International automatic exchange of financial account information (AEoI) – an issue of global importance[1] closely discussed and analyzed by professionals and market players during the last year – is constantly evolving, and, thus, requires further analysis and attention. We have already provided the basics of AEoI and its global standard in previous articles while in this article we would like to present a brief update hereof and implications for businesses, in light of the actual commencement of AEoI by countries in 2017.

As a reminder, a landmark Agreement introducing international AEoI, namely the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA) prepared by the OECD, was signed on October 29th, 2014 at the 7th meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes. Prior to the MCAA execution, in 2013, the G20 Finance Ministers and Central Banks’ Governors endorsed the European initiative of information exchange based on US FATCA codes (which gave rise to such international phenomena as the AEoI), and in September 2014 they proceeded to approve the global AEoI standard. This standard – called the ‘Standard for Automatic Exchange of Financial Account Information – Common Reporting Standard’ (CRS) – will be used as the standard for reporting purposes, while the MCAA is the international agreement activating the OECD AEoI.

By the end of 2016 more than 101 jurisdictions had either signed MCAA or committed to implement AEoI via the CRS. Some of these jurisdictions (early adopters) have undertaken to commit first information exchanges in 2017 and the others (late adopters) will do so during 2018. The list of such jurisdictions is constantly growing. According to the latest news, Pakistan, Switzerland and Liechtenstein has ratified OECD Convention on Mutual Administrative Assistance in Tax Matters, thus soon we can expect those countries to join the Global Standard on AEOI. At the same time, a number of jurisdictions have neither signed MCAA nor officially committed to implement CRS, including in particular Armenia, Azerbaijan, Belarus, Georgia and some other countries.

In the official press release of the OECD dated 22 December 2016, it was stated that there are now more than 1,300 bilateral relationships in place across the globe, most of them based on the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (the CRS MCAA). Thus, bilateral agreements based on the CRS MCAA are the most popular way of implementing the AEoI between a pair of jurisdictions. Besides, CRS can be also implemented by countries based on double tax treaties and bilateral tax information exchange agreements. The largest amount of bilateral information exchange relationships established, as well as CRS implementations, was made by and between EU countries.

In 2016, countries have only begun to collect the reportable financial account information to be automatically exchanged while the first such exchanges will take place during 2017.

In regards to Cyprus, on October 29, 2014, the Republic of Cyprus – following a Council of Ministers decision dated October 22, 2014 – signed the CRS MCAA, and determined September 2017 to be the first date of exchange (i.e. with respect to exchange of data pertaining to the year 2016). Cyprus banks have already started gathering the information for the CRS reporting. In January 2017, Cyprus banks commenced reporting to the local tax authorities. It is expected that by September 2017 the first exchange of information between tax authorities will take place. Information will be exchanged on automatic basis only with jurisdictions with which Cyprus has mutually agreed to exchange information based the relevant bilateral agreements.

We would like to separately note several specific issues which are worth taking into account by actual businesses in view of the commencement of the global AEoI, and, if necessary, to take relevant timely measures in order to avoid respective negative consequences with this regard. In particular:

• reporting under CRS shall be made by the reportable financial institutions which should report to relevant competent authorities of their respective jurisdictions about reportable persons accordingly. Once a financial institution is classified and determined as the “financial institution”, further its necessary to determine whether its reportable or not reportable. . Reportable institution shall be subject to relevant due diligence and reporting requirements. Accordingly, strong due diligence procedures and relevant technical infrastructure will need to be in place to facilitate the recognition of reportable accounts and gather the accountholder identifying information that needs to be reported for such accounts, and to also ensure the protection of personal information within the AEoI;

• reportable persons under CRS will include any individual or entity that is resident in a reportable jurisdiction under the tax laws of such jurisdiction, other than a corporation, the stock of which is regularly traded on one or more established securities market; any corporation that is a related entity of a corporation described above; a governmental entity; an international organization; a central bank, a financial institution; and pre-existing entity accounts (those that are open on 31 December 2015, starting from 1 January 2016 – new accounts) the aggregate account balance of which does not exceed USD 250,000 as of December 31, 2015 or in any subsequent year. The accounts of financial institutions themselves are not reportable based on CRS. The above exemptions from reporting can be considered for purposes of businesses structuring or restructuring in the new global reality.

