Who is a ‘Promoter’
A promoter of a project company is a person or an entity who is generally responsible for the affairs of the project company including but not limited to obtaining consents and approvals with respect to the project, appointment of technical consultants, and otherwise controlling the project company.
The Companies Act, 2013 defines ‘Promoter’ as:
“promoter means a person—
(a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or
(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity;”
In a project finance transaction, the term ‘Promoter’ is often interchangeable with the term ‘Sponsor’ as they refer to the same person with respect to the project company i.e. the one responsible for the affairs of the project company and clearly identified as such in the prospectus or identified in the annual return of the project company.
Promoter’s Contribution
Promoter’s contribution forms a critical component in raising debt for an under-construction project. Depending on the creditworthiness of the Promoter, the Promoter’s contribution may vary from 10% to 30% of the total capital of the Project Company.
Example:
Where the debt to equity ratio is 70:30
It simply means that out of Rs. 100/- that is required for the construction of the project, Rs. 30/- would be funded (in the form of an equity or quasi-equity in rare cases subordinated debt) by the Promoter and Rs. 70 would be raised by way of senior secured debt from the financial institutions.
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The timing of the infusion of Promoter’s equity may vary on case to case basis. However, as a common practice, the lender requires a Promoter to bring in an upfront equity contribution i.e. prior to the disbursement of the loan. The Promoter’s equity is usually applied towards meeting the initial and most fundamental project cost such as the purchase of the project land.
The lender may relax the requirement for the upfront infusion of the entire Promoter’s contribution in the event the Promoters arranges for a bank guarantee or a letter of credit to back it’s a commitment to contribute into the project.
Lenders often bind the Promoters to infuse additional funds into the project company in the event the actual project construction cost overshoots the estimated project cost. the project cost overrun may happen for multiple reasons but generally occur due to change in the cost of raw materials, equipment, land acquisition, etc. Irrespective of the reason the cost overrun may happen, the obligation to meet such additional expenditure is usually on the Promoter.
Cost Overrun clause
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· That in the event of the occurrence of Cost Overrun, the same shall be met by the Promoter shall, without any recourse to the Project Assets, meet all capital requirement on account of the Cost Overrun:
(a) by infusing further equity into the Borrower; or
(b) by providing unsecured subordinated debt to the Borrower; or
(c) in such form and manner as may be acceptable to the Lender.
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Promoter’s Debt Service Obligation
The Promoter is further roped in contractually to replenish the utilized portion of debt service reserve (DSR) in an under-construction project from its own sources.
DSR Obligation clause
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· The Promoter hereby unconditionally and irrevocably agrees to replenish the debts service reserve account (DSRA) within [__] days from the utilization of the DSR or any part thereof by the lender towards payment of Outstanding Amount.
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Other obligations of a Promoter
In typical under-construction project finance, the lender stipulates few additional conditions over and above the ones discussed above. These conditions are more from a commercial point of view to ensure the financial well being of the project. Some of the most common conditions are:
- · The Promoter to retain control through majority shareholding in the project company: restrictive conditions like these are generally imposed in cases where the lender has agreed to lend to the project company based on the creditworthiness or the credit history of the Promoter. However, lenders have in past relaxed the restriction in the event the project company raising additional capital from an investor. In such cases, the part of the investment may be received towards prepayment of the outstanding obligation towards the lender. Such events are often captured under the clause dealing with the mandatory prepayment scenarios in the loan agreement.
- · Negative lien on the assets of Promoter: In most of the under-construction project finance transaction share pledge of the 100% of fully paid-up equity shares of the project company are part of the overall security package that amongst other security interests a lender generally seeks. However, in cases where less than 100% of the entire equity shares issued by the project company are pledged to the lender, the lender generally restricts disposal of or any encumbrance on such shares not being part of the pledged shares. The project company as a borrower is required to obtain prior written consent from the lender prior to sale, transfer, or encumbrance of such shares.
Security usually obtained from the Promoter
· Pledge of the shareholding of the project company (ranging from 51% to 100%);
· Negative lien on its shareholding of the project company: in cases where the entire shareholding of the Promoter has not been pledged in favour of or the for the benefit of the lender or no pledge has been created at all.
· Charge on any receivable that it may obtain from the project-company: this specific security is created in cases where there is a substantial infusion of funds by the Promoter into the project company in the form of debt.
