With an escrow agent of troubled infrastructure developer IL&FS Group citing a court order to stop servicing loans taken for a road project, lawyers and experts said investors could turn cautious on the infrastructure sector in the near term.
Manish Agarwal, leader, infrastructure, PwC India, told FE since bond financing is an under-tapped source for infrastructure, there needs to be clarity on the priority and timeliness of cash flows. Escrow arrangements are meant to ring-fence project cash flows and lenders draw a lot of comfort from it. If this mechanism comes under doubt, it will impact project financing in future.
Krrishan Singhania, managing partner at Singhania & Company, said there is a lack of clarity on the entire process surrounding IL&FS. There are some entities of IL&FS where the respective escrow agent has continued to service the debt. In the case of JRPICL, it appears that repayments were not made and this decision was taken by the escrow bank. There seems to be a lack of clarity, protocol and framework on how to deal with creditors, he said.
Singhania said bondholders can approach the NCLAT as holding companies and subsidiaries are considered to be separate entities for legal purposes.
In a note released on Monday, ratings and research firm Crisil said Jharkhand Road Projects Implementation Company (JRPICL), a subsidiary of IL&FS Transportation Networks (ITNL), did not pay the interest and principal obligations of `76 crore due on January 21, 2019 (while actual due date was January 20, 2019, it being a Sunday, the payment was due on the next working day). Despite adequate funds in the escrow account of the special purpose vehicle (SPV) and timely instruction sent by the trustee to make the payment to investors, the escrow bank did not process the payment. Consequently, Crisil downgraded its rating on the non-convertible debentures (NCD) to ‘default’ grade. There is risk the National Company Law Appellate Tribunal (NCLAT) may not ensure the integrity of the SPV’s ring-fenced structure, given the ongoing resolution at the IL&FS group, Crisil said.
Tarun Bhatia, MD at global corporate investigations and risk consultancy firm Kroll, said investors may start examining the SPV structure more closely. While there is nothing wrong with the structure per se, the sanctity of the structure must be preserved and there must be enforcement, especially in such high-profile cases, he said.