• only passive Non-Financial entities (NFEs) will be obliged to disclose their controlling persons – which, in most cases, are the ultimate beneficiary owners (UBOs) of such entities. The criterion for determining whether the NFE is active or passive is the following: active NFE is an entity whose gross income for the preceding calendar year or other relevant reporting period consists of no more than 50% passive income (i.e. dividends, interests and royalties), and less than 50% of the assets held by the NFE during the preceding calendar year or other relevant reporting period are assets that produce or are held for the production of passive income. All the other NFEs which do not qualify as active ones are considered to be passive NFEs.

• The controlling person (natural persons), to be reported automatically by passive NFEs, are the following persons:

• for companies and cooperative societies: UBO(s), who ultimately owns or controls a legal entity through direct or indirect ownership of 10% and more shares in the company`s capital (for Cyprus – 25% and more). In case no natural person(s) can be identified as exercising control of the entity, the controlling person(s) of the entity will be the natural person(s) who holds the position of senior managing official, except for entities that are (or are majority owned subsidiaries) an entity listed on a stock exchange;

–      for unions, administrative committees, foundations, clubs, association and funds raising committees: members of the Board of Directors/Committee and administrators of accounts;

–      for trusts (if trust qualifies as passive NFI): the settlor(s), trustee(s), the protector(s) (if any), the beneficiary(ies) and any other natural persons exercising ultimate effective control over the trust. If trust qualifies as a financial institution, then different reporting requirements apply.

Despite the above mentioned strict requirements and rules, there is a number of legitimate, doable and practicable options of escaping reporting under CRS for the reason of being exempt therefrom, or not covered by the relevant requirements. In any case, regardless of whether you will be subject to AEoI under the CRS or will be excluded, the fact is that all businesses will be either directly or indirectly affected by new rules in the international tax sphere. As such, businesses will need to quickly adapt to the new reality.

We at Eurofast are ready to meet all your needs and assist you with any requests which you may have with respect to the introduction of AEoI and provide you with practical solutions which would meet your financial and business needs.

[1] AEoI is a global instrument for the prevention and fighting against tax avoidance and the hiding of taxable assets abroad. It has been first initiated by OECD in order to put dividends, interest, royalties, proceeds of the sale of financial assets, other income and account balances within the scope of AEoI.

Since 2014, India has seen a spate of changes centred on improving the banking regulatory environment in India and trimming the proverbial “fat” in the system. To its credit, the Reserve Bank of India (RBI) identified the upcoming crisis on non-performing assets (NPAs) in the banking system, and compelled Indian banks to recognise and to provide for faulty loans – bitter medicine which initially hurt banks’ profit margins, but which markedly strengthened their ability to absorb losses from bad loans. The RBI has also made various moves to diversify the pool of financial sector entities – some of its measures include allowing diversified bank licensing for the first time in the form of payment bank licenses (banks which cannot provide loans, have restrictions on accepting deposits, and whose primary function is to enable processing of payments) and small finance bank licenses (banks which provide basic banking services and which are intended to improve penetration of banks into the unbanked portions of India). In a departure from a previously unsaid and uncodified understanding, the RBI has also issued guidelines allowing granting of universal bank licenses “on tap” as opposed to previous instances where banking licenses were granted only once every few years. The RBI has also taken steps to reduce the dependence of providing finance on the banking system and has taken steps to improve the bond market in India (which is still at a nascent stage of development). The measures taken include allowing foreign portfolio investors (FPIs) to invest in unlisted debt securities, issuing a discussion paper on partial credit enhancements of bonds (followed by guidelines on partial credit enhancements and an amendment to these guidelines to increase limits for participation by banks), and issuing a discussion paper on making borrowing by large borrowers more expensive thus incentivising such borrowers to access the bond market. This article will consider some of the regulatory measures taken by the RBI to improve India’s banking regulatory environment.

