BOARD

OF
DIRECTORS

ASIAN DEVELOPMENT BANK

CONFIDENTIAL
R255-04
22 November 2004

LOAN 1405-IND: POWER TRANSMISSION (SECTOR) PROJECT

AND LOAN 1764-IND: POWER TRANSMISSION
IMPROVEMENT (SECTOR) PROJECT
REQUEST FOR WAIVER OF NEGATIVE PLEDGE CLAUSE

1.
Attached for the consideration of the Board is a paper on the above
subject.
2.
In the absence of any request for discussion (which should be
communicated to The Secretary by the close of business on 13 December
2004, the recommendation in paragraph 15 of the Paper will be deemed to
have been approved, to be recorded in the minutes of a subsequent meeting of
the Board. Any notified abstentions or objections will also be recorded in the
minutes.

For Inquiries: N. Tas-Anvaripour, South Asia Department

(Ext. 6768)
V. S. Rekha, Office of the General Counsel
(Ext. 4882)

The attached document has a restricted distribution and recipients may use it only
in the performance of their official duties. Its contents may not be disclosed
without the authorization of the Asian Development Bank.

Loan No. 1405-IND: Power Transmission (Sector) Project and

Loan No. 1764-IND: Power Transmission Improvement (Sector) Project
Request for Waiver of Negative Pledge Clause
A.

Introduction

1.
The Power Grid Corporation of India Limited (POWERGRID) has requested the Asian
Development Bank (ADB) to waive the negative pledge clause contained in the Loan
Agreements for Loan No. 1405-IND: Power Transmission Project1 and No. 1764-IND: Power
Transmission Improvement (Sector) Project2 for its secured domestic borrowings. This paper
seeks Board approval for a waiver of the negative pledge clause in the Loan Agreements for
secured domestic borrowings of POWERGRID.
B.

The Banks Negative Pledge Clause

2.
As an unsecured creditor (i.e., a creditor that does not take security over assets of the
borrower), ADB, like other multilateral development banks, insists on the incorporation of the
negative pledge. The effect of the negative pledge is to ensure that the Borrower's assets
remain unencumbered and available to service the debt owed to ADB. The negative pledge
clause is a provision to regulate the Borrower's conduct with respect to its future creditors and
thereby ensures that, as a creditor, ADB is not subordinate to secured creditors of the Borrower.
The negative pledge clause in the Loan Agreements with POWERGRID reads as follows:
Loan No. 1405-IND: Section 4.11. (a) The Borrower undertakes that, except as the
Bank may otherwise agree, (i) if the Borrower shall create any lien on any of its assets or
that of any of its Subsidiary, as security for any debt, such lien will ipso facto equally and
ratably secure the payment of the principal of, and interest and other charges on, the
Loan; and the Borrower, in creating or permitting the creation of any such lien, will make
express provision to that effect; and (ii) if any statutory lien shall be created on any
assets of the Borrower, or of that of any Subsidiary, as security for any debt, the
Borrower shall grant to the Bank an equivalent lien satisfactory to the Bank; (b) the
provisions of paragraph (a) of this Section shall not apply to (i) any lien created on
property, at the time of purchase thereof, solely as security for payment of the purchase
price of such property; or (ii) any lien arising in the ordinary course of banking
transactions and securing a debt maturing not more than one year after its date.
Loan No. 1764-IND: (a) The Borrower undertakes that, except as the Bank and the
Borrower shall otherwise agree, (i) if the Borrower or any subsidiary of the Borrower
shall create any lien on any of its assets as security for any debt, such lien will ipso facto
equally and ratably secure the payment of the principal of, and interest and other
charges on, the Loan and the Borrower, in creating or permitting the creation of any such
lien will make express provision; (b) the provisions of paragraph (a) of this Section shall
not apply to (i) any lien created on property, at the time of purchase thereof, solely as
security for payment of the purchase price of such property; or (ii) any lien arising in the
ordinary course of banking transactions and securing a debt maturing not more than one
year after its date.
1
2

For $275 million, approved on 18 July 1996, and loan account closed on 9 July 2003.
For $250 million, approved on 4 December 2000, and currently under implementation with a loan closing date of 31
March 2007. Total amount disbursed to date is $106 million.

3.
Under the LIBOR-based lending (LBL) facility, the negative pledge clause has been
modified by the Ordinary Operations Loan Regulations dated 1 July 2001 and made applicable
only to foreign currency borrowings. While Loan No. 1405-IND is under the pool-based lending
facility, Loan No. 1764-IND is partly under the pool-based lending facility ($26.1 million), and
$223.9 million was transformed into the LBL facility with effect from 31 July 2002.
C.

Secured Liabilities of POWERGRID

4.
The total secured foreign currency borrowings on POWERGRIDs books as of 31 March
2004 amount to Rs22.6 billion ($497 million), as follows:
(i)

(ii)
(iii)

International Bank for Reconstruction and Development (IBRD), Rs7.4 billion ($162
million), secured by equitable mortgage of immovable properties and hypothecation
of movable properties of specific transmission lines, further guaranteed by the
Government of India. The loan agreement was signed on 23 March 1993 prior to
both ADB loans and thus holds a pre-existing loan position;
IBRD, Rs10.8 billion ($237 million), secured by pari passu interest in the liens
created on the assets as security for debts, further guaranteed by the Government
of India; and
Bank of India, Cayman Islands (BOICI), Rs4.4 billion ($97 million), secured by a
floating charge on the immovable properties of the company.

