The premise of project financing lies in financing of infrastructure projects undertaken by a special purpose vehicle (“Borrower”), the repayment of which is broadly dependent on the cash flows generated by the projects itself rather than the balance sheet of the Borrower or its promoter/sponsor. The onset of public private partnership (“PPP”) regime in the project financing space in India has been instrumental in implementation of multiple commercially viable projects. The PPP projects are projects based on a contract or concession agreement, between Government or statutory entity on one side and a private sector company on the other side, delivering public utility infrastructure services which can be availed on payment of user charges. It provides an opportunity for private sector participation in financing, designing, construction, operation and maintenance of public sector programme and projects. The licence to develop such projects is given by the statutory authority in various models like build, operate, transfer (BOT), build, develop, operate and transfer (BDOT), build, own, operate and transfer (BOOT) and toll, operate and transfer (TOT). In most cases, PPPs combine the best of both worlds: the private sector with its resources, management skills and technology and the public sector with its regulatory actions and protection of public interest.
Depending on the model of the PPP project, in most cases the ownership of such projects ultimately lies with the public authority. Funds for developing these economically separable projects are raised by the Borrower from banks and financial institutions who look primarily to the cash flow from the project as the source of funds to service their loans. The common thread under these models is that of the ‘right to use’ and consequently monetisation of the asset is only for a limited period of time. Therefore, if the concession is terminated, then the developer is required to be recouped by the statutory authority by paying an amount which is commonly known as ‘termination payment’. In order to ensure bankability of such concession agreements, the ‘termination payment’ is almost always linked with ‘debt due’ to the lenders.
It is in this context that the judgment pronounced by the Hon’ble Supreme Court of India (“Supreme Court”) in Rapid MetroRail Gurgaon Limited Etc. v Haryana Mass Rapid Transport Corporation Limited & Ors. (“Rapid Metro Judgment”) is relevant and lays down the route of positive outlook for all stakeholders. In the era of poor credit quality of many infrastructure assets and the uncertainty of government contracts, the rights of the lenders to receive the ‘debt due’ pursuant to the provisions of the concession agreements entered into between the Borrower and concessionaire authority for development of two metro projects were re-affirmed by the Supreme Court.
The Supreme Court considered the issue of ‘debt due’ and impact of a regulatory delay on public interest, in respect of two concessions (“Concession Agreements”) being awarded by the Haryana Shehri Vikas Pradhikaran (“HSVP”) (earlier known as HUDA) to Rapid MetroRail Gurgaon Limited (“Rapid Gurgaon”) and Rapid MetroRail Gurgaon South Limited (“Rapid Gurgaon South”) towards developing metro rail links from Delhi Metro Sikanderpur station on MG Road to (a) NH-8; and (b) Sector 56, Gurugram (together referred as “Metro Projects”), respectively.
Both Rapid Gurgaon and Rapid Gurgaon South issued notice(s) of termination seeking to bring an end to the respective Concession Agreements on the ground of breach by HSVP and further claimed that they have complied with the divestment requirement under the Concession Agreements but HSVP had failed to fulfil its obligations to verify the compliance with such divestment requirements. HSVP also issued termination notices to Rapid Gurgaon and Rapid Gurgaon South for breach under the Concession Agreements and directed them to handover the respective Metro Projects to the relevant authority.
Meanwhile, Rapid Gurgaon and Rapid Gurgaon South, both being part of the IL&FS group were classified as ‘red’ entities and Hon’ble NCLAT mandated them to seek the approval of Justice D.K. Jain before alienating, encumbering, transferring, or creating third party rights on assets. Subsequently, Justice D.K Jain permitted Rapid Gurgaon and Rapid Gurgaon South to handover the possession and control of the Metro Projects to HSVP and further clarified that since both the parties have issued notices for terminating the respective Concession Agreements, the metro link has to be taken over by HSVP/HMRTC. Noting that the only dispute is with regard the time of handing over the Metro Projects, he expressed dismay at the lack of explanation as to why, on the receipt of termination notice, the authorities did not take any steps to ensure smooth handing over of the Metro Projects.
It is plausible that in light of the order of the resolution supervisor tilting in favour of the borrowing entities, on the same date, a writ petition was filed by HSVP before the Hon’ble High Court of State of Punjab and Haryana (“High Court”). Pursuant to sustained negotiations between the parties and with a view to safeguard immediate interest of the public sector lenders of the project, the High Court directed Rapid Gurgaon and Rapid Gurgaon South to continue to operate the rapid metro lines for 30 days and the ‘debt due’ would be determined under the auspices of the Comptroller and Auditor General of India (“CAG”).
