (Comm).
179 Excalibur Ventures LLC v. Texas Keystone Inc & Ors., [2016] EWCA Civ 1144.

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conditional fee agreements 180 to be entered into between advocates and their clients, including a success fee capped,
in certain class of cases, at 100% of the normal fees payable181. Damages based agreements are also recognized182 with
a cap of 50% of the sums ultimately recovered by the client183. Although third-party litigation funding is recognized 184, it
is not yet fully regulated.

Ireland
The Irish have not chosen to follow their neighbors in embracing maintenance and champerty, which are still considered
unlawful under their Statute of Conspiracy (Maintenance and Champerty). In Persona Digital185 the Irish Supreme Court
declared TPLF, by an entity having no independent interest in the underlying proceedings, illegal. However, the court
has subsequently186 urged the legislature to reconsider the law to improve access to justice. Furthermore, ‘After-the-
Event’ insurance has gained acceptance in Greenclean187.

France
The French law does not per se bar payment of legal fees by a third party188. Also, the equivalent rules of conduct for
legal practitioners provide that a French attorney may accept funds from the agent of his client. However, settling a fee
that would solely depend on the result of the case, is prohibited. Barring these few aspects, the French do not currently
have any regulation permitting or disallowing TPLF.

New Zealand
In New Zealand, maintenance and champerty are considered to be torts. However, courts have become more permissive
towards TPLF189. Yet, the funding may be disallowed, if it can be shown that the claim is made to deceive the court or is
fictitious, or if there is misuse of the court process towards an ulterior motive, or if the claim is vexatious, oppressive or
groundless. Courts also require disclosure as to the identity of the funder and further mandate his/her amenability to
their jurisdiction. Thus, each case of funding is assessed on its unique facts and circumstances. Conditional fee
agreements entered into with lawyers are regulated by the Lawyers and Conveyancers Act, 2006 190.

Australia
Australia on the other hand does not, for the most part, treat maintenance and champerty as torts or crimes. Instead, it
tests TPLF on the grounds of public policy. While there is no regulation in this regard, TPLF has found acceptance 191 on a
widespread basis, with some funders even being listed companies. Lawyers in Australia are also permitted to use
conditional billing arrangements. However, lawyers are not permitted to have a significant financial interest in the third-
party funder192.

180 Section 58, The Court and Legal Services Act, 1990.
181
The Conditional Fee Agreements Order, 2013.
182
Section 58AA, The Conditional Fee Agreements Order, 2013.
183 The Damages-Based Agreements Regulations, 2013.
184 Section 58B, The Court and Legal Services Act, 1990.
185 Persona Digital Telephone Ltd. and Sigma Wireless Networks Ltd. v. The Minister of Public Enterprise & Ors., [2017] IESC 27.
186
SPV Osus Ltd v. HSBC Institutional Trust Services (Ireland) Ltd & Ors., [2018] IESC 44.
187 Greenclean Waste Management Ltd. v. Leahy, [2014] IEHC 314.
188 Article 1342-1, French Civil Code.
189Saunders v. Houghton, [2010] 3 NZLR 331; Waterhouse v. Contractors Bonding Ltd, [2014] 1 NZLR 91; Strathboss Kiwifruit Ltd v. Attorney-General,
[2015] NZHC 1596.
190 Sections 333 to 336, Lawyers and Conveyancers Act, 2006.
191 Campbells Cash and Carry Pty Ltd v. Fostif Pty Limited, [2006] HCA 41.
192 Bolitho v. Banksia Securities Ltd., [2014] VSC 582

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Singapore
Singapore has developed a commercial approach to TPLF. Champerty and maintenance were not considered as torts or
crimes in Singapore193. However, contracts affected by the same continued to be contrary to public policy or otherwise
illegal. In 2017, through amendments to the Civil Law Act, 1909, Singapore carved out an exception in this regard with
respect to permitted categories, namely international arbitration proceedings, and all court, conciliation, mediation or
insolvency proceedings connected therewith.

This was a major legislative attempt to enhance Singapore’s growing reputation as a preferred seat for international
arbitrations. However, disclosure of any funding so obtained for an international arbitration proceeding, is mandatory 194.
Notably, Singapore amended the Legal Profession Act, 1967, to permit lawyers to introduce/refer third-party funders to
their clients, provided no direct financial benefit is received by way of such introduction/referral. However, lawyers
cannot purchase any interest in any suit or determine a fee contingent on success. Furthermore, lawyers cannot directly
or indirectly hold any share or other ownership interest in a third-party funder, when the same is introduced/referred
by them to their clients or when there exists a contract between the said third-party funder and their client195.

Third party litigation funding in India

Despite adopting Common Law principles to a large extent, champerty and maintenance in India have surprisingly not
found the same treatment as in England196. However, section 23 of the Contract Act provides that the consideration or
object of an agreement is unlawful, if:

▪ It is forbidden by law; or

▪ It is of such nature that, if permitted, it would defeat the provisions of law; or

▪ Is fraudulent; or

▪ Involves or implies, injury to the person or property of another; or

▪ The Court regards it as immoral, or opposed to public policy

Whether agreement is extortionate and unconscionable

Thus, while agreements which may be champertous are not directly opposed to public policy197, Indian courts have
attempted to ascertain whether the transaction is merely the acquisition of an interest in the subject of litigation bona
fide entered into, or whether it is an unfair or illegitimate transaction for the purpose merely of spoil, or of litigation,
disturbing the peace of families, and carried on for a corrupt or other improper motive 198. When found (i) to be
extortionate and unconscionable, so as to be inequitable against the party; or (ii) to be made, not with the bona fide
object of assisting a claim believed to be just, and of obtaining a reasonable recompense therefor, but for improper
objects – as for the purpose of gambling in litigation or of injuring or oppressing others by abetting and encouraging

193
“Third Party Funding – Reinforcing Singapore as a Premier International Dispute Resolution Centre”, A note from Indranee Rajah S.C., Senior
Minister of State for Law, available at https://www.mlaw.gov.sg/content/dam/minlaw/corp/News/Civil%20Law%20Amendment.pdf
194
Rule 49 A, Legal Profession (Professional Conduct) Rules, 2015.
195 Rule 49 B, Legal Profession (Professional Conduct) Rules, 2015.
196 Chedambara Chetty v. Renga Krishna Muthu Vira Purchaiya Naickar, [1874] 1 Ind. App. 241.
197Ram Coomar Coondoo v. Chunder Canto Mookerjee, [1876] L.R. 2 AC (PC) 186, at 210; “A fair agreement to supply funds to carry on a suit in
consideration of having a share of the property; if recovered, ought not to be regarded as being, per se, opposed to public policy. Indeed, cases may
be easily supposed in which it would be in furtherance of rights and justice, and necessary to resist oppression, that a suitor who had a just title to
property, and no means except the property itself, should be assisted in this manner”.
198 Ram Coomar Coondoo v. Chunder Canto Mookerjee, [1876] L.R. 2 AC (PC) 186, at 264.

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unrighteous suits – so as to be contrary to public policy199, Indian courts have declined to give effect to such
agreements200.

Indian courts, in determining whether the

agreement is extortionate and
unconscionable, have stated that though
it is clearly not conclusive, the proportion
to be retained by the claimant is an
important factor to be considered when
ascertaining the fairness of a bargain
made at a time when the litigant is in a
disadvantaged position. Indian courts
have held that the uncertainties of
litigation are proverbial; if the financier
risks losing his money, he may well be
allowed some chance of exceptional
advantage201. There are also rulings to
the effect that upside demanded on a lumpsum basis would not be extortionate and unconscionable 202, and several
cases that have held a return of up to 50% share in suit property valid203.

Contrastingly, in several cases where a third party sought recovery of sums lent plus interest, and further sought an
upside which was disproportionate and hence opposed to public policy 204, the court held that the contract was void
under section 23 of the Contract Act. However, in spite of this, the court awarded to the financiers, in those cases, all
legitimate expenses incurred by them with interest, after refusing to give effect to the agreements 205. This was
presumably done in consideration of section 65 of the Contract Act, which mandates that any person who has received
any advantage under a void contract is bound to restore the same or make compensation for it 206.

Statutory evidence of permissibility of TPLF

Order XXV of the CPC empowers Indian courts to order security for costs. The same has been amended by various states
in India such as Maharashtra, Gujarat and Madhya Pradesh. Rule 3 thereof, as inserted by Maharashtra, Gujarat and
Madhya Pradesh is titled “Power to implead and demand security from third person financing litigation”. The amendment

199
Ram Coomar Coondoo v. Chunder Canto Mookerjee, [1876] L.R. 2 AC (PC) 186, at 210.
200See also Kunwar Ram Lal v. Nil Kanth and Ors., [1893] L.R. 20 Ind. App. 112 at 115; Lal Achal Ram v. Raja Kasin Husain Khan, (1905) 32 I.A. 113;
Rajah Rai Bhagwat Dayal Singh v. Debi Dayal Sahu, (1908) 35 IA 48; Sri Rajah Vatsavaya Ventaka Subhadrayyamma Jagapati Bahadur Garu v. Sri
Poosapati Venkatapati Raju Garu, (1924) 26 BomLR 786.
201 Lala Ram Sarup v. The Court of Wards, (1940) 42 BomLR 307.
202 Navaneethakrishnaswami Devasthanam v. Rukmani and Co., (1955) 2 Mad LJ 339; Pandrangi Gopalam v. Chidamana Chinnayya, AIR 1958 AP 630
20333% of net profits of suit in Ram Coomar Coondoo v. Chunder Canto Mookerjee, [1876] L.R. 2 AC (PC) 186; 50% of suit property in Lal Achal Ram v.
Raja Kasin Husain Khan, (1905) 32 I.A. 113; 18.75% of decretal property in Lala Ram Sarup v. The Court of Wards, (1940) 42 BomLR 307; 50% of the
claim in Unnao Commercial Bank Ltd. v. Kailash Nath and Ors., AIR 1955 All 393; 25% of the suit property in Marina Viranna v. Valluri Ramanamma,
AIR 1928 Mad 437, upheld in appeal in (1931) 33 BomLR 960 (PC).
204 Raja Mohkam Singh v. Raja Rup Singh, ILR 15 All 352 (PC) where a quadruple return over investment was found to be unconscionable; 50% of
decretal amount sought which equated to a return of 10x was held to be gambling in litigation in Suganchand And Ors. v. Balchand and Anr., AIR
1957 Raj 89; 75% share in the decretal property as consideration was considered not to be a fair and reasonable bargain in Nuthaki Venkataswami v.
Katta Nagireddy and Ors., AIR 1962 AP 457; 100% share in the decretal property as consideration was considered not to be a fair and reasonable
bargain in Kamrunnisa v. Pramod Kumar Gupta, AIR 1997 MP 106; 40% share in the decretal property as consideration was considered not to be a
fair and reasonable bargain in Sri Khaja Moinuddin Khan and Ors. v. S.P. Ranga Rao and Ors., AIR 2000 AP 344; See also Harilal Nathalal Talati v.
Bhailal Pranlal Shah, AIR 1940 Bom 143; See also Pannalal Gendalal and Anr. v. Thansing Appaji and Anr., AIR 1952 Nag 195, where the financiers
being moneylenders and because the value of the property sought as recompense was disproportionately high, the court struck down such
transaction.
205 Pandrangi Gopalam v. Chidamana Chinnayya, AIR 1958 AP 630; Kamrunnisa v. Pramod Kumar Gupta, AIR 1997 MP 106.
206 Suganchand and Ors. v. Balchand and Anr., AIR 1957 Raj 89.

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made by the state of Uttar Pradesh allows the court to demand security where the “plaintiff is being financed by another
person”. It is thus evident that there is no outright legislative disapproval of TPLF.

Can advocates in India engage in TPLF?

As far back as 1874, the Calcutta High Court, in Moung Htoon Oung207, condemned an advocate for having entered into
a contract which was contrary to public policy: an agreement to receive professional fees in the form of a fixed share in
the subject-matter of the suit. The full bench of the Calcutta High Court in another case208, observed that it is professional
misconduct for an advocate to agree with his client to accept as his fee a share of the property, fund or other matter in
litigation for his services as advocate in such litigation upon the successful issue thereof.

However, the Legal Practitioners (Fees) Act, 1926, through section 3 thereof, provides that any legal practitioner who
acts or agrees to act for any person may, by private agreement, settle with such person the terms of his engagement
and the fee to be paid for his professional services. Courts have read such contracts to be fettered by public policy
constraints as applicable to any ordinary contract. In R an Advocate209, the advocate agreed to maintain the client and
carry on the litigation, and to receive for his fees a certain share in the proceeds of the litigation. The Full Bench of the
Madras High Court termed the agreement as ‘No cure, no pay’ and reprimanded the advocate for professional
misconduct.

In K.L. Gauba210 an advocate entered into a damages-based agreement wherein, apart from a fixed sum, he agreed to
render legal services in consideration for 50% of the decretal amount. The Bombay High Court held such contract to be
void under section 23 of the Contract Act. It suspended the concerned advocate while holding as under:

“An agreement which makes the payment of lawyer's fees conditional upon the success of the suit
and which gives the lawyer an interest in the subject-matter of the suit itself would necessarily tend
to undermine the status of the lawyer as a lawyer. It would not be difficult at all to imagine how in
such a case a conflict between self-interest and duty would immediately arise. A search for shortcuts
to secure the speedy termination of the litigation would in many cases be a necessary consequence
of such an agreement. The amount of fees stipulated is in terms of a certain percentage of the
realisation from the suit and the longer the litigation is protracted, the more irksome would it be for
the lawyer who acts under such an agreement. A desire to compromise the cause may also overtake
the lawyer in such cases. Temptation to adopt doubtful or devious means in order to win the case
would be difficult to resist, because the lawyer becomes personally interested in the subject-matter
of the suit and is no better than the litigant himself. In fact, a lawyer, who is in part a litigant in such
cases, ceases to be a lawyer properly so called. A person arguing a case in such circumstances is in
many respects a litigant masquerading as a lawyer in professional robes. In our opinion, there is no
doubt whatever that such agreements are bound to affect the detachment of the lawyer and to impair
his status as an officer of the Court to a very large extent. That is why an agreement between a lawyer
and his client which creates in the lawyer a financial interest in the subject-matter of the cause, &
that too on a successful determination of the suit, has always been condemned as unworthy of the
legal profession.”

The Supreme Court similarly penalized the concerned advocate in “G” A Senior Advocate211:

207 In the matter of Moung Htoon Oung, 21 WR 297 (Cal).

208
In the matter of an Advocate, 4 Cal LJ 259 (D); See also 'In the matter of a Pleader of the Chief Court of the Punjab', 69 Pun Re 1904 (F); Ganga
Ram v. Devi Das, 61 Pun Re 1907 (PB) (G); Stipulating ‘Inam’ or success fee amounted to professional misconduct in Advocate General v. Rustamji B.
Sunawalla, 14 Bom LR 691 (L); and in Kathu Jairam Gujar v. Vishvanath Ganesh Javadekar, (1925) 27 Bom LR 682.
209 R an Advocate, In re, AIR 1939 Mad 772.
210 K.L. Gauba, In re, 1954 Cri LJ 1954.
211 “G” A Senior Advocate, In re, AIR 1954 SC 557.

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 “However much these agreements may be open to other men what we have to decide is whether they
are permissible under the rigid rules of conduct enjoyed by the members of a very close professional
preserve so that their integrity, dignity and honour may be placed above the breath of scandal. That
is part of the price one prays for the privilege of belonging to a kind of close and exclusive "club" and
enjoying in it privileges and immunities denied to less fortunate persons who are outside its fold.”

Under the Bar Council of India Rules, 1975 (BCI Rules) – Part IV, Chapter II, Standards of Professional Conduct and
Etiquette, various rules can be read to disallow lawyers to be part of any form of litigation funding:

▪ Rule 9 – An advocate should not act or plead in any matter in which he is himself pecuniarily interested

▪ Rule 18 – An advocate shall not, at any time, be a party to fomenting of litigation

▪ Rule 19 – An advocate shall not act on the instructions of any person other than his client or his authorized
agent

▪ Rule 20 – An advocate shall not stipulate for a fee contingent on the results of litigation or agree to share the
proceeds thereof

▪ Rule 21 – An advocate shall not buy or traffic in or stipulate for or agree to receive any share or interest in any
actionable claim

▪ Rule 32 – An advocate shall not lend money to his client for the purpose of any action or legal proceedings in
which he is engaged by such client
Recently, in B. Sunitha212, the Supreme Court dismissed a cheque bouncing case filed by an advocate who was seeking
to enforce a damages-based agreement for the recovery of 16% of the decretal amount in a motor accident claims case.

However, a recent decision of the Bombay High Court in Jayaswal213 has thrown a new angle to this debate. In this case,
a law graduate, who was a partner in a law firm, entered into a damages based agreement with a client for consultancy
services in relation to arbitration proceedings. It would appear that the concerned individual was not a registered
advocate under the Advocates Act, 1961 (Advocates Act). The outcome of the arbitration being favorable, the client did
not pay the fee, which was expressed in terms of a percentage of the proceeds. The law firm partner succeeded in the
lower court for recovery of the said success fee. In appeal before the Nagpur Bench of the Bombay High Court, the client
sought to argue that the damages based agreement was void in view of the provisions of the Contract Act, the BCI Rules
and the decisions in “G” A Senior Advocate214 and B. Sunitha215. The law firm partner argued that (i) the contract was not
void as champertous agreements were not afoul of section 23 of the Contract Act, (ii) that he was not a registered
advocate and thus not barred under the Bar Council of India Rules from entering into a damages based agreement, and
(iii) that the ground was only raised in oral arguments for the first time by the appellant. The court held that the law firm
partner was only acting as a ‘counsel’ and did not represent his client as an advocate. Towards this end, the court delved
into the definition of counsel, advocate, pleader, vakil, and attorney in legal dictionaries and the provisions of CPC. The
court further held that representation before the arbitrator could not be said to be a representation before the court.
Considering the obiter dicta in “G” A Senior Advocate216, the court held that there was nothing morally wrong, nothing
to shock the conscience, nothing against public policy and public morals in a champertous transaction not involving a
legal practitioner, and further opined that the fact that the concerned individual was a partner in a law firm was by itself

212 B. Sunitha v. The State of Telangana and Anr., (2018) 1 SCC 638.
213Jayaswal Ashoka Infrastructures Pvt. Ltd. v. Pansare Lawad Sallagar, F.A. No. 106 of 2015, decided on 07 March 2019, Nagpur Bench, Bombay
High Court
214 “G” A Senior Advocate, In re, AIR 1954 SC 557.
215 B. Sunitha v. The State of Telangana and Anr., (2018) 1 SCC 638.
216 “G” A Senior Advocate, In re, AIR 1954 SC 557.

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not sufficient to render such an agreement void. It remains to be seen if this tightrope reasoning adopted by the Bombay
High Court will find approval if and when brought before the Supreme Court of India.