5.
POWERGRID also provided securities for domestic currency borrowings. As of 31
March 2004, secured domestic loans on its books amounted to Rs69.2 billion ($1.5 billion).
(i)
(ii)

Bonds totaling Rs50.6 billion ($1.1 billion) issued in various series, secured by pari
passu floating charge over company assets and / or equitable mortgage of
immovable properties; and
Loans from commercial banks totaling Rs18.6 billion ($408 million), secured by pari
passu floating charge over company assets and / or equitable mortgage of
immovable properties.

6.
The coverage for charges of 1.1 times the principal outstanding is the norm, based on
the fact that, at any time, in addition to the principal, there is an up to 1 years interest
outstanding on the borrowings.
D.

Borrowers Proposal

7.
POWERGRID signed loan agreements with ADB on 18 July 1996 for No. 1405-IND and
and on 4 December 2000 for Loan No. 1764-IND. Starting 1999, POWERGRID has borrowed
substantial amounts from various sources, both foreign and domestic, and provided securities
for such borrowings, without securing its ADB loans equally and ratably as required by the loan
agreements negative pledge clause. Noncompliance with the negative pledge clause has been
under continuous discussion with POWERGRID and the Government of India since year 2000.
8.
To maintain the existing relationship with ADB, and not only secure but also deepen
ADBs future involvement in its investment programs, POWERGRID has made the following
proposals:

E.

(i)

Foreign Borrowings. For the outstanding amount under Loan No. 1405-IND and
the full amount of Loan No. 1764-IND, POWERGRID proposed to obtain the
consent of the IBRD and BOICI and amend the respective loan agreements to
reflect that the lien created in their favor shall equally and ratably secure the
payment of the principal of, interest and other charges on, the ADB loans.

(ii)

Domestic Borrowings. For the outstanding amount under Loan No. 1405-IND and
the full amount of Loan No. 1764-IND, POWERGRID requests a waiver of the
negative pledge clause for domestic borrowings.
Review of Proposal

9.
POWERGRID is a central transmission utility wholly owned by the Government of India,
and is responsible for developing and operating the national transmission grid spanning
interstate and interregional transmission links including load dispatch. The Government
recognizes electricity as one of the key drivers for economic growth and poverty reduction, and
has set the target of providing access to electricity for all households by 2012. Consequently,
100,000 megawatts of new generation capacity is envisaged by 2012. To ensure reliable and
secured delivery of power from generation projects to the end users, development of an
adequate national transmission system is vital. POWERGRID has formulated a National
Transmission Development Plan (NTDP) to develop a robust and reliable national transmission
grid to ensure smooth power flow within the whole power system.
10.
POWERGRIDs NTDP envisages cumulative capital expenditure of Rs565 billion (US$
12.5 billion) over the period 2003/04 to 2011/12. POWERGRID has thus far identified loans
from multilaterals and bilaterals in the amount of Rs107.5 billion (20%), budgetary support of
Rs11.3 billion (2%) from the Government of India, and suppliers credit of Rs5.4 billion (1%).
POWERGRID plans to contribute Rs118 billion (21%) from its internal resources and is still in
the process of identifying sources for the remaining Rs324 billion (57%). Given the large
volume of borrowings required to finance the projected capital expenditure, POWERGRID will
need to access the market repeatedly over the next 10 years, and provide security for many
such borrowings.
11.
POWERGRID has been operating profitably since its first year of commercial operations
that ended 31 March 1994. POWERGRID derives income from the transmission of electricity,
and the primary source of revenue for POWERGRID is transmission tariffs. In addition,
POWERGRID generates revenue through management consultancy services such as
preparation of contracts and bidding documents.
The Central Electricity Regulatory
Commission procedures allow POWERGRID to compute its tariff based on full cost recovery of
the loan capital, depreciation, return on equity, operation and maintenance expenses, and
interest on working capital. POWERGRID will remain profitable provided that its cost remains
within the margins established by the tariff procedure.
12.
POWERGRID has fixed assets of Rs187.6 billion ($4.1 billion) including capital work in
progress as of 31 March 2004, and is conservatively geared at present with a debt-equity ratio
of 62:38. The liabilities of POWERGRID are Rs122.7 billion ($2.7 billion) for the same time
frame. ADBs cumulative lending to POWERGRID as of 31 March 2004 amounts to Rs12.7
billion ($278 million), or about 10% of the total outstanding loans. Since ADB began lending to
POWERGRID in 1996, POWERGRID has regularly met its loan servicing obligations.

4
13.
By obtaining the consent of IBRD and BOICI and amending the respective loan
agreements to reflect that the lien created in their favor will equally and ratably secure the
payment of the principal of, interest and other charges on, the ADB loans, POWERGRID will
fully comply with the requirements of the negative pledge covenant for its foreign secured
borrowings. Future loans to POWERGRID under the LBL facility would be governed by the new
negative pledge conditions, which apply only to foreign currency debt. To avoid conflicting
obligations for POWERGRID under the pool-based and LBL facilities, it is desirable to
harmonize this clause by providing a partial waiver of the negative pledge clause only for
domestic borrowings.
F.

Effects of the Waiver

14.
In the case of OCR loans, non-recovery can theoretically have an adverse impact on
ADBs credit standing in the capital markets and, as such, might lead to an increase in ADBs
borrowing rates and, consequently, the OCR lending rates. However, POWERGRID is offering
full compliance with the negative pledge clause for its secured foreign borrowings by equally
and ratably securing the payment of the principal of, interest and other charges on, the ADB
loans. In addition to that, ADB will continue to have the security of the sovereign guarantee
from the Government of India. In view of this, it is expected that the waiver of the negative
pledge clause for domestic borrowings of POWERGRID would not have any adverse impact.
The risks to ADB are minimal, and ADBs rights and financial standing would not be endangered
by this waiver.
G.

Recommendation

15.

For the above reasons, it is recommended that POWERGRIDs request be approved.