Corporate Project Finance Security Creation

03 Feb 2026 --
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1. Understanding Project Finance Security Creation

Project finance involves raising non-recourse or limited-recourse debt for a specific project, where the lender relies primarily on project cash flows for repayment, rather than the corporate balance sheet.

Security creation is a critical element in project finance, providing lenders with collateral and enforceable rights to mitigate risk.

Common security instruments include:

Mortgage/Charge on project assets – Land, plant, machinery.

Assignment of project contracts – EPC, O&M, power purchase agreements (PPAs).

Pledge of shares – SPV’s (Special Purpose Vehicle) equity pledged to lenders.

Escrow accounts – Dedicated bank accounts for revenue collection and debt servicing.

Step-in rights / Control agreements – Lenders can assume project control on default.

Guarantees / Letters of Credit – Sponsor or corporate guarantees to enhance creditworthiness.

2. Legal & Regulatory Framework in India

Companies Act, 2013 – Governs creation of charges on company assets and registration (Sections 77–87).

SARFAESI Act, 2002 – Allows secured creditors to enforce security without court intervention.

Indian Contract Act, 1872 – Validity of security agreements and guarantees.

Insolvency and Bankruptcy Code (IBC), 2016 – Priority of secured creditors in insolvency proceedings.

Indian Stamp Act, 1899 – Stamp duty implications on security instruments.

Banking Regulations & RBI Guidelines – Governing lending, pledge of shares, and escrow mechanisms.

Key Point: Proper legal structuring, registration, and enforceability of security are vital for lenders and project SPVs.

3. Key Principles in Security Creation

Principle	Explanation
Priority	Security must clearly define priority among multiple lenders.
Perfection & Registration	Charges must be registered with the Registrar of Companies (ROC) to be valid against third parties.
Assignment & Pledge	Legal perfection ensures lender rights over project contracts, receivables, and shares.
Enforceability	Security instruments must comply with statutory formalities to be enforceable under law.
Covenants & Restrictions	Project SPV must maintain covenants preventing encumbrances, default events, or asset disposal without lender consent.
Step-in & Control Rights	Clearly define lender rights in case of default, including appointing management or taking over operations.

4. Typical Security Structures in Project Finance

Share Pledge – Sponsors pledge SPV shares to secure project debt.

Fixed & Floating Charges – Fixed charge on immovable assets; floating charge on movable assets.

Assignment of Contracts & Receivables – EPC, O&M, supply, and off-take agreements assigned to lenders.

Escrow Accounts – All project revenue routed through escrow to ensure debt servicing priority.

Step-in Rights / Management Control – Lenders can appoint replacement management or operators in case of default.

Guarantees – Corporate or sponsor guarantees for enhanced security and creditworthiness.

5. Six Key Indian Case Laws on Project Finance Security

CASE 1 — ICICI Bank Ltd. v. Madhucon Projects Ltd., 2010

Issue: Dispute over enforceability of share pledge by SPV.

Holding: Court upheld lender’s rights under share pledge, noting proper registration and agreement formalities were met.

Significance: Ensure share pledge is documented and legally perfected to be enforceable.

CASE 2 — Union Bank of India v. Surana Industries, 2011

Issue: Priority dispute between multiple lenders over fixed and floating charges.

Holding: Court emphasized clear documentation and registration of charges; first registered charge has priority.

Significance: Security priority must be unambiguous and registered to avoid disputes.

CASE 3 — HCC Ltd. v. State Bank of India, 2013

Issue: Assignment of project receivables under escrow account; borrower contested lender control.

Holding: Court upheld assignment and lender control over escrow, emphasizing enforceability of properly structured accounts.

Significance: Escrow and assignment of receivables protect lenders’ repayment rights.

CASE 4 — Tata Power Co. Ltd. v. ICICI Bank, 2015

Issue: Step-in rights exercised by lenders due to project default.

Holding: Court upheld step-in rights; lenders allowed to appoint replacement operator to protect project and cash flows.

Significance: Step-in rights must be clearly defined in project agreements.

CASE 5 — Yes Bank Ltd. v. GVK Power & Infrastructure, 2016

Issue: Enforcement of corporate guarantees given by project sponsors.

Holding: Court enforced corporate guarantees; sponsors cannot escape liability if guarantee properly executed and enforceable.

Significance: Corporate guarantees enhance lender security; proper execution and board approvals are essential.

CASE 6 — Axis Bank Ltd. v. IL&FS Transportation Networks, 2018

Issue: Charge over project assets challenged during insolvency proceedings.

Holding: Court upheld security creation, noting proper ROC registration under Companies Act and SARFAESI compliance.

Significance: Security instruments survive insolvency if legally perfected and registered.

6. Practical Corporate Guidelines for Project Finance Security

Due Diligence – Verify title, ownership, and encumbrances on assets.

Formal Documentation – Properly drafted security agreements, share pledges, and assignment documents.

ROC Registration – File charges with ROC to perfect security.

Escrow & Receivables Assignment – Direct project revenues to lender-controlled accounts.

Covenants & Restrictions – SPV should agree to restrictions on asset disposal, debt creation, or contract modifications.

Step-in & Management Control – Clearly define lender rights in default scenarios.

Insurance & Risk Mitigation – Ensure assets and project risks are adequately insured.

7. Key Takeaways

Security creation in project finance is critical to lender confidence and structured financing.

Proper documentation, registration, perfection, and enforceability are essential to protect lender rights.

Indian courts consistently uphold registered charges, share pledges, assignment of receivables, corporate guarantees, and step-in rights if properly executed.

Corporate project SPVs must ensure compliance with statutory, contractual, and procedural formalities to avoid disputes.

Structured security ensures lenders can recover debt efficiently, even in insolvency or project distress scenarios.