The case for TPLF in India

It is thus abundantly clear that a member of the legal profession in India, unlike his English brethren, cannot enter into
Conditional Fee Arrangements, Damages Based Arrangements, Third Party Litigation Funding Arrangements, or the like.

Examination of the agreements by courts

However, as discussed above, this does not bar persons other than members of the legal profession from entering into
such arrangements. As maintenance and champerty are not considered as offences in India, such agreements are valid,
albeit they must not be opposed to public policy grounds under section 23 of the Contract Act. The courts scrutinize such
contracts closely, in order to determine if the same are opposed to public policy and examine if:

▪ The contracts amount to gambling in litigation; or

▪ The contracts are aimed at injuring or oppressing others by abetting and encouraging unrighteous suits; or

▪ The contracts are unfair or illegitimate transaction got up for the purpose merely of spoil, or of litigation,
disturbing the peace of families, and carried on for a corrupt or other improper motive; or

▪ The recompense is unconscionable or disproportionate to the expense incurred.

Factors to be considered by third-party funders

While entering into such agreements with a disputant, third party litigation funders may thus need to inter alia consider
the following:

▪ Is the service resulting in access to justice of a righteous claim that otherwise would not have been litigated
upon?

▪ Is the claim made to deceive the court; is it fictitious; is there a misuse of the court process for an ulterior
motive; or is the claim vexatious, oppressive or groundless?

▪ Is the disputant being funded under terminable terms?

▪ The upside and/or the multiple of return over investment must be reasonable and not unconscionable so as to
amount to gambling in litigation.

▪ The extent of control by the financier over the litigation must be minimal.

▪ The lawyers involved in the litigation must be excluded from such agreements.

Benefits of TPLF

In our opinion, TPLF in the Indian context can yield the following benefits:

▪ Access to justice;

▪ Fostering nascent class action claims;

▪ Reduction in litigation through early settlements or pruning of unmeritorious claims through exhaustive pre-
litigation analysis;

▪ Social welfare.

Overcoming potential concerns

However, there are valid concerns as under:

▪ Fomenting of unmeritorious litigation may topple an already overburdened judicial system

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 ▪ Over commercialization may lead to increase in costs of litigation

▪ Ethical dilemmas for a dignified profession

▪ Unregulated funding may lead to racketeering

▪ The sanctity of the judicial system may be affected by speculative gambling in litigation

▪ No real access to justice as funding will only be made available to what is ‘commercially viable’

To overcome these fears, the government may be well advised to regulate TPLF. Increasingly, we see that there is a
need for the same. However, as the industry is in its embryonic stages, it might be judicious to begin with tiny steps.
Possibly, the government could think of statutorily permitting and regulating TPLF with respect to arbitrations, and then
extend the same, if successful, to litigation before the civil courts in India.

The rationale behind this suggestion begins with the general trepidation that arbitration is an expensive affair, and thus
litigation funding would possibly be suited thereto. In Singh Builders217 the Supreme Court observed that it is necessary
to find an urgent solution to this problem to save arbitration from the arbitration cost 218. It also bodes well that the
Indian legislature through its recent amendments in 2015 to the Arbitration Act has encouraged shorter periods for
completion of arbitral proceedings219 while enhancing costs provisions220. This enables third party funders to have
reasonable timelines within which the arbitral award will be rendered, and also permits actual costs to be recovered.

However, before the legislature follows the path taken by Singapore, it would be well advised to look at some of the
issues that may crop up if third party litigation funding is permitted in arbitrations. These include:

▪ Disclosure

If a party to an arbitration is availing TPLF, the identity of the funder must be disclosed. This is crucial because,
while the arbitrator(s) may be independent and impartial towards the parties, there may be conflict of interests
with the third-party litigation funder under section 12 of the 1996 Act. Transparency norms are thus suggested
in this regard to prevent conflicts of interest, with disclosure to be made at the inception of the proceedings
or at the earliest feasible stage.

▪ Confidentiality

There are obvious confidentiality issues with respect to the involvement of a person not being a party to the
dispute. It is therefore advisable that any prospective funder be made to sign a Non-Disclosure/Confidentiality
Agreement.

▪ Extent of Control and Transfer of Mere Right to Sue

The legislature should also be mindful that the funder does not take over the litigation and step into the shoes
of the party to the dispute as the same could amount to a transfer of a mere right to sue which is disallowed
under section 6(e) of the Transfer of Property Act, 1882. Furthermore, the funder should not be permitted to
conduct the litigation or give directions/commission to the lawyers which would be detrimental to the interests
of the party being funded.

217 Union of India v. Singh Builders Syndicate, (2009) 4 SCC 523.

218 See also, Sanjeev Kumar Jain v. Raghubir Saran Charitable Trust and Ors., (2012) 1 SCC 455.
219 Section 29A of the 1996 Act.
220 Section 31A of the 1996 Act.

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 ▪ Costs and Security for Costs

English courts suggest that the funder should be liable for the defendant’s costs, if the claim fails. However,
they limit the same to the extent of the funding provided 221. In our view, the legislature may look beyond such
cap that English courts propose, and require the funder to be liable for the whole of the defendant’s costs, as
this would ensure proper vetting of the prospects of litigation subject to contract. Although not explicit, section
31A of the amended 1996 Act read with section 9/section 17 thereof, permits the court/arbitral tribunal to
order a party to furnish security for costs. With the involvement of a third-party funder, it is imperative to
ascertain whether he can be ordered to furnish such security on behalf of the party that he is funding and to
what extent. Guidance in this regard may be taken from the existing amendments made by the states of
Maharashtra, Gujarat and Madhya Pradesh to Order XXV of the CPC.

▪ Public Policy considerations

Considering that the law in India permits third party funding but is still constrained by the public policy
principle, the legislature may, albeit with some difficulty, define the parameters where such funding may not
run afoul of section 23 of the Contract Act. The legislature may also lay down norms to prevent such funding
from becoming a pure speculative trade.

▪ Regulating the Third-Party Funder

The legislature would also be well advised to structure and regulate funders, and address issues such as capital
adequacy norms, internal and external governance, audits, risk assessment norms, code of conduct and ethics
and the like.

Conclusion
Recently, in relation to stressed assets in the infrastructure sector in India, we have seen several opportunities for TPLF
to play a beneficial role. Hindustan Construction Co. Ltd.
monetized a pool of arbitration claims and awards for an
upfront cash payment to permit the company to meet its debt
obligations222. While it was also reported that Patel
Engineering has entered into similar arrangements223, we are
informed that the said transaction is not strictly a TPLF
arrangement.

As we see it, TPLF has yet to find its feet in India, due to
various legislative, judicial, socio-economical and public
policy concerns surrounding it. Nonetheless, it is not
impermissible, except in so far it involves members of the
legal profession. Contrary to popular belief, there is TPLF
occurring in India, albeit executed discreetly until now. Legislative regulation in this regard may thus be the awaited
dawn, one which pulls the activity from the shadows, and shapes and fashions it into a regulated system for greater
access to justice

221Arkin v. Borchard, [2005] EWCA Civ 655; however, see Stephen Innes, ‘Are the Days of the Arkin Cap Numbered?’, available at
http://www.mondaq.com/uk/x/745898/trials+appeals+compensation/Are+The+Days+Of+The+Arkin+Cap+Numbered
222“HCC raises Rs. 1,750 crore in litigation funding deal”, LIVEMINT (27 March 2019), available at https://www.livemint.com/companies/news/hcc-
raises-rs-1-750-crore-in-litigation-funding-deal-1553651279600.html.
223“Infrastructure companies eye litigation funding to settle claims”, BUSINESS STANDARD (18 February 2019), available at https://www.business-
standard.com/article/companies/infrastructure-companies-eye-litigation-funding-to-settle-claims-119021800035_1.html.

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Investo r State Dispute Settlement Mec hanism (ISDS) in the
Infrastructure Sec to r and Model B IT
The Investor State Dispute Settlement Mechanism (ISDS) has seen a fair number of disputes in the infrastructure sector
and there is good reason for it. As certain governments may not be able to commit public finances for large scale
infrastructure projects, PPPs are entered into, through which private financing is driven in such projects. In course of
execution of these projects, invariably disputes arise out of policy decisions taken by the government, revision in
concessions promised to a private party, changes in the government itself, or changes in the expected return on
investment.

India being a developing nation, the GOI too has been at the receiving end of similar disputes. While most of the disputes
against GOI arising out of PPPs, are resolved before an independent arbitral tribunal or domestic courts, some of these
disputes have become the subject of treaty claims against the GOI, in the past as well as in recent years. Provided below
are certain instances where ISDS was opted for by foreign investors in the infrastructure against GOI, which primarily
germinate out of changes in government policies, revision of concessions promised or a change in government.

Defining case studies

Case Study: The Dabhol Power Project (2003-04)
Incorporated in 1992, the Dabhol Power Company (DPC), a company based in Maharashtra, was set up to manage
and operate the Dabhol Power Plant. DPC was incorporated after Enron had approached the Government of
Maharashtra with the idea of building a gas powered plant, where the LNG would have been imported from Qatar
for 20 years and Government of Maharashtra would have then bought the power produced for the same number of
years. The investments for setting up the power plant was drawn through Bechtel, Enron and other entities
(shareholders in the DPC), and several other banks through credit facilities.

In the year 1995, when the power plant was still under construction, there was a change in the ruling government of
the state. Post the new government taking over, there were widespread protests around the site of the power plant
which eventually led to rioting, compelling the law enforcement agencies to use force. Human Rights Watch and
Amnesty International alleged human-rights violations and blamed Enron for being complicit. Eventually, the
Government of Maharashtra directed that the project be halted on account of environmental hazards, lack of
transparency and exemplified costs.

The first treaty claim against the GOI was initiated in the year 2003 by Bechtel (India-Mauritius BIT), alleging
expropriation of its investments as a result of reversal in the energy policy of the local government on account of
political change in the Government. This was the first claim in what became a series of claims under the same issue,
where several banks initiated claims against the GOI in the year 2004, for the GOI’s alleged failure to protect the
investor's loans in the Dabhol power plant, the default of which resulted in significant losses to the claimant's
financing of the failed project. These arbitrations were invoked under BITs which the GOI had executed with
Mauritius, Netherlands, France, Austria, Switzerland and the UK.

Outcome: These arbitrations were subsequently settled in the year 2010

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Case Study: Haldia Port (2014)
Louis Drefyus Armateurs SAS – a shareholder in a JV with ABG Infralogistics. The JV was incorporated for the
modernization of berths at the Haldia port in West Bengal.

Louis Drefyus Armateurs had invoked arbitration proceedings, under the India – France BIT, for its claims arising out
of a series of measures by the government that allegedly prevented the effective implementation of the JV. It was
further alleged that the government failed to provide protection and security to the project, and to obey court orders
concerning the removal of equipment from the port.

Outcome: The matter was decided in favor of the GOI

Case Study: Anrak Aluminum (2016)

Anrak Aluminum Limited was a company incorporated in the State of Andhra Pradesh for setting up an alumina and
aluminum refinery. Ras-Al-Khaimah Investment Authority (RAKIA) was an investor in Anrak which was promised
bauxite by the Andhra Pradesh Mineral Development Corporation (APDMC) for the proposed smelting unit. On
account of public agitation in the areas where mining was to be carried out, the APDMC cancelled the supply
agreement by with ANRAK, based on a government order issued by Government of Andhra Pradesh.

RAKIA invoked arbitration against the GOI under the India – UAE BIT, raising claims for alleged non-fulfillment and
subsequent cancellation of the bauxite concession.

Outcome: The arbitration proceedings are currently pending

Case Study: Nissan (2017)

In the year 2017, Nissan initiated arbitration proceedings against the GOI under the India-Japan Economic Partnership
Agreement of 2011 on account of non-payment of incentives promised by the Government of Tamil Nadu. The state
government in the year 2008 had promised certain tax rebates to Nissan for building a manufacturing unit in that
state.

Outcome: The arbitration proceedings are currently pending

Case Study: Indutech Zone (2017)

Carissa Investments LLC, which held 49% stake in InduTech Zone, invoked arbitration against the GOI, on account of
the project being stalled due to allegations of corruption and money laundering. The dispute relates to the
development of a special economic zone in the erstwhile state of Andhra Pradesh. The development of the project
was halted because of investigations into allegations of money laundering against a senior politician involving the
land intended for the new development. As per news reports, the primary allegation in the notice of arbitration is
that the special economic zone failed to commence given the pending political and legal issues and that Carissa's
investment had not been suitably protected.

Outcome: The arbitration proceedings are currently pending

Case Study: KOWEPO (2018)

In the year 2018, South Korea’s state-owned company, Korea Western Power Company (KOWEPO) initiated
arbitration proceedings under the India-Korea Comprehensive Economic Partnership Agreement.

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 KOWEPO owns 40% in Pioneer Gas Power Limited (PGPL) which operates a gas-powered power plant in the
Government of Maharashtra. PGPL was promised certain gas concessions by the state government which allegedly
remained unfulfilled. As the fuel supply agreement allegedly remained unfulfilled, KOWEPO claims that the same has
led to losses and has thus sought compensation from the GOI under the mechanism prescribed under the India-Korea
CEPA224.

Case Study: White Industries

While the above-mentioned arbitrations in the infrastructure sector have been the subject of much debate and
deliberations, another treaty arbitration, White Industries v. India225, was indeed a watershed moment for India’s
tryst with the ISDS.

In these arbitration proceedings, a decision was rendered against the GOI, which held that judicial delays amounted
to violation of ‘minimum standard of treatment’. Interestingly enough while this arbitration was invoked under the
India – Australia BIT, the MFN clause in this BIT allowed the investor to invoke the ‘minimum standard of treatment’
from the India-Kuwait BIT.

After the White Industries issue, there has been a spate of treaty arbitrations against India which arise out of
government measures undertaken in the telecom and energy sectors, retrospective changes made in tax laws and
revision or non-compliance by the government of certain promised concessions.

The Model India BIT (2016)

It was perhaps the series of treaty claims that GOI received which led it to rethink its existing bilateral treaty obligations.
Consequently, the GOI announced its decision of terminating its existing BITs and adopted the 2016 Model India BIT
(Model BIT). The Model BIT endeavored to provide appropriate protection to foreign investors in India while also
protecting Indian investors in foreign countries.

Though the GOI clearly highlighted its apprehension of the BIT arbitration regimes, it did not adopt the extreme step
out of opting out of the system, something which countries like South Africa, Poland and certain other countries did.

The GOI also adopted a two-pronged approach with respect to its existing BITs. GOI served notices of termination to
some countries and to the others, served notices calling upon them to issue joint interpretative statements (JIS) to
clarify ambiguities in treaty texts so as to avoid expansive interpretations by arbitration tribunals.

Given the importance which the Model BIT will hold for foreign investments in the infrastructure sector, the next section
details key terms of the Model BIT.

Key terms of the Model BIT

Definition of investment
The definition of ‘Investment’ in the Model BIT has moved away from a broad asset-based definition of investment to
an enterprise-based definition where an enterprise is taken together with its assets.

Article 1.4 of the Indian Model BIT provides:

‘Investment’ means an enterprise constituted, organised and operated in good faith by an investor in accordance with
the law of the party in whose territory the investment is made, taken together with the assets of the enterprise, has the
characteristics of an investment such as the commitment of capital or other resources, certain duration, the expectation

224
The information on the disputes has been taken from https://investmentpolicy.unctad.org/investment-dispute-settlement/country/96/india and
news reports
225 https://investmentpolicy.unctad.org/investment-dispute-settlement/cases/378/white-industries-v-india

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of gain or profit, the assumption of risk and a significance for the development of the party in whose territory the
investment is made. An enterprise may possess the following assets:

▪ Shares, stocks and other forms of equity instruments of the enterprise or in another enterprise;

▪ A debt instrument or security of another enterprise;

▪ A loan to another enterprise

− where the enterprise is an affiliate of the investor, or

− where the original maturity of the loan is at least three years

Therefore, only an enterprise that is legally constituted in India can bring a BIT claim. By doing away with an ‘asset’
based approach, the Model BIT aims to narrow the scope of protection to an investment thereby further limiting the
possibility of invocation of a treaty claim against India.

However, Article 1.4 provides a non-exhaustive list of assets that an enterprise may possess. Perhaps inspired by the
interpretation given to ‘investment’ under Salini v. Morocco226, the Model BIT states that an ‘investment’ must have a
commitment of capital and other resources, a certain duration, the expectation of gain or profit, the assumption of risk
and significance for the development of the country where the investment is made. It may however be noted that the
test in Salini vs Morocco227 has itself been watered down in several other arbitration awards. In LESI vs Algeria228, the
tribunal held that it is difficult to ascertain whether an investment has contributed to the economic development of a
state. To provide an ICSID perspective, the tribunal in Quiborax v. Bolivia229, held that that “investment”, as used in
Article 25 of the ICSID Convention, has its own definition and criteria separate from a BIT definition.

Given the fact that the actual meaning of the relevant characteristics remains undefined and open for interpretation,
the Model BIT may indeed lead to conflicting interpretations by future arbitral tribunals.

The MFN clause

The Most Favored Nation (MFN) provision in BIT aims to create a level-playing field for all foreign investors by prohibiting
the host state from discriminating against investors from different countries. In BIT arbitrations however, foreign
investors have often used the MFN provision of the primary BIT (under which the dispute between investor and state
arises) successfully to borrow a favorable substantive provision granted by the host state under another BIT. Investors
have also relied upon the MFN provision in the primary BIT to borrow beneficial provisions from another BIT, to
overcome procedural requirements, to claim treaty breaches by borrowing substantive provisions from another BIT and
on certain instances, have even attempted to borrow ‘umbrella’ clauses to bring a commercial arbitration under the
ambit of a BIT arbitration.

The exclusion of the MFN clause can be seen as a direct reaction to the ruling against the government in White
Industries. The exclusion of MFN is to prevent such cases of ‘treaty shopping’, whereby foreign investors take advantage
of provisions in other BITs by ‘borrowing’ them through the MFN clause.

However, the GOI could have adopted an MFN clause with certain qualifications. For instance, the EU-Canada CETA, in
order to limit the scope of the MFN provision so as to obliviate the situation of beneficial treaty shopping, specifically
excludes ‘procedures for the resolution of investment disputes between investors and states provided for in other
international investment treaties’ and further provides that ‘substantive obligations in other international investment
treaties and other trade agreements do not in themselves constitute ‘treatment’ and thus cannot give rise to a breach
of this Article [MFN]’ unless a host state has adopted or maintained measures pursuant to those obligations.

226 Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco [I], ICSID Case No. ARB/00/4 Decision on Jurisdiction
227 Ibid
228 L.E.S.I. S.p.A. and ASTALDI S.p.A. v. République Algérienne Démocratique et Populaire, ICSID Case No. ARB/05/3 Award
229Quiborax S.A., Non Metallic Minerals S.A. and Allan Fosk Kaplún v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2 Decision on
Jusrisdiction

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The GOI could have followed the above approach (recommended by the Law Commission of India report too) and not
do away with the MFN provision completely, which indeed exposes foreign investors to discriminatory treatment and
substantially tilts the balance in favor of host state’s regulatory power.

