It is the part of long term financing on big projects like infrastructure and industrial projects which are based upon non-recourse or limited alternative of financial structure where project debt and equity are used to finance a project and paid back from cash flow which are created by the project.
Types of projects:
Project finance in India is done for Greenfield as well as Brownfield projects in sectors like:
• Public Infrastructure like Airports, Roads, Metro Rail & Ports etc
• Energy like Power Generation- (Solar, Thermal, Wind & Hydro), Power Transmission etc
• Manufacturing like cement
Project Finance Required:
Developer/ Sponsor:It is the party that organises all other parties and typically control and make equity investments in the company or other unit that owns the project.
Additional Equity Investors: with the sponsor there are additional equity investors also in Project Company.
Construction Contractors: These contractors enter into contact with project finance company for designing, engineering and construction of project.
Operators: They enter in to a long term agreements with the project company for day to day operations and day by day maintains of project.
Feedstock Suppliers: These suppliers enter into long term contract agreement with Project Company for the supply of feedstock like energy, raw materials and other resources.
Product Off Takers: The product off takers enters with the long term agreement with project company for purchase of all energy, goods and other products produced in project.
Lenders: Lender who provides finance to project company.
Advantage of project finance:
• Non -Recourse: In this loan is completely non-recourse to sponsor it means that sponsor have no obligation to make payment of the project loan.
• Maximum Leverage: In project finance sponsor usually pursues to finance the cost of development and construction of the project on highly leveraged basics.
• Off Balance sheet treatment: In project financing sponsor is not liable to show project debt in its balance sheet because such debt is non-recourse to sponsor.
• Maximize tax benefits: Project finance should be properly structured to maximize tax benefits and to make sure that all tax benefits are used by sponsor or transferred to other party through partnership, lease or other vehicle.
Disadvantage of project finance:
• It is very complex.
• Take longer period to structure, negotiate and document any project.
• Legal fees and related cost are high.
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