Framework for Revitalising Distressed Assets

One of the first regulatory moves that signaled a change in the approach of the RBI was the issuance of the “Framework for Revitalising Distressed Assets in the Economy” (the Framework). The Framework was issued on 30 January, 2014 and  followed the issuance of a discussion paper in December 2013 on tackling the growing incidence of NPAs in the Indian financial system. The measures prescribed by the Framework include continuous monitoring and classification of accounts at various levels of “stress”, and the formation of a joint lenders’ forum (JLF) for early resolution of a stressed account before it turns into an NPA. As part of banks’ continuous monitoring obligations under the Framework, banks’ now have to identify accounts that show “incipient stress” as special mention accounts (SMAs), and also classify such accounts as: (a) SMA-0, where principal or interest payment is not overdue for more than 30 days, (b) SMA-1, where principal or interest payment is overdue between 31 and 60 days, and (c) as SMA-2, where principal or interest is overdue between 61 and 90 days.

As soon as a borrower’s account is classified as SMA-2, its lenders will need to come together to form a JLF if the aggregate exposure to the borrower exceeds INR 1 billion (USD 14.97 million approx.). Banks also have the option of forming a JLF when the aggregate exposure is below INR 1 billion (USD 14.97 million approx.) and the account is not reported as SMA-2. Borrowers too can request that lenders form a JLF on the grounds of “imminent stress”.

The aim of constituting a JLF is to explore various options to resolve a stressed account and to formulate a corrective action plan (CAP). The resolution options for a CAP formulated by a JLF include obtaining specific commitments from the borrower to regularise its account so that it does not become an NPA, restructuring the borrower’s account, and initiating recovery proceedings against the borrower.

Timelines for Regulatory Approvals

The Financial Sector Legislative Reforms Commission (FSLRC) was constituted under the chairmanship of retired Supreme Court justice BN Shrikrishna, to comprehensively review, rewrite and clean up the laws governing India’s financial system “to bring them in tune with current requirements“. The FSLRC submitted its report to the Central Government in March 2013. One of the non-legislative recommendations of the report of the FSLRC was that all financial sector regulators should move to a time-bound approvals process for providing permissions to conduct business as well as for the launch of new products and services.

Following this recommendation, and in a bid to demystify the inner workings of the RBI and to increase transparency, on  23 June 2014, the RBI released timelines within which its approval could be expected for matters such as licences for private banks, the issuance of licences to non-banking financial companies (NBFCs) and external commercial borrowings (ECBs) not covered under the automatic route. In parallel, the RBI also placed a “Citizens’ Charter” on its website, providing timelines within which various departments would be able to provide services for matters such as permission for waiver of forms for exports and overseas investment not covered under the automatic route. The timelines provided vary from seven days for trade credits under the approval route, to one hundred and eighty days for compounding of contraventions under the (Indian) Foreign Exchange Management Act, 1999.

Partial Credit Enhancements

In the Second Quarter Review of Monetary Policy 2013-14, the RBI observed that the lack of depth and liquidity in India’s corporate bond market is leading to “significant dependence on bank financing“. The review proposed the issuance of guidelines to allow banks to offer partial credit enhancements (PCEs) to corporate bonds by way of credit facilities and liquidity facilities (and not by way of a bank guarantee). On 24 May, 2014, the RBI issued draft guidelines allowing banks to provide PCEs to corporate bonds issued by companies and special purpose vehicles for financing infrastructure projects. On 24 September, 2015, the RBI issued guidelines on banks providing PCEs for corporate bonds issued for a project. These guidelines allow banks to offer PCE (in aggregate) up to 20% (twenty percent) of the bond issue size in the form of a non-funded irrevocable contingent line of credit. This limit has been raised to 50% of the bond issue subject to a limit of 20% for each bank. The providing of PCEs (together with the enhancement of limit) is intended to increase the credit ratings of lesser rated issuers and special purpose vehicles, and make bonds offered by them more attractive for bond market investors.