Fair and Equitable Treatment

Fair and Equitable Treatment (FET) is one of the most important standards and has been the subject of much debate in
various scholarly writings and awards. Numerous treaty claims show that FET has become a catchall provision capable
of sanctioning many legislative, regulatory, and administrative actions of the host state. This interpretative outreach by
tribunals, could perhaps be because of FET appearing in large number of BITs without much guidance about its
normative content.

The Model BIT does not contain a FET provision. The GOI perhaps decided not to include a provision on FET because
arbitral tribunals often interpret this provision too broadly. The Model BIT contains a provision entitled ‘Treatment of
Investments.’ Article 3.1 prohibits a country from subjecting foreign investments to measures that constitute a violation
of customary international law through:

▪ Denial of justice, which covers both judicial and administrative proceedings; or,
▪ Fundamental breach of due process; or,
▪ Targeted discrimination on manifestly unjustified grounds such as gender, race or religious belief; or,
▪ Manifestly abusive treatment such as coercion, duress, and harassment.

This is clearly an attempt to provide distinct standards of treatment without making any reference to the FET provision.
The said Article 3.1 is further distinct from the concept of minimum standard of treatment as evolved through the 1926
Neer award (Neer v. Mexico230). The Model BIT thus attempts to restrict the applicability of a standard which has become
even broader through arbitration awards in the past years.

Taxation
Article 2.4 (ii) of the Model BIT states that the treaty shall not apply to “any law or measure regarding taxation, including
measures taken to enforce taxation obligations.” This article provides that if a particular regulatory measure is related
to taxation in the host state (whether it made before or after the commencement of arbitral proceedings), an arbitral
tribunal shall not be able to review such a decision.

Clearly, the GOI has decided to keep taxation measures outside the purview of the Model BIT in response to the
Vodafone and Cairn arbitrations, challenging India’s retrospective application of taxation law under different BITs.

Completely excluding taxation measures denotes that foreign investors shall not be able to challenge such measures
under BITs under any circumstance. However, allowing host states to have the last word on whether a regulatory matter
pertains to taxation or not might lead to regulatory abuse. As the tribunal in EnCana v Ecuador231 clearly recognized that
states can abuse their power to tax by designing tax laws that are ‘extraordinary, punitive in amount or arbitrary’ which,
in turn, could trigger a claim of indirect expropriation. The tribunal in Burlington v Ecuador232 recognized that taxation
can be confiscatory, leading to indirect expropriation.

Invocation of arbitral proceedings under the Model BIT

Through the Model BIT, GOI has further qualified (subject to certain conditions) its consent to arbitration by mandating
that a foreign investor should first exhaust local remedies at least for a period of 5 years before commencing
international arbitration. The rule related to ‘exhaustion of local remedies’ is a longstanding rule of customary
international law. However, the time period spent before local courts in having the disputes adjudicated differs in

230 L.Fay H. Neer And Pauline Neer (Usa) v. United Mexican States Mexico/USA General Claims Commission
231 EnCana Corporation v. Republic of Ecuador, LCIA Case No. UN3481, UNCITRAL Award
232 Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5 Decision on Reconsideration and Award

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different BITs. Though some BITs expressly require exhaustion of local remedies, other BITs do not make any reference
to it.

The 5 years under the Model BIT are to be counted from the date when the foreign investor first acquired ‘knowledge
of the measure in question and the resulting loss or damage to the investment’ or when the investor should have first
acquired such knowledge. The other critical element related to exhaustion of local remedies is that the foreign investor
should submit the dispute to the local court within 1 year from the date on which the investor acquired the knowledge
or should have acquired the knowledge about the measure. Pertinently, the period of limitation for filing commercial
disputes before domestic courts is 3 years but the Model BIT has for reasons best known, reduced this to 1 year for a
foreign investor.

The requirement to exhaust local remedies shall not be applicable ‘if the investor can demonstrate that there are no
available domestic legal remedies capable of reasonably providing any relief in respect of the same measure’. The
burden to show that there is no reasonably available relief falls on the foreign investor.

The Model BIT has another clarification attached to Article 15.1, which precludes the investors from claiming that they
have complied with the exhaustion requirement on the basis that the claim under this treaty is by a different party or
in respect of different cause of action. This is an important clarification as it is often found that different companies that
are controlled by the same corporate group launch multiple proceedings against the state at multiple forums.

This clarification will prohibit companies from abusing their rights. Moreover, since cause of action in domestic forum
is formulated in domestic law terms, which would be different from the cause of action formulated in treaty terms, it is
relatively easier to show that the requirement of exhaustion has been complied with.

Further additional qualifications under the Model BIT

The Model BIT provides that the foreign investor, after exhausting all local remedies for five years, without reaching a
satisfactory resolution, of a ‘notice of dispute’ to the host state. This ‘notice of dispute’ will be accompanied by another
six months of attempts by the investor and the state to resolve the dispute through meaningful negotiation, consultation
or other third-party procedures.

In the event that there is no amicable settlement of the dispute, the investor can submit a claim to arbitration, subject
to the following additional conditions:

▪ First, not more than 6 years have elapsed from the date on which the investor first acquired or should have
acquired knowledge of the measure in question; and/or,

▪ Second, not more than 12 months have elapsed from the conclusion of domestic proceedings;

▪ Third, before submitting the claim to arbitration, a minimum of 90 days’ notice has to be given to host state;

▪ Fourth, the investor must waive the ‘right to initiate or continue any proceedings’ under the domestic laws of
the host state.

Therefore, given the above criteria, it will indeed take several years before an investor can actually bring a claim under
the Model BIT, should the same be formalized with another country.

General exceptions
The Model BIT also contains a separate chapter which provides further exceptions to bringing a treaty claim under the
Model BIT. Article 32 contains general exceptions, which includes protection of public morals, maintenance of public
order, protection of human, animal, or plant life or health, protection and conservation of the environment, ensuring
compliance with domestic laws that are not inconsistent with the provisions of the treaty. The inclusion of these
permissible objectives will provide opportunities to reconcile investment protection with the host state’s right to
regulate.

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There is no doubt that India needs to leverage foreign capital to trigger its ambitious growth of being a USD 10 trillion-
dollar economy. Likewise, Indian investors are increasingly looking overseas to diversify their business, gain access to
new markets, procure intellectual property and undertake research and development. BIT’s should now therefore, be
increasingly a part of the India growth narrative. Assuring foreign investors of a stable business environment in which
their interests will be protected is as critical as safeguarding Indian investors capital overseas.

India may have a fair share of treaty arbitrations invoked against it, and the Model BIT too may have its naysayers,
however, the intention of equitable treatment on which the BIT system is rooted is not in doubt. India may have to
rethink certain protectionist measures in its Model BIT going forward and must take the middle path to meet both the
investor and the State interests.

Covid -19 and the infra sector

Undoubtedly, the pandemic has influenced all businesses. While certain sectors like e-commerce, pharma, technology
experienced a surge, sectors such as aviation, automobile, hospitality experienced lower returns. Just like any other
country, the infrastructure sector suffered a massive blow during the lockdown months due to the pandemic in India.
The issues were further accentuated as a substantial portion of the labour force in India was not necessarily from the
same geographic location where an infra project may have been underway. With the ground staff being unavailable,
various projects were either stalled or had to incur exponential costs to keep the projects running.

It goes without saying that no one could have predicted the pandemic or could have foreseen the event. Could an event
of this nature be therefore subject to an arbitration a BIT? Could the measures introduced by a government to curb the
spread of the virus be subject to a treaty arbitration at a later point in time? The answer is very much in the affirmative.
Following are some of the key substantive rights that are generally promised by a sovereign under a BIT, and which may
become the subject matter of a treaty arbitration:

▪ Expropriation:

In order to establish a claim for expropriation, an investor will have to prove the expropriation of its business and
will also have to establish that the expropriation was without compensation. Majority of BITs prohibit
expropriation which may be direct, indirect or may be a consequence of a series of measures. Investors will have
to prove that measures introduced by the sovereign relating to the pandemic, substantially and permanently
deprived them of their investment, or had an irreversible effect, in order to successfully establish a claim for
expropriation.

▪ Fair and Equitable Treatment:

A foreign investor may question the imposition of a discriminatory, arbitrary, unreasonable, or disproportionate
measure which a sovereign may have introduced during the pandemic period, by invoking a violation of the
principle of Fair and Equitable Treatment. Indeed, certain foreign investors did threaten to invoke treaty
arbitrations against a sovereign after it introduced measures cancelling collection of toll taxes for ease of
movement. While the measure may have had the most noble intentions, the investor’s earnings which might have
been a apportioned from the tolls collected, would also have been affected. Similarly, governments have been at
the receiving end of certain BIT arbitrations after they introduced policies towards transition to renewable sources
of energy. In such situations, investors in the past have relied on FET and may elect to do so should a sovereign’s
policies may be discriminatory.

▪ Full Protection and Security:

As per this substantive right, a sovereign undertakes to take all measures of precaution necessary to protect a
foreign investment in its territory. During the period of lockdowns, there were several reported incidents of
agitations, theft, arson at various establishments across the globe. Right from the fact that an investor may choose
to allege a sovereign’s failure to contain the spread of the virus, to the fact that adequate protection was not
available during the lockdown, all of the sovereign’s steps or the lack thereof, can be questioned by an investor in
a BIT arbitration.

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▪ National Treatment & Most Favored Nation Standard:

As a natural consequence of the negative impact that the pandemic has had, a sovereign may introduce which are
aimed to boosting domestic industry. At the same time, it may also introduce measures which promote receiving
investments from only a selected jurisdiction. An investor could claim a violation of the National Treatment
standard or the MFN standard in the above situations. The investor will have to establish that while aid to nationals
during the pandemic was provided by a sovereign, the same treatment was not extended to foreign investments.

▪ Possible State Defences:

While investors may have the arsenal of the above substantive rights, a sovereign has the means to defend itself
too. A sovereign can rely upon the BIT and customary international law to establish the fact that measures
introduced by the sovereign were to protect health, they were the only recourse left to an unforeseeable event or
that had it not been for the measure, further harm could have been caused to the population.

A sovereign might choose to rely on the provisions of applicable treaties that allow the adoption of measures in
certain circumstances that would otherwise be in violation of the State’s treaty obligations, such as, for example,
when public health is at stake. The BITs executed in recent years have started to provide provisions preventing
claims when measures are taken by the States to protect public health.

▪ Necessity:

A possibility is that a sovereign may elect to invoke the defense of necessity, which would require a State to prove
that the following criteria are met:

− the measure adopted was the only way for the State to safeguard an essential interest against a grave and
imminent peril;
− the measure did not seriously impair another essential interest; and
− the State has not contributed to the situation of necessity.

▪ Force Majeure:

A possible defence that a sovereign might elect to defend itself is Force Majeure. While a sovereign may argue that
the pandemic was an unforeseen event, the sovereign may still be required to prove that the that the pandemic-
an external factor, prevented the sovereign from performing its obligations towards the investors.

A successful claim of force majeure must fulfil five conditions:

− there must be an unforeseen event or an irresistible force;

− the event or force must be beyond the control of the State;
− the event must make it ‘materially’ impossible to perform an obligation;
− the State must not have contributed to the situation; and
− the State must not have assumed the risk of the situation occurring.

▪ Distress:

To successfully plead the defence of distress, the sovereign must show that there was a threat to life, a special
relationship between the author of the act, whether this is a State organ or an individual whose acts are
attributable to the State, and the persons in question; that there was no other reasonable way to deal with the
threat; that it did not contribute to the situation; and that the measures were proportionate.

Therefore, to claim this defense successfully, the sovereign will have to establish that the existing threat posed by
COVID-19 was indeed a threat to life of the individuals within the State’s jurisdiction. States will also have to prove
the “special relationship” between the organ imposing a measure and the individuals whose lives are under threat
and that there was no other way but to impose the measure in question. Lastly, the sovereign will also have to
establish that the measure is in question was proportionate to the threat which the measure sought to address.

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Co mpetitio n Law Issues in Conc essio n A greements
A Brief Overview of Competition Law in India
Competition in markets in India is regulated by the provisions of the Competition Act, 2002 (Competition Act), which is
enforced by the Competition Commission of India (CCI). The Competition Act seeks to ensure fair competition in the
markets within India and deals with competition
concerns broadly arising out of:
Like other agreements, Concession Agreements
▪ Anti-competitive agreements under section 3 of
and conduct arising out of the process of grant of
the Competition Act
concession as well as the conduct of the parties
▪ Abuse of dominance under section 4 of the thereafter, do have the potential to raise concerns
Competition Act under the provisions of the Competition Act.
▪ Combinations under section 5 and section 6 of
the Competition Act.

Section 3 – Anti Competitive Agreements

Sections 3 of the Competition Act generally prohibits certain horizontal and vertical agreements which cause or are likely
to cause an appreciable adverse effect on competition
(AAEC) in India. Any such agreement is considered void
under Section 3 of the Competition Act.

The Competition Act does not define the term ‘AAEC’ to

provide definite parameters for the CCI. However, the
Competition Act provides for guidelines in the form of
certain identified factors under Section 19(3) of the
Competition Act, that the CCI is required to consider
while analyzing whether an agreement causes or is likely
to cause an AAEC in India. These factors under Section
19(3) of the Competition Act can be categorized into
positive and negative factors as listed in the adjoining
figure.

Categorization of Agreements
Agreements under section 3 of the Competition Act can
broadly be categorized as:

Horizontal agreements under section 3(3) of the Act:

Section 3(3) of the Competition Act deals with
agreements amongst competitors i.e., agreements
between two or more enterprises that are at the same
stage of the production chain and in the same market.
Such agreements tend to enable sharing of information
which concern fixing of prices, limiting or controlling
quantities, market sharing or rigging bids.

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The following kinds of horizontal agreements, under the Competition Act, are presumed to have an AAEC in India. This
presumption however can be rebutted by the parties with evidence 233.

- Fixing Prices: directly or indirectly determining purchase or sales prices (Agreements regarding prices)

- Production: limit or control production, supply, markets, technical development, investment or the provision of
services (Agreements regarding quantities)

- Market Allocation: allocating geographic markets or customers (Agreements regarding market sharing)

- Collusive Bidding: directly or indirectly result in bid-rigging or collusive bidding (collusive tendering and bid rigging)

Vertical Agreements under Section 3(4) of the Act:

Section 3(4) of the Act deals with vertical agreements and provides for an illustrative list of vertical agreements, which
if proven to cause AAEC in India, are prohibited, i.e., any vertical agreement in respect of inter alia provision of services,
including:

- Tie–in arrangements

- Exclusive supply agreements

- Exclusive distribution agreements

- Refusal to deal

- Resale price maintenance

Section 4 – Abuse of Dominance

Section 4 of the Competition Act deals with and prohibits abuse of dominant position by an enterprise. It defines
dominance as, a position of strength, enjoyed by an enterprise, in the relevant market in India, which allows it to – (a)
operate independently of the competitive forces prevailing in the market; or (b) affect its competitors or consumers or
the relevant market in its favor.

As per Section 4 of the Competition Act, there shall be an abuse of dominant position be it an enterprise or a group, if
it falls within the following categories:

▪ Directly or indirectly imposing unfair or discriminatory:

- Conditions in purchase of sale of goods or services

- Price in purchase or sale of goods or service

▪ Limits or restricts:

- Production of goods or provisions of services or market thereof

- Technical or scientific development relating to goods or services to the prejudice of consumers

▪ Indulges in practice or practices resulting in the denial of the market access

▪ Makes conclusion of contracts subject to acceptance by other parties of supplementary obligations which by their
nature or according to commercial usage, have no connection with the subject of such contracts

▪ Uses its dominant position in one relevant market to enter into or protect another relevant market

In order to determine the abuse of dominance by an enterprise or a group, it is necessary to first determine the relevant
market in which the enterprise/group is operating, for the purpose of assessing the dominance. The term ‘relevant

233 Rajasthan Cylinders and Containers Limited v. Union of India and Anr. Civil Appeal No. 3546 of 2014 (Supreme Court).

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market’ has been defined under Section 19(5) of the Competition Act as an amalgam of the relevant product market
and the relevant geographical market.

After determination of the relevant market, the CCI takes into consideration factors listed under Section 19(4) of the
Competition Act to determine dominance of the enterprise in the identified relevant market. Once dominance of an
enterprise/group is established in an identified relevant market, the CCI scrutinizes whether the conduct of such an
enterprise/group is abusive within the purview of Section 4 of the Competition Act. Section 4 of the Competition Act
sets out a number of practices that are considered to be abusive. Such conduct could be either exclusionary, i.e. having
the effect of excluding other players in the relevant market or exploitative, i.e. practices which tend to exploit the
dominant entity's position by imposing unfair or discriminatory restrictions on other players and consumers in the
relevant market.

Section 5 and Section 6 of the Competition Act – Combinations

The merger control provisions of the Competition Act are enshrined under Sections 5 and 6 of the Competition Act and
the procedure for the enforcement of the provisions is provided in the Competition Commission of India (procedure in
regard to the transaction of business relating to combinations) Regulations, 2011. According to the provisions of the
Competition Act, no person or enterprise shall enter into a combination which causes or is likely to cause an AAEC within
the relevant market in India and such combinations would be treated as void.

The jurisdictional thresholds in India adopt the ‘size of parties or the size of group’ test and transactions, which meet
any one of the following thresholds must be notified to the CCI234:

Companies party to M&A or Acquisition Groups (2 or more enterprises) party to M&A or

Acquisition

In India In India
Assets OR Turnover Assets OR Turnover
> INR 20 Billion (INR > INR 60 Billion (INR > INR 80 Billion (INR > INR 240 Billion (INR
2,000 Crores) 6,000 Crores) 8,000 Crores) 24,000 Crores)
In India & Outside India (aggregate) In India & Outside India (aggregate)
Assets (USD) Turnover (USD) Assets (USD) Turnover (USD)

> 1 Billion (Including OR > 3 Billion (Including > 4 Billion (Including OR > 12 Billion (Including
minimum INR 1,000 minimum INR 3,000 minimum INR 1,000 minimum INR 3,000 Crores
Crores in India) Crores in India) Crores in India) in India)

Additionally, there are certain exemptions available under the Act/Regulations and various notifications issued by the
GOI from time to time. Each combination will be required to be assessed for applicability of these exemptions on a case
to case basis. Further, the CCI has recently amended the regulations pertaining to Combinations, to include Green
Channel provisions or approval through automatic route.

234 Section 20(3) of the Competition Act provides for revision of the threshold limits every two years by the Government of India, in consultation
with the CCI, through notification, based on the changes in Wholesale Price Index (WPI) or fluctuations in exchange rates of rupee or foreign
currencies. Accordingly, the Ministry of Corporate Affairs, Government of India, by way of a notification dated 4 March 2016, have increased the
jurisdictional thresholds provided under the Act, 100% (effectively doubling the thresholds).

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Powers of CCI
It would be necessary to understand the powers of the CCI when presented with complaints and allegations under the
Competition Act.