After much lack of co-operation by HSVP in accepting the results of audit, and what might have also been a delaying tactic, special leave petitions were filed before the Supreme Court of India (“Supreme Court”) by the concessionaires to seek appropriate relief, wherein lenders who had vital stake in the financials of the Metro Projects, including Andhra Bank, Canara Bank (together referred to as “Lenders”) were also permitted to file their responses. Lenders being the biggest stakeholders, urged that 70 per cent of the Metro Projects’ cost is comprised within debt and that the Metro Projects meant for public utility were completed by utilising funds from these Lenders. After analysing the provisions of ‘debt due’ in the respective Concession Agreements and reiterating the sanctity of a ‘consent order’ passed by the High Court, the Supreme Court observed that 80 per cent of the ‘debt due’ as determined in the reports of the auditor would be deposited in the escrow account by HSVP within three months and shall not be appropriated by the escrow bank without specific permission.
Terms of the contract and ‘public good’ consideration, as the Metro Projects were meant for public use and were funded by public banks, were examined in arriving at this decision. The Supreme Court held that the government authorities cannot be permitted to obstruct or delay compliance with their obligations and would be manifestly impermissible for three reasons:
(i) Firstly, the obligation to deposit 80 per cent ‘debt due’ as a consequence of the termination emanates from the provisions of the respective Concession Agreements.
(ii) Secondly, the obligation to deposit 80 per cent of the debt due as determined in the report of the auditor has been assumed voluntarily before the High Court by HSVP/HMRTC from which, as public bodies, they cannot be permitted to resile; and
(iii) Thirdly, there is a vital public interest element in ensuring that the monies which are committed by banks and financial institutions towards financing infrastructure projects are secured to them in terms of the Concession Agreements.
Another key facet of the Rapid Metro Judgment that deserves attention is election of remedies- writ petition vis a vis arbitration, a mechanism contractually agreed between the parties. Relying upon the case of Sanjana M. Wig vs Hindustan Petroleum Corporation Limited, the Supreme Court observed that the High Court’s exercise of writ jurisdiction under Article 226 was justified over a fundamental issue of public interest i.e. the hardship that would be caused to the commuters who use the rapid metro. There was an evident interface between this element of public interest on the one hand and the contractual rights of the parties to the Concession Agreements on the other. Ordinarily, the High Court would decline to entertain a dispute which is arbitrable, however, a writ petition could be entertained when it involves a public law character or involves a question arising out of public law functions and when the forum chosen by the parties would not be in a position to grant appropriate relief.
The Supreme Court in the Rapid Metro Judgment has emphasised the vital element of public interest and that the financing arrangements entered into by financial institutions towards fulfilling infrastructure projects, based on the sanctity of the commercial contracts, are to be duly observed. Needless to say, there is a contractual accountability for the private party to guarantee timely and high-quality infrastructure services to end users in case of PPP projects. The interplay between the terms of the contract and public good by the Supreme Court is a valuable precedent.
The Supreme Court categorically noted that, “..deterioration in loan recovery not only leads to higher provisions and diminished profitability but also constrains banks’ lending capacity, thus affecting the economy adversely. Unless the dues which are assured to financial institutions as part of the arrangements which are envisaged in Concession Agreements are duly enforced, the structure of financing for infrastructure projects may well be in jeopardy.”. The Supreme Court’s sympathy on the bankability of such concession agreements is fair and square and very crucial for growth and development of infrastructure finance and ease of doing business in the country.
At this juncture, it is advisable for the parties to consider entering into a direct agreement, depending on the nature of the project to create a direct agreement/privity of contract between the lenders and the material project participant. Attention to detail in the project documents especially provisions dealing with ‘termination payment’, ‘debt due’, timelines, escrow mechanism, substitution before entering into financing documents can go a long way in protecting the rights of lenders. The Rapid Metro Judgment is indeed a positive outlook by the Supreme Court and will serve as an effective reminder to the stakeholders to understand and implement the nuances of contractual agreements better.
 PPP in Infrastructure Projects, Public Auditing Guidelines, Comptroller and Auditor General of India, 2009, Available at: https://cag.gov.in/uploads/guidelines/ppp-project-05de4f5a51b7fa2-72318731.pdf
 Civil Appeals Nos. 925-926 of 2021, Order dated March 26, 2021
 (2005) 8 SCC 242