Overhauling NBFC Regulations

The global financial crisis of 2008 turned a stark spotlight on “shadow banking”. Minimisation (if not removal) of the risk posed by these entities to the financial system came into sharp focus. Shadow banking, in rudimentary terms, can be described as the exposure of non-regulated financial entities to the financial system. In India, the activities of NBFCs which traditionally enjoyed “light touch” regulatory oversight became an increasing cause for concern. The regulatory advantages enjoyed by NBFCs over banks also led to concerns of “regulatory arbitrage”. For instance, while banks had to declare an asset as “non-performing” at the end of 90 days, for NBFCs this period was 180 days and 12 months in certain cases. Similarly, guidelines for the restructuring of advances by NBFCs were only issued in January 2014.

In November 2014, the RBI overhauled the regulatory framework for NBFCs bringing about many seminal changes in the way NBFCs conduct business. While some are transitional – for instance, the declaration of assets as non-performing after 90 days will only commence from 2018 – others had earlier application, such as 31 March, 2015 for the tightening of the application of the “fit and proper criteria” for directors of systemically important NBFCs. Enhanced corporate governance disclosures, such as registrations/licences obtained from other financial sector regulators, penalties levied by any regulator, extent of financing of parent company products, and details of securitisation and assignment transactions, are now required from all non-deposit-taking systemically important NBFCs and all deposit-taking NBFCs.

While criticised in some circles as disadvantaging NBFCs, the overhaul of the regulatory regime for NBFCs was largely welcomed in industry circles. The alignment to a large extent of regulations applicable to NBFCs and banks has markedly reduced the possibility of regulatory arbitrage that may have led to systemic financial instability.

Strategic Debt Restructuring

As a follow-up to the Framework and the JLF-CAP mechanism, through its circular of 8 June, 2015, the RBI introduced the “Strategic Debt Restructuring” (SDR) scheme, to allow banks to convert a part of their debt to a delinquent borrower into equity so as to facilitate a change in management and exit from exposure to such borrower. The intent behind the SDR scheme is to resolve borrowers which cannot be turned around due to inherent operational and managerial inefficiencies.

The SDR scheme requires the scheme of a JLF to include provisions in the agreement with a borrower for conversion of the restructured debt into equity if prescribed conditions are not fulfilled. The JLF must obtain all appropriate authorisations for such conversion upfront at the time of restructuring of the borrower. Further, conversion of debt into equity must result in the JLF holding at least 51% of the shareholding of the borrower and such conversion must take place within 30 days of the review being conducted by the JLF for the borrower’s non-compliance with the conditions prescribed by the JLF. The detailed prescriptions of the SDR scheme also include the price at which conversion of the debt into equity must take place.

Rupee Denominated Bonds

The report of the Committee to Review the Framework of Access to Domestic and Overseas Capital Markets submitted in February 2015 included a recommendation that the market for local currency denominated bonds should be encouraged as it provides an alternative source of debt financing for private and public sector borrowers which does not expose them to currency fluctuation risk. The report also rationalised that by reducing currency mismatches and lengthening the duration of debt, such bonds could also augment financial stability. In its bi-monthly monetary policy statement of 7 April, 2015, the RBI mentioned that it intended to allow Indian bodies corporate to raise ECBs through Rupee Denominated Bonds. This was followed up by the release of the draft framework for the issuance of Rupee Denominated Bonds on 9 June, 2015 for public comments.