▪ Initiate an inquiry: Section 19 of the Competition Act empowers the CCI to initiate an inquiry into the agreements
and conduct of dominant enterprises for alleged contravention of the Competition Act. The CCI may initiate an
inquiry either on its own or on an information filed by any person or on the basis of a reference made to it by the
Central Government or a State Government or a statutory authority.

▪ Imposition of penalty and other powers under Section 27 of the Act: After conducting the inquiry, if the CCI finds
the conduct or the agreement in violation of the provisions of the Competition Act, it can pass the following orders:

- That the anti-competitive agreement in question be discontinued and not be re-entered into

- That the abuse of dominant position be discontinued

- Impose penalty as it may deem fit, which shall not be more than 10 % of the average of the turnover of the last
three preceding financial years upon each of the concerned parties to the anti-competitive agreement or
abusing its dominance. Further, in case of a cartel, the CCI may impose penalty up to the higher of - three time
of the profits for each year of the continuance of such agreement or 10 % of its turnover for each year of
continuance of the agreement, on each of the parties to such agreement

- Direct the agreements to be modified to the extent and in the manner as may be specified by the CCI

- Pass such other orders as the CCI may deem fit or

- Additionally, the CCI may also pass orders against the group entities, if they are found to have contributed to
the violation of the provisions of the Competition Act.

▪ Contravention by companies under Section 48 of the Act: In cases where the violation by a company is established,
Section 48 of the Competition Act empowers the CCI to also proceed against individuals, who at the time of the
contravention of the provisions of the Act were in charge and responsible to the company for the conduct of business
of the company (unless the contravention was committed without the knowledge of or the individual exercised all
due diligence to prevent the contravention). Further, the CCI may also penalize directors, managers, secretary or any
other officer, where the contravention took place with the consent, connivance, or is attributable to the neglect on
part of such directors, managers, secretary or other officer.

E ssenti al Facil iti es Doctr in e

One of the important principles that is relevant in relation to competition concerns arising out of concession agreements
is the doctrine of Essential Facilities (Doctrine). The Doctrine, prevalent in jurisdictions such as the US, EU and Australia,
states that a dominant firm cannot refuse to grant access to an essential facility which it controls, to other firms.

In the US, the doctrine was conceptualized for the first time by the Seventh Circuit Court’s opinion in MCI Commc'ns
Corp. v. AT&T235 The court listed conditions that held that for the Doctrine to be applied in a case, it must be shown that:

▪ A monopolist controls an essential facility

▪ The facility cannot be reasonably duplicated

▪ The monopolist has denied access and

▪ It was feasible for the monopolist to share the facility

235 MCI Commc'ns Corp. v. AT&T, 708 F.2d 1081 (7th Cir.), cert. denied, 464 U.S. 891 (1983)

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Similarly, in the case of Verizon Communications v Curtis Trinko LLP236, the US Supreme Court stated that even if the
doctrine were valid, it would be applicable only when there was no means of access and that in the case on hand, the
Telecom Act already mandated access or in other words the doctrine was not applicable in a regulated industry.

In India, the Doctrine has not been specifically recognized as such, however, the CCI in certain cases has made references
to the Doctrine.

On a similar front, the Supreme Court of India has acknowledged the Doctrine when it comes to concession agreements,
however not in context of competition law – more so apropos the duty of private bodies performing public functions.

Case Studies
In the case of VST Industries Limited v. VST Industries Workers’ Union and Anr,237 it was held that private bodies that
possess dominant position in the market, are under an implied duty to act in the public interest. The Supreme Court
also observed that any private company in India that is controlling infrastructure facility through concession agreement
as awarded by the government will be considered as performing a public function and thus is expected to act in public
interest. If the company refuses to deal with any competitor, then it would be under judicial scrutiny for performing an
arbitrary action of a body discharging public functions. This, as per the Supreme Court, would make it difficult for a
concessionaire to attempt such unilateral actions.

The CCI observed in Arshiya Rail Infrastructure238 that the Doctrine could only be invoked in certain circumstances, such
as existence of a technical feasibility to provide access, replicating the facility in a reasonable period of time, distinct
possibility of lack of effective competition if such access is denied and possibility of providing access on reasonable
terms.

In another case of Eastern India Petroleum Pvt. Ltd.239, the CCI was required to determine whether the terminalling
infrastructure of South Asia LPG Company Pvt. Ltd. (SALPG) was an essential facility and that SALPG was abusing its
dominant position by imposing unfair conditions on the use of its facilities by its customers. The CCI, however, did not
find it necessary to identify the infrastructure of SALPG as an essential facility, it held that as SALPG was dominant,
SALPG had a special responsibility to not inhibit competition and be compliant with the requirements under Section 4
of the Competition Act. The CCI, while finding SALPG to have abused its dominant position, imposed a penalty of around
INR 19.21 crores.

236 Verizon Commc'ns, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 410-11 (2004)
237 VST Industries Limited v. VST Industries Workers’ Union and Anr (2001) 1 SCC 298.
238 Arshiya Rail Infrastructure Limited v. Ministry of Railways & Ors., Case No. 64/2010 & 12/2011
239 Eastern India Petroleum Pvt. Ltd. (EIPL) vs. South Asia LPG Company Pvt. Ltd., Case No. 76 of 2011

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Scope of Competition issues under the Concession Agreements

The CCI may have an important role to play in concessions.

The provisions of the Competition Act may likely stand
attracted to concession agreements depending upon the
nature of the agreement and stage of grant of a concession.
The grant of concession agreements involves various stages
depending upon the method followed by the entity
involved in granting the concession. Concessions by their
nature provide for certain incentives to the concessionaire
such as tax holidays, exclusive supply, exclusive distribution
and exclusive rights of building, operating and generating
revenue in a geographical location. Depending upon the
nature of the agreement and stage of the concession
process, concession agreements may broadly raise the
several concerns (discussed below) under the provisions of Competition Act. In this regard, it is important to note that
any enterprise, including a government entity that is involved in a commercial activity will be covered within the purview
of the Competition Act. The term ‘enterprise’ has been broadly defined under Section 2(h) of the Competition Act, to
include department of the government but excludes any activity of the government relatable to the sovereign functions
of the government, including all activities carried out by the departments of the central government dealing with atomic
energy, currency, defense and space. As such, any conduct, that in the CCI’s view is anti-competitive, can be investigated,
including conduct emanating from commercial activities of government agencies or departments which are responsible
for issuing tenders.

▪ Exclusivity: A concession is intended to grant exclusive rights over a certain real estate or supply/distribution
channel for a long term. Although, the CCI has not particularly dealt with cases that have raised exclusivity in
relation to the concession agreements, it is important to bear in mind that the grant of exclusive rights is not anti-
competitive per se. However, if the grant of exclusive rights is done in an unfair manner and terms that have led to
exclusion of others from competing on merits, it may potentially raise concerns generally under Section 3 or under
Section 3(4) of the Competition Act as having an AAEC.

▪ Collusive behavior: One of the most common method of granting a concession is by way of a competitive bidding
process. As discussed above, Section 3(3) of the Competition Act specifically prohibits collusive behavior in the
nature of bid-rigging or collusive bidding and any arrangement/conduct/agreement of this nature is presumed to
have an AAEC and is thus void. It is pertinent to note that the term ‘agreement’ has been broadly defined under
Section 2(b) of the Competition Act and has been interpreted accordingly by the CCI.

▪ Renegotiations of the Concession Agreements: Re-negotiations may raise competition concerns where the terms
of the concession agreement are restructured in a manner that they are more favorable to parties that were
involved in initial phase of the bidding process. This may not offer a level playing field to other participants who
are willing to compete with either the incumbent or earlier bidders. Other competitors may argue that such
conditions are anti-competitive under Section 3 and/or Section 4 of the Competition Act.

Renegotiations to refurbish/revise clauses may also have an impact on the competition in the market, depending
upon the clauses being renegotiated in view of change in circumstances, cost structures, currency fluctuations, etc.
For instance, extension of the term of the concession or change in the exclusivity offered under the concession
agreement may potentially raise concerns under Section 3 and Section 4 of the Competition Act. However, at
present, no such concerns have been presented to the CCI.

▪ Abuse of dominant position: By their very nature, concession agreements tend to create a monopoly in favor of
the concessionaire by granting it sole ownership or access to a certain market for a significantly long period of time.

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 While mere dominance is not considered to be objectionable, any abuse of such dominance is prohibited under
Section 4 of the Competition Act. In the context of concession agreements, once granted, the concessionaire is the
only player in that concerned relevant market, establishing its monopoly in that market. Competition law casts a
special responsibility upon dominant enterprises to ensure that their conduct does not impede the process of
competition in the market and as such, any conduct on the part of a concessionaire, being the monopolist, which
dilutes or impedes the overall competitive fabric of the market in which such a concessionaire operates, may raise
concerns under Section 4 of the Competition Act, if it:

− Directly or indirectly imposes unfair and discriminatory conditions on other participants in the market that
are utilizing the concession project facility. These conditions could include price and non-price conditions. For
instance, if the concession grant is done through the competitive bidding method, the terms of the tender
documents may also be examined by the CCI. If the terms of the tender are unfair and discriminatory without
any reasonable justifications, then it may be assessed under Section 4 of the Competition Act.

− Limits or restricts production of goods or provision of services or limits or restricts scientific development to
the prejudice of consumers.

− Denies access to the market to market participants. For instance, where the concessionaire, being a dominant
entity, does not allow to deal or imposes conditions that make it impossible for the other player to enter into
the relevant market.

− Makes conclusion of contracts subject to acceptance of unfair conditions by other participants in the market.

− Uses its dominant position in one relevant market to enter into or protect another relevant market. For
instance, in case a new concession is being granted and the concessionaire uses its dominant position to
influence the market in order to win the concession for the new project, at the cost of exclusion of other
competitors.

Further, concessions may also raise the issue of the concessionaire being in control of an essential facility. As
discussed above, the Doctrine is applicable in cases where the project facility/infrastructure involved fulfils the
criteria of being an essential facility and the concessionaire unjustly refuses to share access to such facility with
other market participants. A case raising this issue would be covered under Section 4 of the Competition Act.
However, the Doctrine has not yet been applied by the CCI as a basis in arriving at a decision under Section 4 of the
Competition Act, but references to it has been made in certain cases.

▪ Combinations, joint ventures and vertical integration: An acquisition or a merger between two competing bidders
or their respective parent entities may also raise concerns under the provisions of the Competition Act. Such
mergers or acquisitions can potentially raise some of the following concerns:

- Elimination/reduction of competition in the market, which is against the spirit of the Competition Act which
seeks to inter alia promote competition in the market.

- Chances of collusion among the newly acquired or merged entities that were originally competitors, thereby
raising concerns under Section 3(3) of the Competition Act.

- A merger or acquisition between entities that are vertically related in the supply/distribution chain, and which
can be said to command dominance in their respective markets, may give rise to an entity that may control
market at two levels. In such case, if the vertically integrated entity engages in a conduct that is prohibited
under Section 4 of the Competition Act, the CCI may proceed against such an enterprise.

- JVs between two competitors or entities that are vertically related may also raise similar concerns under the
Section 3 and Section 4 of the Competition Act. However, JVs between competitors in appropriate cases may
be defended and justified on efficiency grounds as provided in the proviso to Section 3(3) of the Competition
Act.

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 - Mergers and acquisitions between two entities, where the prescribed thresholds under Section 5 of the
Competition Act are breached will be governed by provisions dealing with combinations. In such a case, the
proposed transaction (subject to any available exemptions) will have to be notified to the CCI for its prior
mandatory approval, without which the proposed transaction cannot be consummated. The CCI has the
power to pass appropriate orders under Section 31 of the Competition Act.

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Inco me Tax Issues: Infrastructure Co ntrac ts
While entering into contracts pertaining to infrastructure development, examination of direct tax implications plays a
vital role from the Indian party as well as the foreign investor perspective. In this section, we have broadly set out the
implications under the provisions of the Income-tax Act, 1961 (IT Act), which the parties to infrastructure contracts
should consider.

Ta x a b i l i t y o f t h e S p e c i a l P u r p o s e Ve h i c l e
The project SPV, being an Indian company is regarded as a resident in India for income-tax purposes and accordingly, its
global income will be taxed in India.

Under the IT Act, the following taxes240 are applicable to a domestic company:

▪ Applicable corporate tax rate is 30%

▪ A concessional corporate tax rate is applicable to domestic companies at 22%, provided no deductions/exemptions
are availed by such a company

− Minimum Alternate Tax (MAT) will not be applicable to such companies

▪ MAT at the rate of 15% applicable to companies, if the total income is less than 18.5% of the book profits

▪ Dividend distribution tax is applicable at the rate of 15%

Incentives to domestic companies involved in the infrastructure facility

The SPV undertaking the business in the nature of developing/operating and maintaining/developing, operating and
maintaining, any new infrastructure facility will be allowed a deduction in respect of the entire capital expenditure
incurred for the purposes of this facility (subject to fulfillment of certain conditions). The term infrastructure facility
covers:

▪ A road including toll road, a bridge or a rail system

▪ A highway project including housing or other activities being an integral part of the highway project
▪ A water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste
management system
▪ A port, airport, inland waterway, inland port or navigational channel in the sea

Ta x c o n s i d e r a t i o n s o f a f o r e i g n p a r t y
A foreign party investing into India or when becoming party to an infrastructure contract must be cognizant of the tax
implications. Listed below are three broad categories – that of investor, technology partner and execution partner.

Foreign party: Investor

Effective tax structuring at the time of investing into India is vital, since the same determines the returns from the project
in India. Following are the broad aspects, which need to be considered:

▪ If the investment is undertaken from an Intermediary holding company, jurisdictional analysis should take the
following factors into account:
− Taxation laws in the offshore jurisdiction
o Double Taxation Avoidance Agreements (DTAA), whether any benefit is available
o Domestic tax laws of the offshore jurisdiction (rate of tax on profits)

240 All the above rates are subject to applicable surcharge and cess.

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 o Laws relating to foreign tax credit in the offshore jurisdiction

− Regulatory regime in the offshore jurisdiction

o Permits investment - No stringent regulatory regime (protection of valuable rights)
o Flexibility for incorporation of the entity

− Administrative flexibility
o Flexibility in terms of managing the entity,
o Appointment of resident directors, maintenance of accounts, day to day compliance

▪ Type of instrument through which investment should be undertaken

▪ Form of the legal entity in which investment is to be made
▪ Tax implications arising at the time of investment, if any, including withholding tax implications on secondary
purchase, on upstream of profits/interest and exit of investment (taxation of capital gains)

Foreign party: Technology partner

A foreign party as part of the infrastructure contract may enter into a Technology Assistance Agreement/Technical
Services Agreement for transferring technology, design or rendering technical services. Receipts under these contracts
are liable to tax in the hands of the foreign party. Few points which need to be considered are:
▪ Examination of the receipts to be taxed as “royalty” or “Fees for technical services”
▪ Examination of the receipt from a DTAA perspective – to determine the rate of tax as well as any benefit which can
be obtained
▪ Examination from a service Permanent Establishment (PE) perspective, if the services are rendered through
employees deputed in India
▪ In case of creation of a PE, to obtain a withholding certificate to ensure taxes are deducted on a net income basis
and not on a gross income basis
▪ Whether the receipt should be grossed-up i.e. when taxes are to be borne by the Indian counterpart
▪ Related compliance to be undertaken

Foreign party: Execution partner

In this case, a foreign party as part of the infrastructure contract, is responsible for executing the contract in India in
terms of supply of machinery and rendering of services. The scope of a foreign party under the contract could be as
follows:

▪ Offshore supply of equipment

▪ Installation and commissioning of the equipment
▪ Offshore services
▪ Onshore services

Few tax considerations, which should be kept in mind in this case are:

▪ Tax implications arising on offshore supply of equipment – generally as the title and risk are transferred outside
India, no tax implications should arise.
▪ Creation of PE on account of installation and commissioning of the machinery.
▪ Tax implications arising on account of composite contracts – should the offshore supply be segregated from the
onshore installation and services.

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▪

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Co ncessio n Contrac ts: Implicatio ns o f GST
With effect from July 1, 2017, the indirect tax landscape of India was completely overhauled, with multifarious indirect
taxes such as Central Excise, Service tax, Value Added Tax (VAT), Central Sales Tax (CST), Countervailing Duty (CVD) and
several cesses, being replaced and subsumed into a singular levy in the form of the Goods and Services Tax (GST).

India follows a dual structure of the GST, with both the Centre and the State empowered to levy GST, on equal measure,
in every transaction of a ‘supply’. To effectuate GST in the country, the Central Goods and Services Act, 2017 (CGST Act),
the State Goods and Services Act, 2017 (SGST Act), the Union Territory Goods and Services Tax Act, 2017 (UTGST Act)
and the Integrated Goods and Services Act, 2017 (IGST Act) have been enacted, and the resultant rules and notifications
notified.

Some issues and aspects specific to concession contracts are listed below:

▪ By way of specific exemption, service by way of access to a road or a bridge on payment of toll charges as well as
service by way of access to a road or a bridge on payment of annuity, are both exempt from the levy of GST.
▪ If roads fall in more than one State, then the toll charges will be apportioned to each State on proportionate basis
i.e. on the basis of ratio of length of roads in each State.
▪ The service of transportation of passengers, with or without accompanied belongings, by metro continues to be
exempt under GST (like it was under the Service tax regime).
▪ However, the issue that remains is whether the activities of construction, operation and maintenance of roads/
metro lines is carried out under BOT/DBFOT basis when carried out against toll collection rights, will be liable to GST.
It remains to be seen whether such activities are seen to be are carried out for self and thus outside the purview of
GST.
▪ Where the infrastructure is handed over back to awarding entity (e.g. NHAI for roads or MMRDA for metro lines) as
a going concern, upon the completion of the concession period, it is noteworthy that services by way of transfer of
a going concern, as a whole or an independent part thereof are exempt from the levy of GST.
▪ Another issue is whether GST becomes payable on grants received from the awarding entity (e.g. NHAI) to bridge
the viability gap of the project. “Consideration” 241 as defined to not include any grant received from the Central
Government or a State Government. However, it requires consideration whether NHAI can be understood as Central
Government/State Government, especially when NHAI merely acts as a conduit to facilitate such a grant from the
Central Government.
▪ Owing to the specific restriction of credits242 , credit of the goods or services received for repairs of an immovable
property (other than plant or machinery), to the extent of capitalization, to the said immovable property shall not
be available.
▪ Any consideration payable by one party to a registered person on account of termination of contract would be
deemed to be supply of service and attract GST, as it would amount to consideration for tolerating an act. However,
if such person is supplier (in the ordinary course in respect of an arrangement with the registered person) of goods
and/or services, the amount payable on the account of delay in the delivery maybe treated as price adjustment and
in such case the supplier is required to issue credit note. In case, there is a dispute as to the entitlement of
compensation to be paid on account of termination of the contract unless, the dispute is settled by way of
acceptance of an arbitration award(s)/order(s) by both the parties, the amount payable as compensation will not
enter into the realm of consideration till the dispute attains finality.

