To facilitate the financial closure of the Rs 17,000 crore Mundra ultra mega power project (UMPP), Tata Power — promoter of the project — has agreed to stand guarantee and meet any increase in capital costs if it crosses a certain level.

Speaking to The Indian Express, Tata Power managing director Prasad Menon said that under the arrangement with lenders, the company would take care of additional funding in the event the capital expenditure of the project rises by 5 per cent. This gives lenders added comfort that Tata Power will use its balance sheet if more funds are required.

Traditionally, large infrastructure projects are executed through special purpose vehicles (for Mundra, it is Coastal Gujarat Power Ltd or CGPL) and are “ring fenced” in a manner that there is no or very limited recourse to the parent company’s balance sheet.

The viability of the SPV should ideally be totally dependent on the revenue stream of the project which is why these projects have credit enhancement facilities to improve the viability of the project. Companies normally want to avoid giving balance sheet support to large infrastructure projects because this also reduces their ability to leverage their balance sheet to raise funds in the future.

In the case of the Mundra project that announced its financial closure on Thursday, the debt component comprises of external commercial borrowings to the tune of $1.8 billion and rupee loans of Rs 5,550 crore. Equity support through Tata Power and through the issue of preferential shares from Tata Sons towards the Mundra project is around Rs 4,250 crore. Even though the financial closure has been announced, there are still some outstanding issues.

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