The RBI notified the framework for the issuance of Rupee Denominated Bonds under the overall ECB framework on 29 September, 2015. While the draft framework had received a lukewarm reception, the notified framework received a warm welcome as it appeared to have rectified many shortcomings of the draft framework. For instance, the notified framework allows all bodies corporate including real estate investment trusts and infrastructure investment trusts to raise debt under the ECB policy by issuing rupee denominated bonds. The only end-use restrictions in the notified framework are that funds raised cannot be used for real estate activities (other than for development of integrated township/affordable housing projects), capital market and domestic equity investment, activities prohibited under the foreign direct investment policy, on-lending for any of the above, and the purchase of land. Further, the only all-in-cost restriction is that the all-in-cost should be “commensurate with prevailing market conditions“.

The framework on Rupee Denominated Bonds was further liberalised  by the RBI through its circular of 13 April, 2016, which reduced the minimum maturity for Rupee Denominated Bonds from 5 years to 3 years.

Conclusion

It is possible to attribute some of the steps that the RBI has taken since 2014 to the dynamism of former Governor Raghuram Rajan. However, due care should be taken on this count, as the RBI has previously shown itself to be proactive (albeit somewhat conservative). It is quite possible that these steps were already in the offing, and were merely accelerated due to the presence of Governor Rajan.

This article covers only a few regulatory moves that have been made by the RBI and is not exhaustive. There are also many background steps and relatively minor regulatory tweaks that the RBI has made to operationalise these steps. For instance, along with the government and the Securities and Exchange Board of India, the RBI is also considering measures for improving the secondary market for bonds (by making bond-trading easier) and also the tertiary market for bonds (by introducing/improving existing instruments such as the GMRA). Notably, as part of a shift in the regulatory rulemaking mindset, the RBI appears to be shifting from prescriptive rulemaking to a mix of principle-based and prescriptive rulemaking, thereby more closely aligning itself with regulatory rulemaking in more developed economies.

While these steps have stoked a quiet revolution in the banking regulatory environment in India, much still remains to be achieved. We watch and we wait.

Crowdfunding, an alternative means of financing for individual projects and companies, has become an increasingly popular concept in recent years. It emerged in response to the financial crisis of 2007–08, but didn’t officially appear in Lebanon until 2013 with the launching of Zoomaal and has grown throughout the surrounding region. Fundamentally, financing through crowdfunding relies on a large number of relatively small investments from a variety of individuals often facilitated with internet based platforms.

Crowdfunding can follow a few different models but all are based on the funders’ expectations of return being either financial or non-financial. Those providing the funding can donate based on a desire to help without financial expectations, give money in exchange for some benefit or reward, loan the money, or receive a loyalty interest or some sort of equity instrument, such as shares.  Crowdfunding platforms, like Zoomaal, typically use some combination of these models to attract more investors. These platforms earn money through some combination of fixed upfront fees in exchange for listing a request for funds, contingency fees payable upon successful funding and other means. The Lebanese Capital Markets Authority (CMA) took measures to regulate the equity based crowdfunding model.

In 2011, the CMA issued a decree regulating the formation and operation of companies offering crowdfunding through equity instruments in Lebanon as well as the procedures to request capital increases through these Lebanese crowdfunding companies.

Formation and Operation of Crowdfunding Company

Decision no. 3 lays out the requirements and processes for any company, Lebanese or non-Lebanese, to operate a platform that facilitates the raising of funds by small and medium sized enterprises and start-ups through the sale of shares of equity to many individual investors (“Platform”) in Lebanon.

First, a request to form a company that will offer the Platform must be submitted to the CMA along side a feasibility study that outlines the projected profits and losses, financial balance statements and cash flow for the upcoming three years.

Once this approval is obtained, the company must be formed as a Lebanese joint stock company, otherwise known as a Société anonyme libanaise, with a minimum capital of 1,000,000,000 Lebanese Pounds, roughly equivalent to 666,666 United States Dollars, or as a registered branch of a foreign company with the same amount available to finance its operations.