241 under Section 2(31) of the CGST Act

242 under Section 17(5)(d) of the CGST Act

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Co rruptio n: The Infrastruc ture Secto r

The global context

The World Economic Forum’s Global Competitiveness Report 2014–2015 rates corruption as the number-one
impediment to conducting business in 24 out of 144 economies. Although bribery and other forms of corruption are
risks in almost every industry sector, companies operating in the engineering, construction and real estate industries
face unique challenges due to the nature of their business.

As per a report by the World Economic Forum 243, key corruption risks in selected phases of an industry-specific capital
project include:

Project
Selection

Construction Planning

Bidding Design

Based on this framework, the report also lists examples of identified corruption risks which include:

▪ The involvement of government in approving contracts and orders and in issuing multiple clearances creates

a risk of bribery to obtain contracts and orders or to expedite clearances.

▪ Infrastructure and urban development is a monopolistic sector by nature, giving rise to the risk that bidders
will unlawfully collude to rig bidding to favor one bidder or to exchange or fix bid prices in advance of tendering.

▪ The mammoth size of projects and of the subsequent contracts can create incentives for corruption and

provide ample means of hiding corrupt acts. A cascading increase in the number of contractual links provides
opportunities to bribe or collude.

▪ During the construction stage, contractors tend to hire varied groups of workers and acquire equipment so

as to effectively meet the job requirements, and due to a lack of transparency in these processes, bills and

invoices can be manipulated and exaggerated claims and false documentation can be submitted.

The Indi a context

According to a 2016 report by the World Economic Forum on corruption in the country, it has been estimated that
Indian firms on an average pay 50% of the total project cost, as a bribe. World Economic Forum focused on real estate
and infrastructure sectors which are perceived to be amongst the most affected by bribery around the world.

243 https://es.weforum.org/reports/building-foundations-against-corruption-recommendations-on-anti-corruption-in-the-infrastructure-urban-

development-industries

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PPP projects in India's roads and power sectors are most prone to corruption, with private partners' evasion of revenue-
share due to the government emerging as the biggest menace according to a survey by the United Nations 244.

The Indian Government, however, has been making sustained efforts to reduce corruption, which is evident from the
fact that on World Bank’s ease of doing business Index, India has jumped 53 notches in 2 years (2018 and 2019). The
biggest gain was in construction permit where India climbed 129 ranks to 52nd place. While in World Bank’s Ease of
Doing Business Report 2020, India’s rank remains at 77, it is among top 20 most improved countries. Further, in
Transparency International’s Corruption Perception Index, 2018, India’s score has improved by 1 notch and ranking has
gone up to 78 from 81 in 2017.

In light of the above, it is important to understand the legal framework on anti-corruption in India and its impact on
infrastructure sector.

The Prevention of Corruption Act, 1988 (PCA) is the principal law245 which criminalizes corruption in India. Further, on
26th July 2018, the Prevention of Corruption (Amendment) Act, 1988 (Amendment Act)246 has been passed, which seeks
to bring the Indian anti-corruption framework in conformity with United Nations Convention Against Corruption
(UNCAC), which was ratified by India in 2011. A brief snapshot of the coverage of the PCA is set out below:

Under the existing law (PCA) As per the Amendment under Amendment Act

Bribe taker who is a public servant247 (as Bribe taker who is a public servant (as defined under PCA)
defined under PCA)
Bribe giver (only where he abets taking of Giving a bribe by any person to a public servant for improper
bribe by the public servant) performance of public duty or to improperly perform a public duty,
has specifically been made an offence. This also covers giving bribe
to a third person (intermediary) for inducing/rewarding a public
servant for such purpose
Facilitator/inducer – a person who induces Facilitator/inducer - a person who induces a public servant by
a public servant by corrupt/illegal corrupt/illegal means/by personal influence
means/by personal influence
Commercial organization - where any person associated with such
organization gives bribe to a public servant with an intention to
obtain or retain business, or, to obtain or retain an advantage in
conduct of business, for such commercial organization
Director, manager, secretary or other officers of commercial
organization would be liable where offence is committed with his
consent/connivance

244
https://economictimes.indiatimes.com/news/economy/infrastructure/ppp-infrastructure-and-power-projects-most-prone-to-corruption-un-
body/articleshow/20401667.cms?from=mdr
245
Other applicable laws include Indian Penal Code, 1860, Prevention of Money Laundering Act, 2002, Benami Transactions (Prohibition)
Amendment Act, 2016, Lokpal and Lokayuktas Act, 2013, Whistle Blowers Protection Act, 2011, Right to Information Act, 2005, Service Rules for
Government officials, Companies Act, 2013, Foreign Contribution Regulation Act, 2010, Income Tax Act, 1961, Customs Act, 1962
246 Provisions are yet to be notified.
247The Hon’ble Supreme Court, in Central Bureau of Investigation v. Ramesh Gelli has held that officers of private banks are also ‘public servants’
under the PCA. In light of the same, question arises as to whether employees of infrastructure companies that work on government projects would
be considered public servants. In an in-depth analysis carried out by ELP for a project management company, it was concluded that such employees
would not qualify as public servants under the PCA.

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 From the above, it is evident that under the Amendment Act, where any person associated with commercial
organization gives bribe to public servant with an intention to obtain or retain business, or, to obtain or retain an
advantage in conduct of business, for such commercial organization, it will be an offence committed by a commercial
organization.

The Amendment Act defines ‘commercial organization’ to include all incorporated bodies, partnerships or association
of persons, whether incorporated/formed in India, or, whether incorporated/formed outside India but carrying on
business or part of business in India. Having adequate procedures in place with prescribed guidelines shall be an
adequate defense for commercial organizations. The onus, therefore, is on the commercial organizations to set up
comprehensive anti-corruption compliance programs with requisite procedures which should be compliant with Central
Government guidelines (which are yet to be prescribed).
Considering that real estate and infrastructure sectors are considered to be highly affected by corruption, it is essential
that they have adequate procedures in place. Generally, compliance programs involve employing anti-corruption
compliance and ethics code, training of employees, conducting third party audits, whistle-blower mechanism,
monitoring mechanism etc. In this regard, reference may be made to the UK Bribery Act, 2010. The UK Government has
issued guidelines based on the following six principles:

Monitoring
and review
Communication
and training
Due
diligence
Risk
Top level
assessment
commitment
Principles of
proportionate
procedures

Practical concerns
Apart from giving or offering bribes, providing gifts/other benefits and speed money (gratification for doing routine
governmental action) will also be an offence under the PCA. Therefore, certain acts which may seem justifiable (as set
out below) are also an offence under the PCA:

▪ Providing entertainment to retain business

− Examples include paying for extravagant meals during meeting with Govt. official, paying for ‘side trip’ so that
officials can visit tourist attractions

▪ Giving gifts to win and retain business

− Examples include providing excessive gifts on festivals, weddings etc. to a Govt. official

▪ Giving donations to political parties to develop/retain business

▪ Speed money

− Examples include paying a Govt. official to bypass inspection/overlook incorrect/incomplete paperwork, paying
local fire department regulator to overlook code violations

The infrastructure and real estate sector are highly vulnerable to receiving requests for gifts/favors from Government
servants, owing to their nature of business, which requires taking several permissions from Government Servants.

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In light of the above, it is essential that stakeholders in the infrastructure sector operating in India are well-aware of the
anti-corruption laws in the country. The penal consequences for committing an offence under the PCA are as under:

Commercial organization Director, manager, secretary or Employees

other officer of the commercial
organization

Fine ▪ Imprisonment between 3 to 7 years ▪ Imprisonment between 3 to 7 years

▪ Fine ▪ Fine

Bribery of Foreign Public Officials

While there is no express provision or law in India that applies to bribery of foreign public officials, such provisions do
exist under the Foreign Corrupt Practices Act, 1977 (FCPA), the UK Bribery Act or other anti-bribery laws of other
countries. Therefore, various multi-national companies, operating in India are at risk of facing proceedings by the
relevant authorities under laws of their country, for bribing public servants in India.

This interplay is explained in a snapshot below:

In light of the above, it is becoming highly crucial for commercial organizations to have stringent anti-corruption policies
in place and to ensure its continuous adherence, through routine checks.

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Case Study
The Enforcement Directorate initiated investigations against London-based Rolls Royce Plc (Rolls Royce) in respect of
allegations of corruption in India. This investigation was initiated on the basis of a First Information Report filed by
the Central Bureau of Investigation against Rolls Royce on July 29, 2019. The probe was made pursuant to the
preliminary inquiry against Rolls Royce upon the direction of the GOI, Ministry of Defence in 2014.

The FIR was lodged against Rolls Royce, Rolls Royce India Private Limited (Rolls Royce India), Mr Ashok Patni, Director
of Aashmore Private Limited (Aashmore), Turbotech Energy Services International Private Limited (Turbotech),
unknown officials of Hindustan Aeronautics Limited (HAL), Oil & Natural Gas Corporation (ONGC), Gas Authority of
India Limited (GAIL) and others. The offences registered under the FIR were criminal conspiracy, public servant taking
gratification other than legal remuneration in respect of an official act, taking gratification by corrupt or illegal means
to influence public servant, criminal misconduct by a public servant. The investigation covered the following aspects
of dealings of Rolls Royce in India:

▪ Dealings with HAL

An Energy Maintenance, Repair and Overhaul Center (EMROC) Agreement was executed between Rolls Royce
Power Engineering Plc and HAL in June 2007 valid up to December 31, 2011. Vide the said agreement HAL
provided maintenance, repair and overhaul services for the units owned by the GAIL and ONGC under above
license from Rolls Royce. In order to perform these services, HAL had to purchase spare parts and engineering
services from Rolls Royce. HAL issued Purchase Orders to Rolls Royce to procure spare parts,
component/module or their items. The Purchase Order condition specifically mentioned that Rolls Royce is not
supposed to appoint any agent in India to promote this contract and no commission is payable to such agent. It
has been alleged that Rolls Royce appointed Mr Ashok Patni, as a commercial advisor in India for providing sales,
logistic support, local business expertise and strategic advice in violation of terms and condition of the purchase
orders (POs) and Integrity Pact with HAL. In case of supply parts, Rolls Royce paid commission to the Ashok Patni
@ 10 to 11.3% of the value of the POs which were not declared earlier at the time of execution of the contract
and paid commissions to Aashmore to the tune of INR 18.87 crores in 100 Purchase orders placed by HAL during
the period from 2007 to 2011. It was only in December 2013, Rolls Royce declared to HAL, the name of Ashok
Patni and Aashmore as commercial advisor of Rolls Royce with regard to its transactions with HAL for the period
2007-2011. It has been alleged that there is likelihood that Rolls Royce may have been engaging Aashmore on
payment of commission in other Purchase Orders and part of this commission paid by may have been paid as
kickback to unknown officials of HAL involved in the procurement process as the total business of HAL with Rolls
Royce in recent years is in excess of INR 4700 crores.

▪ Dealings with ONGC

It was alleged that Rolls Royce appointed Mr Ashok Patni as a Commercial Advisor in India in respect of supply
of spare parts to ONGC during the year 2007 to 2011 by violating the provisions of Integrity Pact. Rolls Royce
paid commissions to Aashmore in 38 transactions of supply of material/spare parts to ONGC during the period
from 2007 to 2011. The value of this commission was declared in December 2013, which was at the rate of 10-
11.3% of the value of order. It has been alleged that payment of above commission was not made by Rolls Royce
at the time of bid/tender deliberately in order to conceal the illegal payments made to Aashmore in
contravention of the provisions of the Government guidelines/request for quotation/integrity pact. Rolls Royce
did not declare the name of any agent at the time of bid/tender and did not declare details of transgression in
the Integrity Pact. It was only in December 2013 Rolls Royce declared to ONGC the name of Ashok Patni and his
company Aashmore as a commercial advisor of Rolls Royce with regard to its transactions with ONGC for the
period 2007-2011. As per the FIR, it has also been found during the enquiry that Aashmore along with Turbotech

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 made payments of Rs. 10 lakhs as donation to a cooperative society of ONGG namely ONGC Officers Mahila
Samiti which was unethically accepted by the aforesaid society.

▪ Dealings with GAIL

It was also alleged that Rolls Royce appointed Mr Ashok Patni as a commercial advisor in India in respect of
supply of spare parts to GAIL during the period 2007 to 2011 by violating the provisions of Integrity Pact. Rolls
Royce paid commissions to Aashmore in 68 Purchase Orders of supply of material/spare parts to GAIL during
the period from 2007 Io 2011. The value of this commission was declared in December 2013, which was at the
rate of 11.13% of the value of order. As per the FIR, the declaration of appointment of Ashok Patni and Aashmore
as commercial advisor and payment of above commission was not made by Rolls Royce at the time of the bid/
tender deliberately in order to conceal the illegal payments made to Aashmore.

It is further alleged that during the 2008-2009 Rolls Royce engaged Turbotech in Vijaypur, Dadri, Bawana
Pipeline Project and declared 2% commission on the bid. Further, during 2008-09 Rolls Royce also engaged the
services of another company M/s. Infinity owned by Ashok Patni in the said pipeline project by violating the
conditions of the Integrity Pact with GAIL and made 2% of extra payment to M/s. Infinity for project
management services in connection with the above project.

As per the findings of the inquiry in relation to the matter, there was conspiracy by Rolls Royce and its subsidiary Rolls
Royce India to misrepresent facts before HAL, GAIL and ONGC regarding the engagement of an agent/commercial
advisor in order to win contracts with HAL, GAIL and ONGC, respectively in contravention of the terms and conditions
of the bids/tenders/purchase orders issued by the aforesaid companies. It has also been observed that the facts of
the matter prima facie establish that the officers of ONGC and GAIL were negligent towards protection of interest of
their respective companies. Further, as per the FIR, there is a likelihood that the payment made by Rolls Royce to
Ashok Patni and the entities associated with him, as commissions, may have been paid as kickback to unknown
officials involved in the procurement process.

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Data Privac y - A irpo rts
In today’s day and age, data is ubiquitous. Personal data is collected at airports by the Government agencies as well as
the airport operators.
Nature of Personal Data Collected at Airports
▪ The airport operator often collects personal data
of the passengers and staff for providing security. The
data collected includes camera images captured within
the airport premises.
▪ In some situations, where airports are tasked
with conducting preventive security checks, third
parties are involved in collecting data.
▪ In airports where long term parking spaces are
provided, personal data is collected for provision of
these services. The operator could collect personal data in nature of name, address, arrival date/arrival time,
departure date/departure time, email address, flight numbers, vehicle registration number, payment details such
as a credit card number etc.
▪ Some airports run loyalty programs and may collect personal data to provide benefits under the programs.

▪ Certain airports websites use cookies and tracking pixels (web beacons).

Facial Recognition
In 2018, Delta was the first to introduce a biometric terminal at the Hartsfield-Jackson Atlanta International Airport
where passengers could use facial recognition technology to reach the gate. This technology is now available at many
other airports. Other airlines use biometric data to verify travelers during the boarding process with a photo-capture.
The photograph is then matched through biometric facial recognition technology to photos that were previously taken
of the passengers for their passports, visas, or other government documentation. In the process, airlines are collecting
a vast amount of valuable person data.

Data Protection: The India perspective

In India, there is no specific data privacy law in existence. The right to privacy has been recognized as a facet to the right
to life under Article 21 of the Constitution. However, unlike in other countries there is no specific legislation dealing with
data privacy. The existing legislations and policies are essentially sectoral in nature 248. With the intent to formulate a
comprehensive data protection legislature, the expert committee set-up under the chairmanship of Justice Srikrishna
for formulation of data protection regime in India released in the year 2018 the Personal Data Protection Bill, 2018. After
public consultations and taking on board the views of the stakeholders, the Government introduced before the Lok
Sabha, on December 11, 2019, the Personal Data Protection Bill, 2019 (the Proposed Bill). 2019 Bill has now been
referred to the joint parliamentary committee and is expected to be tabled before the Parliament in the next session.
The Proposed Bill aims at regulating the processing of personal data as a recognition of an individual’s right to privacy.
The essence of what is considered as personal data entitled to protection under the Proposed Bill is data relating to
individuals, which can lead to identification of such individual.

Where personal data is collected, processed or stored electronically, the provisions of the Information Technology Act,
2000 (the IT Act) and the Information Technology (Reasonable security practices and procedures and sensitive personal

248E.g. Indian Telegraph Act, 1885 and National Long Distance Licence, Unified Access Service Licence and the Cellular Mobile Telephone Service
Licence for Telecom Industry, Credit Information Companies (Regulation) Act, 2005, Credit Information Companies Regulations, 2006 and The Public
Financial Institutions (Obligation As To Fidelity And Secrecy) Act, 1983 for Banking Sector, Mental Health Act, 1987 and he Digital Information
Security in Healthcare Act for Healthcare Sector etc.

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data or information) Rules, 2011 (the IT Rules) would need to be referred to. Most data collected at airports is in
electronic form and hence would fall within the purview of IT Act and the IT Rules.
The IT Rules require that any person who on behalf of body corporate collects, receives, possesses, stores, deals with or
otherwise handles information, shall provide a privacy policy setting out the manner of handling of or dealing in personal
information including sensitive personal data or information and ensure that the same are readily available for review
by individuals. The privacy policy is required to be published on the website of the operator. Individuals are entitled to
review the information provided, to enable them to correct or amend erroneous or deficient data.
Consent is required for the collection, storage, and disclosure of sensitive personal data, e.g. financial information,
medical history biometric information etc. Where operators share passenger data which is sensitive personal data with
third party service providers, specific consent from the passengers for the onward sharing of data is required.

The IT Rules require safeguards in case of transfer or transmission of the information as well as adoption and
implementation of policies with respect to security practices and procedures by the collection agency. The collectors of
personal information are also required to establish a mechanism for redressal of grievances in compliance with the
provisions of the IT Rules.

Proposed Bill

The Proposed Bill envisages stricter controls over the

collection, dissemination, and processing of personal
data. Under the Proposed Bill, the processing of
personal data is possible only on the following grounds:

(i) On the basis of consent:

▪ Given prior to the commencement of processing
▪ Which is free, informed, specific, given through
affirmative action (not implied), and being capable of
withdrawal with the same ease with which it was
granted
▪ Where provision of goods or services, their
quality, enjoyment of legal rights etc. are not
conditional upon such consent being provided if not
necessary for that purpose
(ii) If necessary, for the function of the State
(iii) If necessary, under any Indian law or required for compliance of an order of the court or tribunal in India
(iv) If necessary, for prompt action in case of medical emergency or during epidemic or disaster or public disorder
(v) For the purpose of employment
(vi) For reasonable purposes as notified by the data protection authority

Also, the Proposed Bill envisages the following rights being granted to the data providers:

(i) Right to obtain a confirmation that personal data is being processed, a brief summary of personal data
processed, and the processing activities undertaken
(ii) Right to correct incorrect data, complete incomplete data and update data that is outdated
(iii) Right to transfer personal data collected to a third party
(iv) Right to restrict or prevent continuing disclosure of personal data where the purpose is served, or where
consent has been withdrawn in relation to personal data processed on the basis of consent or, any disclosure
was made illegally, provided such right is approved by the adjudicating officer.

