Legal and Financial Structure of Project Finance in India Essay

Legal and Financial Structure of Project Finance in India - Essay Example This paper further discusses several aspects of investment risks in India, and points out how investors can implement certain useful techniques. Finally, it offers some suggestions to overcome these challenges. Keywords: Investment, Project Finance, Investment in India, Public-Private-Partnership. Introduction: The long term financing of various types of infrastructure, industrial and public service projects are usually referred to project finance. In recent times, it has funded many large-scale natural resource projects as well as a number of high-profile corporate projects. However, similar type of financing scheme is recorded in the history of ancient Greece and Rome, the modern trend of project finance developed in last forty years. Basically this is an innovative and timely financing system. The non-recourse or limited recourse loans of project finance are mainly based upon the estimated cash flow of the project. â€Å"The key to project finance is in the precise forecasting of cash flows† (Ghersiy, 5). The assets, rights and interests of project secure the loan amount in such cases of debt. And repayment of loan exclusively depends on project’s cash flow. The balance sheet and creditworthiness of the project sponsors are secondary in it. Unlike conventional financing methods, project financing is unique. Since project financing enhances the values of some of these projects by permitting higher optimal leverage than with conventional financing.... The borrowing party has limited liability in some risky and expensive projects. Such cases are secured by a surety from sponsors. Therefore this is also known as limited recourse financing. There are many huge industrial and infrastructural projects, as already carried out successfully for certain types of project i.e. infrastructure development, mining, highways, railways, pipelines, power stations, etc. By the end of previous millennium, the private share alone in infrastructure investment varied between the lows of 9% and 13% in Germany and France and the extreme highs of 47% and 71% in the US and Great Britain, respectively (Miller & Lessard, 67). In fact, the projects that require non-recourse project financing would require significant contractual framework (Singh, 19). Moreover, the securities and borrowings are designed to be serviced and redeemed exclusively from the cash flow in non-recourse project finance. Whereas, the project sponsors or government provide undertakings t o an effect that coerce them to supplement the cash flow under assured limited conditions in limited recourse project finance. Generally, project financing is not designed for already running business rather for the large-scale innovative initiatives. Often it involves the creation of a legally independent project company financed with equity from one or more sponsoring firms and non-recourse debt for the purpose of investing in a capital asset (Esty, 213). The design of project finance is indicated in the following diagram. Figure: Project Finance Structure Source: The Institute for Public Private Partnership (Powell, 19) In present scenario, project financing emerged as an alternative to conventional financing over the world,