Thirdly, the Company cannot begin operating until it obtains a license to offer the Platform from the CMA by submitting a series of documents best summarized as a detailed business plan, risk management procedures and background checks for its directors and auditors among other documents. As outlined in the Decision no. 3, the Company must submit

(i)    administrative documents proving successful registration at the commercial registry and that the minimum capital or required funds are available in a bank in Lebanon, as well as a list of the Company’s authorized signatories and directors,
(ii)    internal regulations concerning the job description of employees, any user manual(s) or code(s) of conduct, and the procedures in place to protect investors from fraud, prevent money laundering, subscribe to shares, protect personal information and professional secrecy, accept electronic signatures, and
(iii)    technical precautions taken to make the platform effective and safe such as antispam, antivirus, firewalls, log in access restrictions, authentication procedures, etc…

Once the CMA is satisfied that the Company has fulfilled all the conditions above, it issues a license to operate the Platform that must be used within 6 months of issuance or it becomes void.

In operating the Company, the Company is required to have an electronic platform to connect the companies seeking investment with potential investors and an interest bearing escrow account at a bank operating in Lebanon for each crowdfunding transaction with release to either the company seeking investors upon reaching the stated funding goal or to the investor, with interest, if funding goals are not reached within 180 days.

Finally, the Company should cooperate with the CMA by facilitating CMA supervision, sending periodic reports and annual financial reports to the CMA and clarifying that the CMA takes no responsibility related to the information on the Platform. Specifically the Company cannot give advice to any investor or company nor display anything other than shares on the Platform, restricting the Platform to only the equity based model of crowdfunding.

Capital Increases through Crowdfunding

In order for any company to request funds through a Platform operating out of Lebanon, the Company must receive the former’s commercial registry certificate, statues, financial reports, a feasibility study and a list of all directors, general manager and shareholders signed by the Chairman. This means that only already existing entities can raise funds by offering shares on the Platform.

Each attempt to raise funds must be at least 30,000,000 Lebanese Pounds, roughly equivalent to $20,000, and each investor’s direct and indirect investment must be between 750,000 LBP and 15,000,000 LBP, roughly equivalent to $500 and $10,000.

Furthermore the Company should ensure that the company requesting funds submits a term sheet to the investor consisting of: Capital of Company to be crowdfunded, Conditions for investment, summary on risks that the Investors might encounter, relation with Organization and CMA and that the company executes a contract detailing subscription conditions with the investor governed by the Lebanese Commercial Law.

Crowdfunding presents a unique model to test out ideas and venture before expending the capital to put them into the market, while allowing more individuals to invest. As crowdfunding continues to grow as an alternative finance method, we can expect regulations to increase with it.

1. Project finance principles

“The equity investment is ‘first in, last out’—that is, in principle any losses that the project suffers are borne first by the investors, and lenders begin to suffer only if the equity investment is lost“, Edward Farquharson, How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets, p. 53.

“Thus the investors’ risk is the same whether the equity is invested early or late.”, E. R. Yescombe, Principles of Project Finance, p. 294.

 An experienced project finance practitioner will probably recognize the above statements as basic and indisputable principles of a project financed transaction.

Indeed, it is (or it used to be) generally and consistently accepted among project finance practitioners and studiers that the first loss, in a project financed transaction, is always incurred by the sponsors of the project, for the maximum amount of the equity they undertake to bring to the project, and that the lenders’ losses will only commence to the extent the equity brought by the sponsors is lost. The sponsors’ liability is accordingly limited only in the sense that their contribution to the project is expressly provided for and limited to a maximum amount of equity. Sponsors and lenders are not therefore partners; the sponsors’ risk is always, in relative terms, higher than that of the lenders that fund the project, primarily because the sponsors’ return on the project is also greater than the banks’ return. This is in line with one of the most elementary market rules: the greater the risk, the greater the reward and vice versa.

This is true irrespectively of whether the investors’ contribution is made up front, pro rata/pari passu or back ended because this only concerns the timing of the contribution, not the corresponding amount: it relates to the when, not to the how much.