Also, substantial penalties have been prescribed under the Proposed Bill. The penalties have been imposed with
cascading effect depending upon the nature of contravention. The maximum penalty can extend up to INR 15 crore
rupees or 4% of the total worldwide turnover of the preceding financial year of the defaulter, whichever is higher.

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Additionally, the data provider who has suffered harm as a result of any violation of any provision of the data protection
law would have the right to seek compensation for the loss suffered.

For certain contraventions which result in significant harm to a passenger, the Proposed Bill also prescribes
imprisonment which may extend up to the maximum term of 5 years.

Given the stringent penalties and strict compliance requirements prescribed under the Proposed Bill, the operators need
to be compliant while collecting, processing, transferring personal data. If a request is made for deletion of personal
data, the operator would need to comply with such request. The operators also need to have processes in place to delete
the personal data once the purpose for which it was collected has been served. With facial recognition being used
rampantly, the threat of data breach and the consequences thereof are all the more real. Each operator needs to have
sufficient security measures in place for preventing data breaches.

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Employment issues that arise in Infrastruc ture Projec ts:
Guest Column by Ayesha Damania - A dvo cate
Infrastructure development is directly linked to generation of employment because the creation of infrastructure in the
form of roads, railways, airports, ports and power generation is labor intensive. This is especially so in a developing
country like India. By providing employment to thousands of workers working on infrastructure projects, these projects
could kick start development even before they are operational.

This, however, presupposes that the workers engaged for

construction activity, and thereafter for operational
activities, are treated fairly and are not exploited. The
labor force must move from the un-organized sector into
the organized sector249 and avail of all benefits available
under the myriad labor laws applicable under both
central and state legislation. Whether this shift from the
un-organized to the organized sector occurs will depend
on the type of Concession Agreement. Where the
Concessionaire takes over an existing facility, modernizes
the same and operates it for a fixed period of time before
handing it back to the government, (OMDA model) there
would be little or no shift of workers from the
unorganized to the organized sector. The issues that would arise in such a scenario would be:

▪ Whether the transfer of the undertaking requires the prior consent of the workmen
▪ Whether a reduction in work force can be effected
▪ Whether the Concessionaire can change the terms and conditions of service of the inherited workers so as to
increase productivity

On the other hand, where the Concessionaire sets up a new infrastructure project and operates it for the concession
period and then hands it over to the Government, (BOT and BOOT models) there would be a shift of workers from the
unorganized to the organized sector. The issues that would arise in such a scenario would be:

▪ Determining responsibility for compliance with employment laws relating to payment of minimum wage and
other statutory benefits and the consequences of non-compliance;
▪ Determining responsibility for safety and security of workers;
▪ Concept of “Occupier” which attaches vicarious liability to Directors of a company
▪ Contractor’s liabilities and those of the Principal Employer
▪ Statutory compliances under Central and State Employment laws
▪ Procedure for termination of employees
▪ International Workers and Social Security payments

This chapter seeks to address the issues mentioned herein above and highlight key statutory provisions and judicial
decisions that prospective investors in infrastructure projects in India need to bear in mind.

Operation, Management and Development Agreements (OMDAs) are usually entered into for operation of Airports,
ports or other infrastructure projects already in operation. This section addresses the principal areas of concern, from
an employment law perspective, in the OMDA model of PPP agreements.

249As per a survey carried out by the National Sample Survey Organisation (NSSO) in 2009–10, the total employment in the country was of 465
million comprising around 28 million in the organised and the remaining 437 million workers in the unorganised sector. Out of these workers in the
unorganised sector, there are 246 million workers employed in agricultural sector, about 44 million in construction work and remaining in
manufacturing and service.

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T h e O M DA m o d e l o f C o n c e s s i o n a i r e A g r e e m e n t s

Consent of employees
The Supreme Court of India in the Mettur Beardsell 250 case was called upon to decide the question as to whether an
employee's consent is a must under Section 25FF of the Industrial Disputes Act, 1947 (IDA). The Industrial Relations
Code, 2020 (IR Code) incorporates verbatim, in Section 73, the provisions of Section 25FF of the IDA. Section 25FF, inter
alia, which sets out when the compensation would be payable to employees on transfer of undertakings. The Supreme
Court held that the common law rule that an employee cannot be transferred without his consent, applies in master-
servant relationships and not to statutory transfers. The Court held that there is nothing in the wording of Section 25FF
even remotely to suggest that consent is a pre-requisite for transfer and that the underlying purpose of Section 25FF is
to establish a continuity of service and to secure benefits otherwise not available to a workman if a break in service to
another employer was accepted.

However, in a more recent case where Phillips India sold one of its factories to another Company, the Supreme Court 251
held that even if all service terms and conditions are protected on transfer of an undertaking, it was settled law that
without consent workmen cannot be forced to work under a different management. The Court held that employees
who did not consent to the transfer were entitled to receive, from Phillips India, all the benefits and dues payable to
them on a retrenchment. A conjoint reading of these two decisions would suggest that whilst employee consent is not
required to transfer an undertaking, employee consent is required prior to transferring the services of the employee to
the new employer and employees who do not consent to the transfer are required to be retrenched after payment of
all statutory benefits. Since the IR Code which is likely to come into force from 1 st April 2021, makes no change in these
provisions of the IDA, the decisions of the Supreme Court will continue to be applicable.

Reduction and improved productivity of the workforce

The size of the workforce the concessionaire would be required to take over, their skill set and productivity are a major
issue in the OMDA model. Typically, there will be overstaffing and poor to average skill set and productivity. The
concessionaire should, therefore, ideally negotiate down the percentage of existing work force it will be required to take
over and try and negotiate for itself a right to choose which workers it inherits. For both the Delhi and Mumbai
International Airports, the OMDAs required the Concessionaire to take over a minimum of 60% of the General
Employees. These OMDAs also provided for a transition period of 3 years where the employees remained employees
of the Airport Authority of India (AAI) and the Concessionaire was required to pay an Operation Support Cost to AAI for
the Operational Support provided by these employees.
At the end of the Operational Support Period the
Concessionaire was required to offer employment to a
minimum of 60% of the General Employees at which
point the employees who accept employment with the
Concessionaire were required to resign as employees
of AAI and take up employment with the
concessionaire on mutually agreed terms which were
not less favorable than those they enjoyed as
employees of AAI. The Concessionaire was given the
liberty of choosing its own senior management team on
The above image has been sourced from the Times of India’s
website terms its deemed fit.

There may be instances when the Concessionaire is not given the aforesaid liberties to determine how many and which
employees it will take over. A concessionaire taking over an undertaking as a going concern, is required to provide

250 Management, Mettur Beardsell Ltd vs Workmen Of Mettur Beardsell Ltd.

251 Sunil Kr. Ghosh v. K. Ram Chandran

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continuity of service to all workmen 252 and ensure that their service conditions are no less favorable than what they
enjoyed prior to the transfer of the undertaking253.

Liability of concessionaire for past statutory dues of employees

When an undertaking is transferred to a concessionaire, the concessionaire is held responsible for any unpaid statutory
dues of the employees despite the concession agreement providing that the liability will continue to be that of the
transferor. The Supreme Court of India has held the successor employer liable to pay damages for any default in remitting
provident fund contributions. Though the default was committed by the transferor entity prior to the date of transfer of
employees, the Supreme Court has held the successor employer liable despite the agreement between the parties
providing that the liability would be exclusively that of the transferor.

Case Study
The McLeod Russel acquired a Tea Estate which had defaulted in remitting the contributions and accumulations
payable under the Employees’ Provident Fund Act, 1952 (EPF Act). At the time of acquisition, the proceedings to
recover dues and impose damages were ongoing. Parties had entered into an agreement which provided that any
damages payable on account of failure to deposit dues under the EPF Act, would be solely that of the Transferor
Company. The RPFC254 however sought to recover Penal interest from McLeod Russel. This action was challenged, and
the matter was taken up to the Supreme Court. The question before the Supreme Court 255 was whether the Transferee
Company would be liable to pay damages for default committed by the Transferor Company. The Supreme Court held
that the agreement between the parties would not protect McLeod Russel from the liability to pay damages imposed
under the EPF Act.

Reduction of workforce
If the concessionaire is required to take over a work force larger than its requirement, the primary question that will
need to be answered will be how to reduce the work force. In India, the existing labor legislation that addresses this
issue is the IDA. The IDA prohibits employers from downsizing the workforce as a result of rationalization, standardization
or improvement of plant or technique, unless a Notice of Change 256 has been issued to the affected workers and their
Trade Unions at least 21 days before any such restructuring and the resultant downsizing. The Notice of Change enables
the workers and unions to set in motion the machinery under the IDA for a negotiated settlement or an industrial
adjudication. Until either a settlement with the unions or an Award from an Industrial Tribunal is obtained, the proposed
change cannot be effected. The time taken for an Award to be published, if settlement fails, could stretch from 3 to 5
years. The Concessionaire could also face industrial action in the form of strikes, go-slows and other disruptive work
practices which could further bring down productivity. There is no change to these requirements for giving a Notice of
Change under the IR Code.

The IDA also requires certain employers to seek permission from the Appropriate Government prior to effecting
retrenchment or closure. The IDA Rules also specify the procedure that needs to be followed whilst effecting
retrenchment and the norm that is required to be followed is that of “last come first go”257. If this rule is not followed
the retrenchment would be held to be illegal and the employer could be required to reinstate all the retrenched
workmen with full back wages. Whilst under the IDA industrial establishments employing more than 100 workers were
required to seek prior government permission before layoffs, retrenchment or closure, the IR Code requires only those

252
Workman” has been defined under Section 2(s) of the Industrial Disputes Act to mean any person employed in any industry to do manual,
unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward. It however, excludes any such person who is employed
mainly in a managerial or administrative capacity or employed in a supervisory capacity drawing wages exceeding Rs. 10,000 p.m.
253 Section 25FF of the Industrial Disputes Act, 1947
254 Regional Provident Fund Commissioner
255 McLeod Russel India Limited vs. Regional Provident Fund Commissioner, Jalpaiguri and others, 2014(8)SCALE272
256 Section 9A of the Industrial Disputes Act, 1947
257 Section 25G of the IDA read with rule 81 of the Bombay Rules

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industrial establishments employing more than to 300 workers to seek prior permission. Once the IR Code becomes
applicable, it will be easier for smaller establishments to downsize or close down.

Case Study
Mackinnon Mackenzie Ltd. was engaged in shipping business which was divided into 4 divisions. It closed down two
divisions and retained two. The retrenchment notices issued to the workers who were retrenched was challenged by
the Union on the grounds that the Company had (i) not sought prior permission from the appropriate government
and (ii) not put up a seniority list of all its employees and that it had retained some of the junior workers whilst
retrenching some senior employees and thus violated the “last come first go” rule.

The Supreme Court258, after 23 years of litigation, decided the matter in favour of the workmen and held all the
retrenchments to be illegal and ordered that the workmen be reinstated in service with full back wages.

Measures to increase productivity

Measures to increase productivity, or any attempt to change any condition of service, may also fall within purview of the
Fourth Schedule259 of the IDA and will require a Notice of Change to be issued before implementation.

Case Study
A Joint Venture Company (JVC) between the Government of India and the Republic of Nauru is set up. The Republic
of Nauru disinvested its entire equity stake to the Government of India (GOI) making the JVC a Public Sector
Undertaking. GOI decided to increase the retirement age for all Central Public Sector Employees from 58 years to 60
years. The JVC implemented the same in 1998. GOI thereafter decided to retract its decision and changed the
retirement age back from 60 years to 58 years in 2001. The JVC however, did not implement this decision. In 2002 the
GOI divested the 74% of its shareholding in JVC. The JVC then withdrew the earlier order enhancing retirement age
from 60 to 58 years and restored the retirement age to 58 years.
The Trade Union raised a dispute in the Industrial Tribunal on the grounds of violation of Article 9A of the IDA which
requires 21 days’ prior notice to be given before any privilege is withdrawn. The Industrial Tribunal held in favor of
the employees by invalidating the roll back on the ground that the required notice under Article 9A of the IDA was
not given. The Appeal in the High Court was rejected, and the JVC challenged the decision before the Supreme Court
of India. JVC contended that the Standing Order and appointment letters continued to show the retirement age at 58
years and the age was increased to 60 years only as a temporary measure.
The Supreme Court260 whilst rejecting the appeal observed as follows:
“To sum up, we are of the view that at the very moment when the order of enhancement of superannuation
of the employees came into force though temporary in nature, it would amount to privilege to employees
since it is a special right granted to them. Hence, any unilateral withdrawal of such privilege amounts to
contravention of Section 9A of the Act and such act of the employer is bad in the eyes of law.”

258 Mackinnon Mackenzie Ltd. v. Mackinnon Employees Union Supreme court 25th February 2015 AIR 2015 (SC) 1373
259 CONDITIONS OF SERVICE FOR CHANGE OF WHICH NOTICE IS TO BE GIVEN
1. Wages, including the period and mode of payment ;
2. Contribution paid, or payable, by the employer to any provident fund or for the benefit of the workmen under any law for the time being
in force ;
3. Compensatory and other allowances ;
4. Hours of work and rest intervals;
5. Leave with wages and holidays ;
6. Starting alteration or discontinuance of shift working otherwise than in accordance with standing orders;
7. Classification by grades ;
8. Withdrawal of any customary concession or privilege or change in usage;
9. Introduction of new rules of discipline, or alteration of existing rules except insofar as they are provided in standing orders;
10. Rationalisation , standardization or improvement of plant or technique which is likely to lead to retrenchment of workmen;
11. Any increase or reduction (other than casual ) in the number of persons employed or to be employed in any occupation or process or
department of shift [ not occasioned by circumstances over which the employer has no control]
260 Paradeep Phosphates Ltd. v. State of Orissa & Ors. SCC (2018) 195

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Employment issues on termination of the concession period
Whilst OMDA agreements in respect of Delhi and Mumbai International Airports have elaborate provisions for transfer
of employees from the Airport Authority of India to the Concessionaire, they are silent in respect of the fate of employees
at the end of the concession period or in case of premature termination of the concession agreement. Concessionaires
must ensure that appointment letters issued to all employees contain clear provisions that the contract of employment
is for a fixed term and terminates with the termination of the concession. Otherwise the concessionaire would be
required to terminate employment by paying significant amounts of retrenchment compensation, after seeking
necessary permissions which may not be forthcoming.

T h e B OT a n d B O OT M o d e l s o f C o n c e s s i o n a i r e A g r e e m e n t s
In the Build Operate and Transfer (BOT) and Build Own Operate and Transfer (BOOT) models of Public private
partnerships (PPP) projects the Concessionaire is required to build infrastructure like roads, metro systems or ports,
operate them for the concession period, then hand over the project over to the Government or another concessionaire.
This section briefly summarizes the employment issues that would arise in BOT and BOOT projects.

Determining responsibility for compliance

The Contract Labour Act261 regulates the employment of contract labour. The Occupational Safety, Health and Working
Conditions Code (OSHW Code) will regulate contract workers once it becomes operational. Under the OSHW Code an
employer is prohibited from engaging contract workers for core activity which is defined as any activity for which the
establishment is set up and includes any activity which is essential or necessary to such activity. Unlike the Contract
Labour Act which is applicable to establishments and contractors employing 20 or more contract workers the OSHW
Code is applicable if 50 or more contract workers are employed. A Principal Employer is defined, in case of a factory, as
the owner or occupier of the factory or the person named as the manager of the factory. In establishments other than
factories, a Principal Employer, under the Contract Labour Act, would be any person responsible for the supervision and
control of the establishment.

Concepts of “factory” and “occupier”

The Supreme Court has held262 that construction of a railway line amounts to a “manufacturing process” and the area
over which the line was being laid was a “factory”. The Supreme Court referred to two earlier judgments regarding
power lines263 and distinguishing these suggested that the laying of power transmission lines would amount to a
“manufacturing process” even though the maintenance of those lines or the transmission of electricity in those lines
would not amount to “manufacturing process”. The Court held all the 54 kms. of land over which the railway line was
laid to be phase-wise factories for construction of railway lines over them. The Court held that the definition of
manufacturing process cannot be construed as requiring an end product which is a movable final product or a
commodity. These decisions were not considering the provisions of the Factories Act but those of the Employees State
Insurance Act which is applicable to all factories. However, since the definition of “manufacturing process” 264 as set out

261 Contract Labour (Regulation and Abolition) Act, 1970

262 Lal Mohammed v. India Railway Construction Co. (1998)
263Nagpur Electric Light and Power Company v. Regional Director of ESIC (1967) and Nagpur Electric Light and Power Company v. Regional Director of
ESIC (1967)
264 Section 2(k) “manufacturing process” means any process for—
(i) making, altering, repairing, ornamenting, finishing, packing, oiling, washing, cleaning, breaking up, demolishing, or otherwise treating or adapting
any article or substance with a view to its use, sale, transport, delivery or disposal,
(ii) pumping oil, water, sewage or any other substance; or]
(iii) generating, transforming or transmitting power; or
(iv) composing types for printing, printing by letter press, lithography, photogravure or other similar process or book binding; or
(v) constructing, reconstructing, repairing, refitting, finishing or breaking up ships or vessels; or
(vi) preserving or storing any article in cold storage;

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in the Factories Act has been adopted in the ESIC Act, these decisions will be applicable in determining what constitutes
a Factory under the Factories Act.

In light to the foregoing, all infrastructure projects where construction activity is being carried on could potentially be
considered to be a factory, not just for the purpose of coverage of its employees under various other statutes made
applicable to “factories” but also for the purposes of attaching liability on Occupiers as determined under the Factories
Act.

Section 2 (n) of the Factories Act, 1948 defines “occupier” in relation to factories. In case of a company, it mandates
that it must be one of the directors of the company notified as such. In case no Director is notified as an Occupier, all
directors will be deemed to be Occupiers. The Factories Act fixes liability on the Occupier for compliance of all provisions
of the Act. In the J. K. Industries case265 the Supreme court, upholding these amended provisions, has observed that the
legislature whilst amending the Act in 1987, (post the Bhopal Gas Leak at the Union Carbide factory) wanted to bring in
a sense of responsibility in the minds of those who have the ultimate control over the affairs of the factory so that they
take proper care for maintenance of the factories and the safety and security measures therein. The Court held that the
fear of penalty and punishment is bound to make the Board of Directors of the company more vigilant and responsive
to the need to carry out various obligations and duties under the Act, particularly in regard to safety and welfare of the
workers. The Court further held that for offences under the Factories Act, mens rea 266 or motive is not an ingredient.
The offences are strict statutory offences for which establishment of mens rea is not an essential ingredient. The
omission or commission of statutory breach is itself the offence. The Occupier is held vicariously liable along with the
manager and the actual offender. Even where the Occupier establishes that the actual offender is the person named by
him, he must still prove to the satisfaction of the court that he had used due diligence to enforce the execution of the
Act and that the said other person committed the offence in question without his knowledge, consent or connivance.
Penalties under the Factories Act include fines and imprisonment. A review of the labor laws and compliances therefore
becomes imperative for all companies in the infrastructure sector. On a practical level, companies nowadays use
specialized and bespoke software to keep abreast of regulations and compliances. The provisions of the Factories act
have been subsumed in the OSHW Code. There is no material change in the definition of Factory or Occupier nor in
respect of the liabilities of an Occupier.

