In Russel & Partners, while working with our clients on various projects we provide assistance in every legal aspect. We offer business, strategic, and cultural guidance to assist in the client’s structure, negotiate, and record a wide range of project and financing agreements that are suited to each client’s needs and local practices. We assist a number of clients operating in Bangladesh to run various projects who frequently require financing from many financial institutions, and our team of lawyers assist clients in producing the relevant documentation as well as providing legal advice on any legal matters and complexities that may develop as a result of such transactions. Furthermore, if required, we aid clients by negotiating on their behalf with financial institutions.
Project Financing
‘Project Finance’ is well known in the private sector of the economy as the long- term financial funding for the infrastructure, commercial & industrial projects and public services. Two main forms of corporate lending of these are – Project finance loan & corporate sheet. It is the financial analysis of the complete lifecycle of a project. Investment firms and financial institutions provide some limited guarantee. Project finance encompasses the legal work required for the development, equity and non-recourse debt financing, construction, operation, and maintenance of major industrial organisations and infrastructure projects such as power plants, hydrocarbon processing, chemical plants, pipelines, transmission lines, airports etc.
Project Financing in Bangladesh
Project finance is now a key to acquiring capital for financial institutions as they find this mode of channeling their funds lucrative. Many of the Bangladeshi entrepreneurs in order to successfully complete several large ranges of projects have resorted to project finance.
Project financing can be done via a single bank or through loan syndication. Before allowing project finance, the key aspect that banks look into is ‘the cash flow generating capacity of the project’ along with a strong operational and financial track record. Consulting for the projects of finance at the planning stage of the PPP project such as, on choosing its model, determining its scope, calculating the budget and time frame for the work, as well as analyzing the market from the perspective of potential bidders, financial institutions and consultants.
Russel & Partners deals with high profile clients who are operating in Bangladesh in order to run specific projects such as power-projects, roads and highways and so on. They often require to obtain finance from several financial institutions and it is our lawyers who assist them in preparing the necessary documents, advise them in relation to the legal issues that may arise from such transactions.
The types of projects make use of project financing opportunity in Bangladesh:
In Bangladesh, project finance is often mostly used in industrial projects conducted by the private sector, infrastructure projects are usually carried out by the Bangladeshi government or through a public-private partnership (PPP) model. The majority of project-financed PPP infrastructure projects follow either a Build Operate and Transfer (BOT) or a Build Own and Operate (BOO) model. There are also certain projects that combine corporate and asset finance with quasi project financing. The World Bank, Japan International Cooperation Agency (JICA), IDB, The China Exim Bank are among the major donors and development partners of the various mega projects in Bangladesh like metro Rail Projects, Dhaka Mass Elevated Express Way, Airport Third Terminal, Payra Mega Coal Power Projects etc.
How the regulatory structure in project finance works:
Borrowing in the local currency. Only the following types of loans in local currency by local banks and financial institutions to local enterprises are permitted by the Bangladesh Bank, which is the country’s central bank and the supreme regulatory body for project financing approvals:
•Fixed term loans: Loans with a set repayment period.
•Continuous Loans such as cash credit, overdrafts and so on
•Loans on demand such as loans against imported merchandise, payments against documents, purchase of foreign bills, purchase of inland bills and so on.
Regulatory authorities:
•Bangladesh Bank – The supreme regulatory authority for project financing approvals.
•BIDA – The government authority for processing loan applications authorized by Bangladesh Bank.
•ECNEC – The ministries generally formulate their own plans, programs, or projects. ECNEC consists of all members of the Cabinet and the Prime Minister is the chairperson. The Planning Division is the secretariat of ECNEC.
•ERD – one of the most significant divisions of the government of Bangladesh. It is under the Ministry of Finance and mobilises external resources for socio-economic development.
•BSEC- approves issues of bonds by private entities and large-scale issues of shares.
•Different government ministries. Various ministries act as off-takers awarding projects to project sponsors such as:
•Petro Bangla for gas transmission, exploration and LNG terminals;
•Civil Aviation Authority for airports;
•Bangladesh Power Development Board for power generation;
•Bangladesh Bridge Authority for bridges, expressways etc.
Jurisdiction of Bangladesh Courts:
The Bangladesh courts will not exercise jurisdiction over a contractual dispute where the contract states a foreign court has exclusive/non-exclusive jurisdiction, unless all of the parties to the dispute agree to the Bangladesh court’s jurisdiction. However, Bangladesh courts do assume jurisdiction in special cases where they have exclusive jurisdiction, such as for Labor disputes.
Legal developments affecting project financing:
No reforms are currently envisaged. Export Credit Agency (ECA) backed finances are a new addition to local project financing. Given the requirement of a prior payment of the ECA premium, the Bangladesh Investment Development Authority normally grants disbursement methods based on direct disbursement and reimbursement.
Restriction in the Project financing area:
There are no legal restrictions except, Bangladesh Bank has set out a limit on interest on deposit and lending such at present interest rate is 9%.
There are some restrictions on extending facilities to foreign-controlled companies. Term loans in BDT for capacity expansion of foreign owned/controlled industrial firms can be extended or renewed by banks, provided the:
- Term loan in BDT does not exceed the percentage of equity held by Bangladesh nationals and firms/companies not owned or controlled by foreigners, as percentage of the total term borrowing and
- Total debt of the firm/company does not exceed a 50:50 debt equity ratio.
Laws that govern project finance in Bangladesh:
•Foreign Exchange Regulation Act 1947 – This legislation regulates foreign exchange transactions including foreign borrowing which is governed by this law.
•Foreign Exchange Transactions Guidelines -The Bangladesh Bank created this guideline to outline the rules of foreign exchange transactions.
Other subsequent legislation that followed include:
•Contract Act 1872 – Contracts such as loan agreements and security documents are governed by this very law.
•Companies Act 1994 – This governs, among other matters, the perfection of charge on company’s assets, debt and equity conversions, and borrowing and security interest creation procedural compliances.
•Registration Act 1908 – Securities and other rights over movable and immovable properties must be registered under this law.
•Transfer of Property Act 1882 – This governs creation and enforcement of security over immovable property.
•The Bankruptcy Act 1997 – This law establishes Bangladesh’s insolvency and bankruptcy legislation that apply to companies, partnerships as well as individuals.
•Money Loan Court Act 2003 – This outlines the summary procedures for local financial institutions and some foreign creditors such as International Finance Corporation, Islamic Development Bank, World Bank and more to enforce securities and loan agreements.
•Code of Civil Procedure 1908 (CPC) – The principal law regulating procedure for civil court proceedings and used by the creditors for recovery proceedings and enforcement of security.