In fact, nowadays, lenders tend not to object to the equity being injected pro rata/pari passu or even at the end of the construction period or even later, and grant, in the latter case, an additional credit facility that replaces equity in the meantime, conditional upon the equity injection being the subject of a firm, legally binding commitment by the investors, i. e., duly secured, notably by providing bank guarantees or letters of credit. Postponement of the sponsors’ contributions does not impact on the allocation of the risk inherent in the project as the sponsors “credit exposure to the project is essentially the same as it would have been had it made its equity contribution to the project company in the usual way” (upfront), (John Dewar, International Project Finance, p. 311).

1. Not quite indisputable

A recent dispute made however clear that there’s no such thing as undisputable principles.

The facts:

• In 2008, a Portuguese company (a special purpose entity created for the effect, below “the Company”) and the Portuguese State entered into a concession agreement for the conception, construction, financing, operation and maintenance, with toll, of a motorway in Portugal.
• In the context of the concession agreement, the Company, its shareholders (“the Sponsors”) and a syndicate of banks (“the Lenders”) entered into several agreements, including Facility Agreements – whereby the Lenders granted long term facilities and equity bridge facilities – and an equity subscription agreement according to which the Sponsors undertook to make additional capital contributions to a certain maximum amount.
• The actual payment of the Sponsors’ additional capital contributions was partially deferred to the end of the construction period, but on first demand bank guarantees were provided as security for these contributions.
• Since the long-term facilities were insufficient to satisfy all the funding needs of the project up to the end of the construction, postponement of the aforementioned Sponsors’ contributions implied additional short-term credit facilities, which would make it possible to overcome the aforementioned gap.
• The construction works were suspended by a preliminary injunction requested by a company claiming damages arising from the construction.
• Because the construction works were on hold and the Company could not assure that the completion date would occur on the estimated date or what impact the suspension would have on the feasibility of the Concession, the drawdowns under the Facility Agreements were suspended.
• The equity bridge facilities were not used in full.
• The Sponsors voluntarily made additional capital contributions but in an amount substantially lower than the maximum amount foreseen in the equity subscription agreement.
• In 2012, on the date foreseen in the equity subscription agreement, the lenders and the Company requested the payment by the Sponsors of the remaining amount of the additional capital contributions up to the full amount foreseen in the referred agreement, failing which the Lenders would enforce the bank guarantees.
• The Sponsors refused to pay the outstanding full amount, alleging that the amount of the additional capital contributions was unquestionably linked to the sums withdrawn under the equity bridge facilities.
• The Lenders therefore enforced the bank guarantees.
• The Sponsors however filled two separate injunctions against the Company and the banks which provided for the on first demand bank guarantees – but not against the Lenders who had to, by their own initiative, intervene in the proceedings as a third party – to prevent the enforcement of the bank guarantees, alleging that their obligation to make additional capital contributions was limited by the amounts withdrawn under the equity bridge facilities.
• One of the injunctions was granted, with the court actually analysing and interpreting the relevant clauses of the equity subscription agreement, despite the fact that it was deciding on the enforcement of on first demand bank guarantees. The other injunction was rejected and two of the Sponsors’ bank guarantees were indeed enforced and paid.
• The Sponsors then commenced arbitral proceedings against the Lenders and the Company asking the arbitral tribunal to declare that the Sponsors had fulfilled their obligations under the equity subscription agreement and that no amount was due under the referred agreement and to declare that the Lenders and the Company, by requesting the payment of the full outstanding amount of additional capital contributions and enforcing the bank guarantees, had breached the equity subscription agreement. The Lenders on the other hand asked the arbitral tribunal to condemn the Sponsors to pay the total amount of additional capital contributions plus interests.

In summary, the Sponsors’ thesis was based on three main arguments:

• That it resulted from the agreements and the Base Case (financial model) that the funding of the project would always have to respect a debt/equity ratio of 85/15 and a proportional and pari passu payment of funds, in the sense that the Sponsors could never be required to fund more than 15% of the total funds, even in the event of collapse of the project;
• That the terms of the equity subscription agreement restricted the required amount of additional capital contributions to the sum outstanding under the equity bridge facilities; and, finally,
• That the agreements contained no clause providing for mandatory prepayment or acceleration of the obligation to make additional capital contributions.