Factory or building and construction site – The conundrum

The Building and Construction Workers Act 1996 (BOCW) would be applicable to most infrastructure projects in India 267
and aims to provide welfare measures to the construction workers. The definition of building and construction work
under the BOCW however, specifically excludes building and other construction work to which the provisions of the
Factories Act, 1948 apply. The BOCW along with the Cess Act268 provides for collection of cess at the rate of 1% of the
total cost of construction, which cess is paid into the Building and other Construction Workers’ Welfare Fund. The
monetary resources accumulated through this fund are used to secure social benefits for construction workers who are
protected within the realm of this Act. Concessionaires and statutory authorities would need to decide whether the
construction activities fall within the definition of “factory” as interpreted by the Supreme Court in the decisions
mentioned above, or whether they are covered under the BOCW Act. Whilst the former may permit exemption from

265
J. K. Industries Ltd. v. Chief Inspector of Fisheries and Boilers (1996) 6 SCC 665
266Mens Rea refers to criminal intent. The literal translation from Latin is "guilty mind." Establishing the mens rea of an offender is usually necessary
to prove guilt in a criminal trial. Justice Oliver Wendell Holmes, Jr. (The Common Law 2 (1888) explained the concept of mens rea when
he said “even a dog knows the difference between being stumbled over and being kicked.”
267
'building or other construction work includes 'the construction, alteration, repairs, maintenance or demolition- of or, in relation to, buildings,
streets, roads, railways, tramways, airfields, irrigation, drainage, embankment and navigation works, flood control works (including storm water
drainage works), generation, transmission and distribution of power, water works (including channels for distribution of water), oil and gas
installations, electric lines, wireless, radio; television, telephone, telegraph and overseas communication dams, canals, reservoirs, watercourses,
tunnels, bridges, viaducts, aquaducts, pipelines, towers, cooling towers, transmission towers and such other work as may be specified in this behalf
by the appropriate Government, by notification but does not include any building or other construction work to which the provisions of the Factories
Act, 1948 (63 of 1948), or the Mines Act, 1952 (35 of 1952), apply.'
268 The Building and Other Construction Workers Welfare Cess Act, 1996

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the payment of 1% cess, the liabilities of directors is strict and vicarious, and all workers would be entitled to statutory
benefits payable to factory workers.

Case Study
The Supreme Court in the case of Lanco Anpara Power Ltd. V. State of Uttar Pradesh & Others 269 was required to
consider whether the appellants were covered under the Factories Act or the BOCW Act. The appellant proposed to
set up a 2X600 Megawatt capacity coal-based thermal power project pursuant to being selected by a tariff-based
competitive bidding initiated by the Uttar Pradesh Power Corporation Ltd. The appellant was granted registration and
licence under the Factories Act to construct its plant. A letter was also received from the District Collector, calling
upon the appellant to get itself/its contractors registered under the provisions of the BOCW Act and the BOCW Rules.
Some more notices were issued with regard to the construction activities in respect of the construction of the
township in Anpara, undertaken by the appellant. Insofar as the township is concerned, the appellant got itself
registered through its principal contractors under Welfare Cess Act and started paying the cess. However, in respect
of construction activity at the factory premises, the appellant reiterated its stand that by virtue of Section 2(1)(d) of
the BOCW Act, it was excluded from the coverage thereof. The contention of the appellant was rejected by the
respondents which led to the writ petition being filed. The Supreme Court held that the building was being
constructed for carrying out the particular manufacturing process, which was generation, transmission and
distribution of power. The Court held that the workers who were engaged in construction of the building did not fall
within the definition of 'worker' under the Factories Act as they were not engaged in a manufacturing process. On
this aspect both parties were at ad idem. The Court therefore found that these construction workers were not covered
by the provisions of the Factories Act and were entitled to the welfare measures under the BOCW Act and the Cess
Act.

The earlier decision of the Supreme Court in the case of Lal Mohammad (supra) has not been considered by the Court
in the Lanco case. In Lanco the court proceeds on the basis that the construction workers were not engaged in any
manufacturing process. Therefore, concessionaires must weigh carefully whether they should contend that their project
sites are “factory” and they are exempt from the provisions of the BOCW and Cess Acts or pay the cess and contend that
they are not “factory”.

Liability of Directors for non-compliance under Acts other than the Factories Act
In order to fasten personal liability onto Directors for the non – payment of statutory dues such as Provident Fund or
Employee State Insurance Contributions, and for non-payment of Minimum Wages or Bonus, once it is shown that the
director was in charge of and responsible for the conduct of the business of the Company, the director would be held to
be personally responsible.

Case Study
The Supreme Court quashed criminal proceedings against the MD of Asian Hotels Ltd. 270 which runs Hyatt Regency
Hotel, in a criminal negligence case in which a man had fallen from the sixth floor of the hotel and suffered serious
injuries. The Supreme Court relied on the Sunil Bharti Mittal Case 271 wherein the Supreme Court had observed that
“when a company is the offender, vicarious liability of the Directors cannot be imputed automatically, in the absence
of any statutory provision to this effect.”

Accordingly, the Supreme Court held that there was no reason or justification to proceed against the MD only on the
ground that he was the Managing Director of Asian Hotels, which ran the Hotel.

However, the Supreme Court clarified that Directors would be held liable where the statutory regime itself attracts
the doctrine of vicariously liability i.e. where a statute specifies that every person who at the time of commission of

269 2016 SCC Online SC1153

270 Shiv Kumar Jatia v. State of NCT of Delhi
271 Sunil Bharti Mittal vs. Central Bureau of Investigation, AIR 2015 SC 923

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 the offence was responsible to the company for the conduct of the business of the company, would along with the
company, be deemed to be guilty of the offence272.

Statutory Benefits, rights and conditions of service

Central Labor legislations such as the IDA, the Factories Act, 1948, the Code on Wages, 2019, 273 and the state-specific
Shops and Establishment Acts, set out the statutory minimal obligations of the concessionaire towards employees with
respect to working hours, minimum wages, bonus, termination, entitlements, health and safety standards,
compensation in case of injury etc. In India, there is a separate minimum wage rate dictated by the Central Government
and State Government. A concessionaire must note that under the Code on Wages, the Appropriate Government274 will
have the jurisdiction to determine the minimum wage rate for construction workers. Every state in India has a different
minimum wage. This is largely because of socio-economic factors and variance in the cost of living. Presently,
Maharashtra and Gujarat are among those States with the highest minimum wage rate for construction workers, while
Jharkhand and Bihar have the lowest.

Contractors’ liabilities
In order to avoid hiring employees directly and consequently mitigate the employer’s liability, concessionaires often hire
large manpower on a temporary basis, engaged typically through an intermediary or contractor. Such a scenario entails
the applicability of the Contract Labour (Regulation and Abolition) Act, 1970 upon the concessionaire and the contractor.
The OSHW Code once operational, will replace the Contract Labour Act. IT will be applicable if 50 or more contract
workers are engaged and allows contract labour to be engaged for all activities except core activities of the
establishment. Even for core activities, contract labour can eb engaged in certain situations. The definition of contractor
includes sub-contractors. A contractor is responsible, at the first instance, for payment of wages and other statutory
benefits to each worker employed by him as contract labor. In case the contractor fails to make these payments within
the prescribed period, or makes short payment, the principal employer is liable to make these payments and recover
the amounts so paid from the Contractor. Should a sub-contractor fail to discharge his obligations, both the contractor
and the principal employer will be held liable under the Act.

In order to protect the interest of the Concessionaire, firstly, the concessionaire should ensure that the contractor/sub-
contractor is fully compliant under all applicable labor laws. The Contractor or sub-contractor must have a registration
number under the Provident Fund Act and the Employees State Insurance Act. The Concessionaire must have
procedures in place which ensure that all statutory dues are in fact deducted and paid by the contractors/sub-contractors
to the statutory authorities. Secondly, there should be a watertight indemnity clause protecting the concessionaire.

One major change that will come into effect once the Code on Wages is notified, is that Contractors who are paying their
workers all statutory benefits and who are registered under the statutes mentioned above, will be treated as

272 For instance section 14A of the Employees Provident Funds Act, 1952 which reads as follows:
14A. Offences by companies
(1) If the person committing offence under this Act, the Scheme , the [Pension] Scheme or the Insurance Scheme] is a company, every person, who
at the time the offence was committed was in charge of, and was responsible to, the company for the conduct of the business of the company, as
well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:
PROVIDED that nothing contained in this sub-section shall render any such person liable to any punishment, if he proves that the offence was
committed without his knowledge or that he exercised all due diligence to prevent the commission of such offence.
273
The Code on Wages, 2019 received the assent of the President of India on August 8, 2019. The Payment of Wages Act, 1936, the Minimum Wages
Act, 1948, the Payment of Bonus Act, 1965, and the Equal Remuneration Act, 1976 will stand repealed once the Code on Wages is notified.
274Under the Code on Wages, the term Appropriate Government is defined as “in relation to, an establishment carried on by or under the authority
of the Central Government or the establishment of railways, mines, oil field, major ports, air transport service, telecommunication, banking and
insurance company or a corporation or other authority established by a Central Act or a central public sector undertaking or subsidiary companies
set up by central public sector undertakings or autonomous bodies owned or controlled by the Central Government, including establishment of
contractors for the purposes of such establishment, corporation or other authority, central public sector undertakings, subsidiary companies or
autonomous bodies, as the case may be, the Central Government; (ii) in relation to any other establishment, the State Government.

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“Employers” of their regular employees. Contractors will be held responsible for any breach in payment of statutory
dues to these regular employees and not the concessionaire.

Termination/retrenchment
Termination of employment of “workmen” can only be effected for reasonable cause or grave misconduct. One months’
notice has to be provided. Upon termination, the employer is liable to pay severance payments such as gratuity, leave
encashment and retrenchment unless the termination is for grave misconduct.

Judicial pronouncements have emphasized the importance of following the principles of natural justice in case of
termination for misconduct. Under the IDA the termination of employment for any reason other than due to dismissal
as a result of disciplinary action, retirement, termination on grounds specified in a fixed-term contract (or the non-
renewal of a fixed term contract) or termination on grounds of continued ill health is retrenchment.

Persons who are not “workmen” but engaged in a managerial or supervisory capacity are not entitled to these
safeguards under the IDA or the IR Code unless they earn less than Rs. 18,000 per month as a supervisor.” The services
of those who are not “workman can be terminated in accordance with the provisions of their contracts of employment.

International workers
Most infrastructure projects will engage the services of International Workers who are mostly engaged in key positions.
The Provident Fund Act defines an international worker as an employee other than an Indian employee, holding other
than an Indian passport, working for an establishment in India to which the Act applies. Every International Worker of
an establishment to whom the Provident Fund Scheme applies, other than an excluded employee, is required to become
a member of the Fund. As a result, 12% of their salary is required to be deducted and paid into the Fund along with a
matching 12% contribution from the employer. There is no upper limit to the statutory contribution. The significant
accumulated contribution is payable to the employee concerned only upon the employee completing 58 years of age
i.e. on reaching the age of retirement. Employees who are citizens of countries with whom India has signed Social
Security Agreements (SSAs)275 are excluded from making these contributions provided they are receiving social security
benefits in their home country. They are also permitted to withdraw accumulations in their PF account when they cease
to be employed in India and do not have to wait till the age of 58 years like other International Workers to receive the
payment.

275
As on date India has operationalized SSAs with 18 countries including Australia, Austria, Belgium, Canada, Czech Republic, France, Germany,
Hungary, Japan, Luxembourg, Netherlands, Norway, Portugal, Sweden, Switzerland and South Korea.

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Co ncessio n A greements in Highway Projec ts: Guest Co lumn
by Larsen & Toubro

Foreword
The NHAI has played a pivotal role in significant developments in India’s roads and highways infrastructure. Having one
of world’s largest road networks, the GOI ambitiously has undertaken the NHDP to be implemented in two phases,
primarily through EPC contracts and others, by way of the BOT model. The growth of the road development sector and
the need to raise funds through equity investments, necessitated the government to partner with private contractors
and enter into PPP agreements and concession arrangements. Such partnership between private and state entities, not
only facilitates new investments and promotes a quicker return to sustainable economic growth, but also contributes to
innovation and the long-term development of infrastructure and services to the public. The European Union countries
realized the need to streamline the procedures involved in such arrangements and promulgated a national directive in
2012 which was later transposed as a legislation. However, in India, although there are various rules/regulations specific
to certain government agencies regulating the modalities in a concession agreement, a national legislation is yet to see
the light of the day.

Ordinarily, the concessionaire undertakes the concession contract in the form and fashion of an SPV exclusively set-up
for the purpose of the project contemplated. The SPV is a fictional company, created with the sole purpose of capturing
all the cash flows generated by various project financing agencies. For the aforesaid reason, everything that is needed
in order to design, build, manage and finance the project must be purchased by third parties. To analyze the risks
associated with such concession contracts, it is quintessential to understand the network of contracts which majorly
impacts the Concessionaire/SPV.

The intricacies of the contractual network are much widespread and complex than they appear. The bottlenecks of the
concessionaire in such a contractual arrangement are many. This article tries to capsulate few of them.

C o n t r a c t u a l S t r u c t u r e o f P r o j e c t F i n a n c e 276

Pre-Contract
The bidders for road construction contracts are mostly local contractors. Although these contractors meet the technical
requirements and are acquainted with the native issues involved in execution of such works, they are however, unaware
of the complexities involved in the process of tendering and implementation of concession contracts. Due to such
difficulties faced by the local contractors, the big multi-national entities race through and the works are often
subcontracted to such local workers. Perhaps the employing entities are keen on entering into contracts with renowned
construction contractors to ensure smooth execution in the most economic manner without any compromise on quality.
However, the pre-contract stage of the concession arrangement, is not fool proof.

Further, the government agencies have their standard template of contracts with onerous and open-ended clauses,
mostly favoring the employer such as fitness for purpose obligations. The concessionaire has negligible scope for
negotiation of such contracts and are commonly constrained to sign on the dotted lines of the contract as-is. This is
often considered as a major pitfall in government contracts, as it amounts to coercion. The tender document of the
NHAI, modelled upon generic FIDIC (International Federation of Consulting Engineers) construction contracts, envisage
that since the estimation of work including the rates, prices and costs of various items of work is done on the basis of
prices/costs of materials, labor and other inputs prevailing on and around the date of the submission of bid, ‘Price
Adjustment’ (also generally known as Price Escalation/Variation) is needed so as to protect both the parties in cases of
rise or fall of prices/costs of various components of work during the period when the work is being executed. In the

276 Article on ‘Private Financing and Government support to promote long-term investments in infrastructure’ published by OECD, 2014

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NHAI contracts, as opposed to one lump financial quote, the entire work to be executed under the contract is divided
into various estimated quantities of work unit wise in the BOQ (Bills of Quantities) document which is part of tender
document. Each bidder is required to quote rates/prices for each estimated quantities or items of work. These rates are
also referred to as ‘Base Unit Rates and Prices’ or ‘BOQ Rates/Prices’.

Post-Contract award
Ideally, the Employer provides a ‘Notice to Proceed’ once the contract is executed by both parties and the conditions
precedent are complied with. The NTP marks the commencement of the works under the Project and time starts ticking
therefrom. The delay in the actual Date of Completion Delay by Government from the contractual date of completion
may be due to various factors attributable to the employer or the concessionaire or both or for reasons beyond
reasonable control of the parties.

Delays in construction of highway contracts cause tremendous financial impact on the cash flow of the concessionaire,
both for present as well as in the future prospects. Therefore, the concessionaire has to bear in mind to conduct a
thorough delay analysis rather than shorthand analysis of summary documents, prior to raising claims. The ‘critical path’
theory is mostly followed across the construction fraternity, while calculating the delay claims. The delay claims have to
be typically calculated based on the Construction Schedules/the Contractor’s program of work and the As-built/As-
planned Schedule. The gaps found in the analysis helps to determine where, why and how the delay occurred and
whether it was addressed effectively. Addressing the delay effectively means whether appropriate documentation was
maintained by the contractor who encountered a delay in the project. It is also important for the contractor to effectively
communicate with the employer on a regular basis, in order to document the acts of the parties which help in the
process of delay analysis.

The major hiccups in the execution of the project caused to the Concessionaire are under:

Unavailability of Land/Work front

Road contracts involve issues like village private limits, land acquisition, approvals from government authorities, phased
or non-exclusive possession of the land, lands subjected to litigation, court or administrative directions restraining the
execution of the works in certain areas, which are collectively referred as ROW issues. Under the concession contracts,
the obligation to provide a hindrance-free work front or access to site is reposed on the employer. Delays caused as a
consequence of either failure of the employer or for reasons beyond its control, have an impact on the performance of
the concessionaire’s reciprocal promise.

LHS and RHS

A unique problem faced by the contractors in road/highway construction contracts is the issue of non-availability of clear
work front on both sides of the site, where the roads are planned to be laid. Contractors complete a particular stretch
on one side of the road/highway and are constrained to idle their resources due to non-availability of the other side of
the path, thus stuck in the vicious circle without completion, incurring huge costs as a consequence.

Non-payment of dues
The contractors often face low cash inflows, due to delay in release of payments towards certified/accepted amounts by
the employer. In such an event, the contractor would be constrained to suspend the performance idling the resources
at site.

Prejudiced determination by Independent Engineers

The concession contracts provide for appoint of IEs or Engineer-in charge (EIC) or Employer’s representative who is in
charge of the day-to-day decision making. The claims of the concessionaire fall before the IE or EIC for determination
and decision making. However, the IEs are seldom independent and have prejudice of mind acting as a puppet in the
hands of the employer. Therefore, the concessionaire’s claims often fall apart and are less appreciated by the IE/EIC. On

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the other hand, the concessionaires are burdened with liquidated damages and levy of penalties by the employer based
on the unilateral determination of the IE/EIC.

Wrongful encashment of Bank Guarantees

The performance bank guarantees furnished in favor of the employer acts as a tool to threaten the concessionaire in
most of the occasions. The courts have also taken a back-step in restraining the employer from invocation of bank
guarantees unless there is a clear establishment of fraud 277. Therefore, the law of injunction being no longer res integra,
fail to rescue innocent contractors.

