This article mainly focuses on explaining the concept of Project Finance and its Legal Service in Bangladesh. The Relevant laws and procedures, regulatory frame work governing Project Finance in Bangladesh are also reflected in this article. In addition, it will also focus on the legal services available for project finance practitioners in Bangladesh.
- What is Project Financing?
Globally, Project Finance is used as a means to finance large infrastructure projects involving a special purpose vehicle (SPV) structure. In Bangladesh, Project Finance is frequently used for the financing of industrial and infrastructure projects. Usually, project finance involves no recourse or limited recourse financial structure. This allows sponsors to protect their other assets. The debt and equity used to finance the project are paid back from the cash flow generated by the project.
- Project Financing Mechanism
Project financing can be done by either a single bank or through loan syndication (arranging loan from a number of banks/financial institutions). In both cases, credit appraisal needs to be conducted in the same manner with focus being on determining cash flow generating capacity of the project. Project appraisal is the due diligence conducted on sponsors, technical, market, environmental, financial, legal, and risk aspects, among others, of the proposed project.
- Components of Project Appraisal
The components of Project Appraisal on which due diligence will be conducted are:
- Sponsors Analysis
- Technical Analysis
- Market Analysis
- Environmental Analysis
- Financial Analysis
- Legal Analysis
- Risk Analysis
For due diligence report on these matters contact us.
- Loan Syndication Process
The loan syndication process entails two stages:
- Pre-Signing Stage
- Post-Signing Stage
- Pre-Signing stage
There are again two stages under Pre-Signing Stage. First, is the pre-mandate stage where the details of the proposed transaction are discussed and finalized through an indicative Term Sheet after which a Letter of Mandate is obtained from the borrower. This stage can take rarely shorter than one month and can be as long as one year. Second, it the Post-mandate stage where loan syndication takes place and facility agreements are negotiated and finalized through a signing ceremony. This phase may take six to eight weeks.
- Post-Signing Stage
This stage covers the period from signing of syndication loan and security documents till full and final adjustment of syndicated loan facility.
- Who are the parties in Project Finance deals
The main parties in a project finance deal are listed below:
- The owners or the ultimate beneficiaries to the project.
- The implementer of the project or Project Company or SPV incorporated by the sponsors.
- Party supplying the funds.
- Government authority awarding the project in other words off-takers.
- Non-bank guarantors other than the sponsors.
- Bank guarantors other than the sponsors.
- Government entities facilitating exports and sharing risk against a risk premium known as Export credit agencies.
- The security trustee who holds the securities in its name for the lenders.
- Bank maintaining the account to receive loan proceeds and accumulate funds for repayment.
- The Agent who acts for the lenders in a syndicated financing.
- Legal Regulations for Project Finance
The legal regulations that govern Project Finance in Bangladesh are as follows:
- Borrowing in local currency: Approval needed from Bangladesh Bank.
- Borrowing in foreign currency: Authorization from the Executive Committee of the National Economic Council (ECNEC) is required for Public sector companies for a foreign loan. Other the other hand, for Private sector companies Bangladesh Bank requires the borrower to obtain permission from the Bangladesh Investment Development Authority (BIDA) for borrowing.
- Bonds: Bangladesh Securities and Exchange Commission (BSEC) and merchant bank approve the underlying prospectus.
- Preferred shares and equity: this is a simple process to raise funds to finance a project.
- Relevant laws applicable for Project Finance in Bangladesh
The relevant laws are listed below:
- Foreign Exchange Regulation Act 1947.
- Contract Act 1872.
- Transfer of Property Act 1882.
- Registration Act 1908
- Code of Civil Procedure 1908 (CPC).
- The Bank Company Act 1991.
- Companies Act 1994.
- Bankruptcy Act 1997.
- Money Loan Court Act 2003.
- Guidelines to Foreign Exchange Transactions.
- Documentation for Project Finance
The typical documents include:
- Term sheet
- Facility agreements.
- Security agreements.
- Inter-creditor agreements.
- Account bank agreements.
- Sponsor support agreement.
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- Registration for Project Finance in Bangladesh
Before filing a foreign borrowing application for project financing in industrial and infrastructure project, the project must be registered with the Bangladesh Investment Development Authority (BIDA). Such requirements do not apply in case of local borrowing.
All securities over immovable properties must be registered with the office of sub-registrar in the relevant geographic area. In addition, any securities over any immovable properties of a company must be perfected with the Registrar of Joint Stock Companies (RJSC) within 21 days of the date of creation of the security.
- Other protections for lenders
Apart from Securities, lenders may seek to protect their investment through contractual protections. The contractual protections available for the lenders of Project Finance are discussed below:
- Equity Contribution Agreement: These are undertakings by the sponsors to support the company by injecting equity in case of additional fund requirements or cost overruns.
- Subordination of loan agreements: These are agreements subordinating the sponsor loans to the loan of the senior lender.
- Beneficiary of project insurance: The senior lender assumes the role of principal beneficiary of the project insurance as nominated by the project company.
- Guarantees of Sponsor: These allow the lenders limited recourse to make the sponsors personally liable to repay the debt.
- Step-in rights: In case of default event, these normally gives rights to lenders to convert debt into equity, sell pledged shares, appoint nominee directors, takeover management control, and so on.
For Legal Services in creation of the above mentioned Agreements visit.
- Insurance and Reinsurance for Project Finance
All risk insurance needs to be done for project finance along with additional insurances for risks based on the kind of Project financed. In Bangladesh reinsurance is a general feature for project financing. Fifty percent of the insurances given by the local insurance companies must be reinsured by the Sadharan Bima Corporation. Reinsurance can also be done from foreign insurance companies. However, a clearance from Insurance Development & Regulatory Authority of Bangladesh is required for that which is normally granted.
Legal Advice regarding Project Finance by CLP:
The Barristers, Advocates, and lawyers at CLP in Gulshan, Dhaka, Bangladesh are highly experienced at assisting clients through the entire process and legal provisions relating to Project Finance in Bangladesh .
For any queries or legal assistance, please reach us at:E-mail: [email protected]
Phone:+8801700920980. +8801947470606. Address: House 39, Road 126 (3rd Floor) Islam Mansion, Gulshan 1, Dhaka.