On the other hand the Lenders argued that:

• The Sponsors had undertaken to make additional capital contributions in the maximum amount foreseen in the equity subscription agreement irrespectively of the amount of debt service owed by the Company at any time or of the amounts disbursed under the equity bridge facilities;
• The Sponsors’ risk is the same whether the equity is invested up front, pro rata or back ended (as in case) and irrespectively of the amount disbursed by the Lenders under the equity bridge facilities, because the debt/equity ratio only stands in normal conditions but does not necessarily stand when the project collapses, or of the amount disbursed under the equity bridge facilities (when they exist, as in case);
• The Base Case (financial model) cannot be used as an element of interpretation of the agreements – namely to limit the Sponsors’ risk, by limiting the amount of the additional capital contributions to the amount disbursed under the equity bridge facilities – because it isn’t made with that concern or purpose. The Base Case is nothing but a reference scenario which cannot be used in case of disruption of the construction works, suspension of the financing and collapse of the concession. The Base Case is not prepared to be applied or solve abnormal situations and can only be changed for the purposes of restoring the financial balance of the Concession. It is then irrelevant if there is in the financial model an operational connection between the reimbursement of the equity bridge facilities and the payment of the additional capital contributions.
• Once the Base Case of a project finance transaction and the debt/equity ratio are agreed, the Sponsors undertake, from inception, to inject in the project company the equity foreseen in the Base Case, i.e. equity equal to the difference between what would be, in the light of the aforementioned model, the amount of the total funding needs of the project and the amount of loans agreed to meet these needs (whether they should do so upfront, pari passu or at the end is a different issue).
• If a project needs to secure funding to meet costs possibly exceeding those contemplated in the Base Case, this is normally provided as contingency funding/ standby equity.
• The additional capital contributions at stake corresponded to the equity required according to the Base Case: they are, accordingly, base equity (equity that must always be injected) and not standby equity (equity that must be injected only if certain circumstances occur).
• A back-ended project finance transaction includes an equity bridge component — a facility whose purpose is to bridge the gap created by the postponement of payment of equity until the date the equity is injected by the sponsors. It is because the sponsors undertake from the outset to make their contributions at a certain date in the future that the project company agrees a bridge loan for the intervening period; and not the reverse, i.e. the sponsors undertake to make their contributions at a certain date in the future because this is the date of repayment of the bridge loan.

Both the Sponsors and the Lenders filled several legal opinions in support of their thesis.

In 2014, the arbitral tribunal issued its award which was entirely favourable to the Banks: the arbitral tribunal endorsed the Lenders’ interpretation of the Equity Subscription Agreement and sentenced the Sponsors to pay the full amount of additional contributions foreseen in the equity subscription agreement and confirmed that the enforcement of the bank guarantees by the Lenders was entirely licit and compliant with the equity subscription agreement.

The Sponsors then filed a request to set aside the arbitral proceedings – still pending – mainly sustaining violation of public policy’s principles, the main argument being that the arbitral tribunal, by arguing that the obligation of payment of additional capital contributions also had a function of guarantee of the Lenders’ credits over the Company violated the Portuguese rule according to which surety must be expressly declared because such rule applies to all personal guarantees.

The Lenders argued in response that (i) the referred obligations are not and were not considered by the court as personal guarantees; (ii) in any case, such obligations were expressly declared; (iii) in any case, the Portuguese rule regarding surety does not apply to other personal guarantees; (iv) in any case, such rule could not be considered as an international public order principle not only because the Portuguese rule has no specific correspondence to other countries rules regarding surety but also because in other countries’ courts and authors also defend that such surety’s rules do not apply to personal guarantees.

Despite all Sponsors’ creative attempts not to comply with their obligations, postponing the payment of the full amount of the additional capital contributions, at the end the abovementioned principles were reinforced as basic principles of project finance transactions.