Uncertainty
There is an inherent uncertainty that plagues any long-term project. The concessionaire can never be certain of the
actual conditions on the ground, availability of labour and material, weather changes, changes in technology, changes
in law (which itself is a contentious term) and interference from third parties and the Government. Given the inherent
uncertainties and the nature of the construction work, the possibility of a change which may give rise to a claim is
inevitable. Accordingly, it becomes important that due regard is paid to the provisions of the contract as regards
resolution of claims. Further, for a party to succeed in a claim, it would be critical for such party to maintain adequate
records so as to be able to establish the causation for the loss suffered by it.

Variations
The prices quoted by the contractor at the time of bidding would lose its worth as time elapses. Since most of the
highway construction contracts are for a substantially long period of time considering the extensions and defect of
liability period, the concessionaire mostly quotes based on the variation formula under the contract. The price
adjustment clause in the contracts of NHAI resulted in plenty of litigations and disputes between the parties. The
arbitration awards also failed to clear the slate by giving diametrically opposite decisions in different cases.

Case Study
The Hon’ble Supreme Court, in M/s Progressive MVR (JV) vs. NHAI which is considered as one of its recent landmark
judgements, clarified the long pending muddle on the price escalation formula, however in favor of NHAI. The NHAI
contract contains a ‘price adjustment clause’ which provides for a formula for adjusting prices for each month’s
payment on the basis of positive or negative variation from the base rates on which bids were accepted. The dispute
was regarding the method of computing variable cost component ‘x’, ‘y’, ‘z’ for bitumen, cement and steel. According
to the contractor, it has to be computed on the basis of the actual and prevailing cost of every month. It was noted
by the Hon’ble Court that “the intention in the formula was to keep in mind the base cost while arriving at the price
adjustment. The clause of the agreement deals with percentages on various components that will govern the price
adjustment. The three components, namely, bitumen, cement and steel variable percentage was mentioned which
has to be calculated. Seventh component was 'Other Material', which was the balance percentage, after percentage
of bitumen, cement and steel is arrived at, as it mentions "50 -(x+y+z)" percentage. From this, it was inferred that
normally the combined percentages of x, y and z has to be less than 50%. However, when the current cost was taken
into consideration while working the formula, the percentages of x, y and z far exceed 50% which would make the
percentage of other materials in the negative. Such a negative aspect was to be avoided 278.”

Therefore, the law as it stands today on NHAI or similar highway contracts, is ostensibly in favor of the employer.

Other issues arise from the long duration of the highway contracts and delays and grant of extension of time. If any
contract has fixed timelines within which the contractor has to complete the works and fails to do so, the employer will
have the right to repudiate the contract and the contractor shall not have any right to claim any compensation for such
a repudiation, in such an event it can be concluded that ‘time is the essence of contract’. Even if the contract has no

277 Dwarikesh Sugar Industries Limited vs. Prem Heavy Engineering works (P) Ltd. (A997)6 SCC 450
278 MANU/SC/0162/2018

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express provision to that effect, when a party to a contract has caused substantial delay in performance beyond the
given time, the owner can give a notice making time as essence of the contract279 . Therefore, the contract in which time
is the essence will not have any provision for extension of time.

If a contract includes clauses providing for extension of time in certain events, provided under the Contract and/or
determined by the EIC, such clauses in a contract may render the provisions relating to time being the essence,
ineffective. If the employer is accepting the progress in the execution of work beyond all deadlines without any objection
and extending the deadline, then it may be inferred as time has lost its significance. Further, in Ravindra Kumar Gupta
Vs Union of India280 , the Hon’ble Apex Court confirmed the award passed by the arbitrator holding that the extension
of time was given repeatedly by the government and hence time was not the essence of the contract moreover since
the delay was attributable to the government entity, the claim of the contractor was allowed.

In the case of Arson Enterprises Ltd vs. Union of India it was held by the Supreme Court of India that if there is a provision

of extension of time and consequential deemed acceptance of the works, time cannot be said to be the essence of the
contract. The concessionaire is often coerced to accept penalties and liquidated damages upon itself, levied by the
autarchic decisions of the EIC/Employer while such extensions are granted under the contract.

Another issue is the failure of the parties to read and understand the contracts and to exercise their rights and comply
with their obligations under such contracts. Given that the contracts are so complex, parties more often than not, fail to
truly understand and comprehend the nature of their obligations under the contract. For instance, the FIDIC contract
form has around 167 references to a notice. However, parties often overlook the obligation to provide such notices.
Compliance with the provisions regarding notice and maintenance of records would accord a lot more transparency and
enable effective resolution of issues. If records are maintained properly, not only would a party be fully compliant with
a contract, but it would also be able to successfully initiate or defend a claim for non-performance.

Pitfalls in recovery of Damages

Most of the contractors face difficulties in recovery of damages or cost compensation when they are made to extend
their stay due to delays of the owner even while the contracts itself obligates the employer to pay damages in case of a
delay on its part and grant of consequential extension of time to complete the work. In a contract which is silent on this
subject, recovery of such damages, cost compensation along with the extension of time, is a hard-hitting task.

Case Study
The Supreme Court of India addressed this issue in Ramnath International Construction (P) Ltd., Vs Union of India 281
the court considered the following question:
“Whether the contractor is entitled to compensation in the light of provisions of clause 11 of the agreement?”
Clause 11(c) in the agreement imposed a clear bar to any claim for compensation for delays in respect of which
extensions have been sought and obtained. That means the above said clause was a waiver of the rights of the
contractor to claim any compensation and accept the extension of time alone without compensation. But the
arbitrator went ahead and granted damages on the ground that the restriction cannot apply to the arbitrator in an
arbitration proceeding and the arbitrator may take the decision on the basis of the facts and circumstances of the
case. Supreme Court of India while disposing of the above said matter in which the arbitral award was under
challenge, held that granting damages and ignoring the contractual terms is a misconduct of the arbitrator and set
aside the award. Therefore, in normal circumstances if there is a restriction with regard to damages payable by the
owner to the contractor, the contractor, at a later point of time, cannot claim damages for the delay. It was held that
the contract provides that if there is any delay, attributable either to contractor or employer or to both, and the
contractor seeks and obtains extension of time for execution on that account, he will not be entitled to claim

279 Bal Saroop Daulat Ram Vs Lakhbir Singh AIR 1964 Punj 375(DB)
280 (2010)1SCC 409
281 (2007)2 SCC 453

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 compensation of any nature, on ground of such delay, in addition to extension of time obtained by him. Further, the
claims for compensation as a consequence of delays were barred by clause 11(C).
However, at the same time some exceptions are282 :

▪ If the contractor repudiates the contract exercising his right to do so under Section 55 of the Contract Act

▪ The employer gives an extension of time either by entering into supplemental agreement or by making it
clear that escalation of rates or compensation for delay would be permissible

▪ If the contractor makes it clear that escalation of rates or compensation for delay shall have to be made by
the employer and the employer accepts performance by the contractor in spite of delay and such notice by
the contractor putting the employer on terms

Further, the arbitral tribunals have recognized the claims of the contractor for compensation under Section 74 of the
Indian Contracts Act.

Conclusion
Very often the contractors do not recognize the delays unless it has taken its full course. The parties involved must
predict the likelihood of delays and claims at its very infancy. Perhaps establishing a project administration strategy from
the outset would help mitigate such issues. The Project Reports must be studied carefully, and the concessionaires must
take corrective actions to stand a better chance to win a claim in a dispute. It is difficult to avoid disputes in highway
contracts owing to increasing complexity offered by the PPP model and also sophistication adopted in EPC contracts.
However, given the financial stakes in the project and the consequences of a failure, it is important that parties maintain
accurate records of the delay so that they can substantiate delay claims with contemporaneous documentation and
serve notices wherever required.

This article has been authored by K Jagannathan, Head- Legal Services & Amba Prasad, General Manager, Legal
Larsen & Toubro

282
General Manager Northern Railways and Ors. vs. Sarvesh Chopra (01.03.2002 - SC) : AIR2002SC1272 relied by Delhi High Court in its order in the
matter between Public works department vs Navayuga Engineering Co. Ltd (2014) SCC online 1343.

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Challenges in B OT & A nnuity Road Pro ject Exec utio n: Guest
column by Pell Frisc hmann
In BOT and Annuity based highway projects, the concessionaire is responsible for the design, procurement, finance,
construction, operation and maintenance of the highway project. While, the concessionaire is responsible for the quality
assurance during the construction period; the IE has a defined role towards the quality assurance as per the MCA.

Role of an IE
As per the MCA (NHAI, 2006), the IE has the following obligations:

▪ Review the Drawing and Document submitted by the concessionaire

▪ Review, inspect and monitor the progress of Construction Works as per the MCA

▪ Conducting Tests on completion of construction and issuing Completion/Provisional Certificate

▪ Undertaking all other duties and functions in accordance with the MCA

▪ The IE shall discharge its duties in a fair, impartial and efficient manner, consistent with the highest standards of
professional integrity and good industry practice.

Monitoring of Construction Works as per MCA

Relevant guidelines of MCA (Planning Commission, 2011) are as follows:

▪ During the construction period, the concessionaire shall, no later than 7 days after the close of each month,
furnish to the authority and the IE a monthly report on progress of the Construction Works and shall promptly
give other relevant information as may be required by the IE.

▪ During the construction period, the IE shall inspect the highway project at least once in a month and make the
‘Inspection Report’ stating in reasonable detail the defects or deficiencies, if any, with particular reference to the
scope of the project and specifications and standards. The IE shall send the copy of the inspection report to the
authority and the concessionaire within 7 days of such inspection and upon receipt thereof, the concessionaire
shall rectify and remedy the defects or deficiencies, if any, stated in the inspection report. Such inspection or
submission of inspection report by the IE shall not relieve or absolve the concessionaire of its obligations and
liabilities hereunder in any manner whatsoever.

▪ For determining that the construction works conform to the specifications and standards, the IE shall require the
concessionaire to carry out or cause to be carried out tests, at such time and frequency and in such a manner as
may be specified by the IE from time to time, in accordance with good industry practices for quality assurance.
The size of sample for such tests shall, to the extent possible, not exceed 10% of the quantity and/or number of
tests prescribed by IRC and/or MORTH for the construction works undertaken by the authority through their
contractors. The concessionaire shall, with due diligence, carry out all the tests in accordance with the instructions
of the IE and furnish the results thereof to the IE. In the event that results of any tests conducted establish any
defects or deficiencies in the construction works, the concessionaire shall carry out remedial measures and furnish
a report to the IE in this context. The IE shall require the concessionaire to carry out or cause to be carried out
tests to determine that such remedial measures have brought the construction works in compliance with the
specifications and standards, and the procedure set forth in the MCA shall be repeated until such construction
works conform to the specifications and standards.

▪ During the construction period, the concessionaire shall provide to the authority, for each calendar quarter, a
video recording, which will be compiled into a 3 hour compact disc or digital video disc, as the case may be,
covering the status and progress of construction works in that quarter.

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K e y i s s u e s d u r i n g p r o j e c t e x e c u t i o n : A n I n d e p e n d e n t E n g i n e e r ’s p e r s p e c t i v e

With the above background, the major issues identified during such project execution on part of Independent Engineer/
Authority’s Engineer are discussed in detail below.

Sourcing of Competent Technical Manpower

As an entity overviewing the day to day works of the concessionaire, the requirement of fully competent, highly skilled
and experienced manpower is of paramount importance for the IE. The manpower requirements are set forth by the
authority and the personnel’s’ CVs are evaluated in detail (as part of technical evaluation) during the bid evaluation
stage of IE’s appointment contract. However, the requirement of IE engagement has increased manifold during recent
years vis-à-vis the number of newly awarded/developed highway development projects creating a highly competitive
scenario for technical experts. It is highly difficult to find fully competent technical manpower for designations such as
the Team Leader and even after the right expert is found, the probability that he/she may continue on the project for
the entire contract period is unknown and many a times the IE has to find suitable replacements more than once in the
contract period which leads to a reduction in remuneration for the replaced person.

Quality Control
The responsibility of ensuring and maintaining the quality rests with the concessionaire and the IE contracts specifies
only 10/20% of tests to be witnessed.

Due to the flexibility provided to the concessionaire to use output based specifications in the technical parameters for
design and execution of the highway project, and various operation issues they may undergo during the project tenure,
serious challenges may arise towards the quality assurance of the project due to non-compliance by the concessionaire
to its obligations as per the concession agreement.

Cost/Time Overrun
An accomplishment of any construction projects is interconnected to its timely end within the specified financial plan,
with the accurate quality and safe environment. Cost and time overruns have been another major issue in road projects.
The reasons for such overruns are due to the following:

▪ Delay in land acquisition

▪ Delays in approval and clearances

▪ Resettlement of project affected persons

▪ Tree cutting

▪ Shifting of utilities

These delays often result in manpower idling. As it is concessionaires often quote lower prices to win the award. Any
increase in costs of the concessionaire due to delays on the part of the authority ultimately leads to claims by the
concessionaire and even disputes with the authority. Verification and vetting of such claims by independent engineer
appointed for the project only adds up to the delay at the cost of the project.

Settlement of Disputes/Arbitration Cases

The contract agreement between the authority and IE/AE is based on man month inputs and duration of contract is
equal to the development period (about 6 months before commencement of work) and construction period. In general,
the concessionaire raises the disputes/arbitration proceedings after construction since the concessionaire’s agreement
is for a concession period which is about 15 to 20 years. In the absence of IE/AE, the matter has to be dealt by the
authority. Certain time limit for raising claims must be specified in concession agreements.

Contradiction in conditions of contract between IE and Authority and Authority and concessionaire

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Though the role and responsibility of the IE/AE is defined in concession agreement, there are few other conditions in
the contract agreement between IE and authority which the concessionaire may not be aware of. This may give rise to
a dispute between the authority and the concessionaire. Therefore, the required changes to remove discrepancies
should be made in concession agreement.

Traffic risk and related issues

One of the major issues related to BOT projects is the revenue realization during the concession period. While most of
the concessionaires carry out their due diligence study, traffic being a derived demand, majorly depends on the
movement of men and material. Several projects are hit due to the variations in projected growth rate of traffic for
future years. The lower traffic on a project corridor results in reduced revenues thus impacting the fund flow of the
concessionaire. If this deficit continues, the impact is felt in poor maintenance of road thus affecting the safety of road
users. Often in such cases, it has become very difficult for the AE/IE and authority to take corrective measures as funds
are not available with concessionaire and as such legal route is cumbersome.

Provision for quick fix solutions therefore should made in the concession agreement.

Toll operations
As per the concession agreement, certain vehicles such as ambulances, government vehicles, military vehicles etc. are
exempted from paying toll. Often, this is misused by powerful individuals and result in forced exemptions thus making
day today toll operations difficult. In order to eliminate such illegal exemptions, the concessionaire has to depend on
local administration/police for enforcement – these authorities are already overstretched with other duties and the
concessionaire ends up losing realizable revenue.

It is suggested that the concession agreement should abolish exemptions and the government should issue
coupons/card for all such exempted categories to avoid hassle free toll operations.

This article has been authored by D.M.Chame, Director, Pell Frischmann

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Glo ssar y

AAI Airports Authority of India

Amendment Act Prevention of Corruption (Amendment) Act, 1988
Arbitration Act Arbitration and Conciliation Act, 1996
Amendment Act, 2015 Arbitration and Conciliation (Amendment) Act, 2015
Amendment Act, 2019 Arbitration and Conciliation (Amendment) Act, 2019
Amendment Act, 2020 Arbitration and Conciliation (Amendment) Act, 2020
BLT Build Lease and Transfer
BOLT Build Operate Lease Transfer
BOOT Build Own Operate and Transfer
BOT Build Operate and Transfer
BOT Annuity Annuity based BOTs
BOT Toll Toll based BOTs
BTL Build Transfer and Lease
CCEA Cabinet Committee on Economic Affairs
CCI Competition Commission of India
CERCs and SERCs Central and State Electricity Regulatory Commissions
Companies Act Companies Act, 2013
COC Committee of Creditors
Competition Act Competition Act, 2002
Constitution Constitution of India
Contract Act Indian Contract Act, 1872
CPC Code of Civil Procedure, 1908
CPP Captive Power Plants
DBFOT Design Build Finance Operate Transfer
DBO Design Build Operate
DBOT Design Build Operate Transfer
DEA Department of Economic Affairs, Ministry of Finance, GOI
Doctrine Doctrine of Essential Facilities
DISCOM Distribution companies of India
EIC Engineer-in charge
EPC Engineering, Procurement, Construction
EPF Act Employees’ Provident Fund Act, 1952
FDI Foreign direct investment
FEMA Foreign Exchange Management Act, 1999

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GMB Gujarat Maritime Board
GOI Government of India
GST Goods and Services Tax
HAM Hybrid Annuity Model
HAM MCA of 2016 Hybrid Annuity Model released in 2016
IBC The Insolvency and Bankruptcy Code, 2016
IDA Industrial Disputes Act, 1947
IDFC Infrastructure Development Finance Company
IE Independent Engineers
IR Code Industrial Relations Code, 2020
ISDS Investor State Dispute Settlement Mechanism
IT Act Income-tax Act, 1961
JV Joint Venture
JVC Joint Venture Company
Kelkar Committee Report Report of the Committee on Revisiting and Revitalizing Public Private Partnership
Model of Infrastructure headed by Mr. Vijay Kelkar
MAT Minimum Alternate Tax
MCA Model Concession Agreement
MGC Minimum Guaranteed Cargo
MMR Major maintenance reserve
Model BIT The Model India BIT (2016)
MOEFCC Ministry of Environment Forests and Climate Change, GOI
MORTH Ministry of Road Transport and Highways, GOI
MoS Ministry of Shipping
MPA Bill Major Port Authorities Bill, 2016
MPTA Major Ports Trusts Act, 1963
NCLAT National Company Law Appellate Tribunal
NH Act National Highways Act, 1956
NHAI National Highways Authority of India
NHDP National Highway Development Programme
NHIDCL National Highways and Infrastructure Development Corporation Limited
O&M Operations and maintenance
OECD The Organization for Economic Co-operation and Development
OMT Operations, Maintenance and Tolling
OSHW Code The Occupational Safety, Health and Working Conditions Code
PCA Prevention of Corruption Act, 1988
PCU Passenger car units

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Planning Commission Planning Commission, GOI
PPP Public Private Partnership
Proposed Bill Personal Data Protection Bill, 2019
PSU Public Sector Undertaking
PWD Public Works Department
RFP Request for Proposal
ROW Right of way
SAROD Society for Affordable Redressal of Disputes
SAROD-PORTS The Society for Affordable Redressal of Disputes Ports
SCC Supreme Court Cases
SCOD Scheduled Completion Date
SOP Standard operating procedure
SPV Special Purpose Vehicle
TAMP Tariff Authority for Major Ports
TEU Twenty-foot equivalent unit
TOT Toll Operate Transfer
TOT MCA of 2017 Toll Operate Transfer MCA released in 2017
TPLF Third-party Litigation Funding
VGF Viability Gap Funding
WPI WPI

© Economic Laws Practice 2021 Pa g e | 2 3 5

© Economic Laws Practice 2021 Pa g e | 2 3 6