Aug 04, 2020

Roads – Effecting a Substitution Agreement


Under various models of Public–Private Partnership (“PPP“) for infrastructure procurement in different sectors, the development of a project is awarded as a concession. Upon award, a concession agreement (“CA”) is executed between the concessioning authority and the concessionaire wherein, the concessionaire obtains certain rights and obligations with respect to the infrastructure asset, but not complete ownership of the asset. Even if there is any ‘ownership’ of the asset by a concessionaire, such ‘ownership’ reverts to the relevant government authority at the end of the concession period.

In order to facilitate raising of debt by the concessionaire for the development of the project and to provide quasi security , the lenders of the project are granted the ability of ‘substitution’ by the concessioning authority, usually through a tripartite agreement between the concessioning authority, concessionaire and the lenders or their representative, known as a substitution agreement. This right of substitution enables the lenders, upon a default by the concessionaire of the concession agreement or the financing agreements, to substitute the concessionaire with a different entity nominated by the lenders subject to approval of the concessioning authority. The actual process of such a substitution under CAs executed with the National Highways Authority of India (“NHAI“) is the subject matter of this article.


The substitution agreements under various NHAI concession agreements provide the following broad framework for the right of substitution to be enforced –

(i) In the event of a material default by the concessionaire of the terms of the CA or the financing documents, the lenders are entitled to substitute the concessionaire with their nominee (subject to such nominee being acceptable to the NHAI); this is implemented by the NHAI by novating or endorsing the CA in favour of the nominee;

(ii) The nominee has to agree to assume the liability and obligations of the outgoing concessionaire under the CA and the financing documents.


The substitution agreements however do not detail the manner in which such substitution will be carried out with respect to other agreements entered into by the concessionaire, such as the State Support Agreement and the NHAI Escrow Agreement. While the novation agreement in relation to NHAI Escrow Agreement (to which NHAI, escrow agent (appointed by lenders) and the concessionaire are typically the parties) could be executed simultaneous with the execution of the CA novation agreement, the substitution agreements and the CAs do not specify that NHAI will ensure that the State Support Agreement will also be novated by the relevant State Government simultaneous with the novation of the CA.

In addition to the CA and the financing documents entered into by the concessionaire, the lenders will also need to ensure the continuance of the other contractual arrangements of the concessionaire such as the engineering, procurement and construction (“EPC“) agreements, operation and maintenance (“O&M“) agreements and tolling agreements (if any). The lenders’ nominee could have the following options (i) take over the existing contracts, for which deeds of novation will need to be executed; or (ii) enter into fresh agreements with the existing contractors; or (iii) appoint new contractors of its choice. These could be achieved simultaneous with the novation of the CA.

In addition to the above, the substituting entity will need to obtain the requisite permits and consents in its name from the relevant governmental authorities, as required under law – however, this could lead to delay in implementation of substitution.


The above process of substitution may take up a considerable amount of time and as a road project cannot be non-operational for any period of time, it would be in the best interests of the NHAI, concessionaire, lenders, the substituting entity and the users of the project that the substitution be carried out in the most timely and efficient manner possible. Towards this, possibly the most efficient way to effect a substitution could be by way of effecting a change in control of the concessionaire through transfer of the shares of the concessionaire to a nominee of the lenders. This would eliminate the need for transfer of the various contractual arrangements and also the permits and consents in relation to the project, as there would be no change in the identity of the concessionaire, but only in its ownership.

However, some of the key aspects to be addressed to effect the above would be:

(i) Substitution by way of change in shareholding will also need to be incorporated in the CA as well as the substitution agreement, as the present versions of these agreements do not envisage the same;

(ii) The CA will also need to provide that such change in shareholding will be an exception to the other provisions of the CA which restrict changes in equity holding of the concessionaire;

(iii) In order to carry out such a transfer of shareholding, the lenders would need to require the promoters/shareholders of the concessionaire to execute share pledge covering 100% of the share capital of the concessionaire or a non-disposal undertaking coupled with a power of attorney in favour of the lenders, simultaneous with the execution of the financing agreements with regard to the project;

(iv) The lenders will need to work out a commercial resolution of the loans provided by the shareholders/ third parties (not being the project lenders) to the concessionaire;

(v) Besides, the promoters/ shareholders of the concessionaire will also need to upfront agree that they will indemnify the incoming shareholders in relation to all liabilities of the concessionaire up to the date of change in control of the concessionaire pursuant to the aforesaid “substitution” and also in relation to title to shares; and

(vi) Substitution through transfer of shares will need to be structured such that it is in compliance with applicable laws, including foreign exchange laws of India.

This additional mode of substitution could provide further comfort to the lenders. Similar structure could possibly be incorporated in other PPP projects too – such as ports, airports, etc.

Qais Jamal, Partner
Nitin Gupta, Senior Associate
Arhant Madhyala, Associate





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