M&A In The Ports Sector In India: Key Regulatory And Contractual Considerations

India is a strategically important location for global trade. With its 7,500 kms coastline, 12 ‘major ports’ (notified as such by the Government), 200+ ‘non-major ports’ (ports that have not been notified as ‘major ports’) and a vast network of inland waterways, India has a significant maritime presence that accounts for 95% of the country’s international trade volume.

In the last decade, the Indian government has attempted to address various market concerns, including in relation to competitive bidding processes, tariff, operational efficiencies and dispute resolution mechanisms. The ‘Maritime Vision India 2030’ (“MIV 2030”) issued by the Government provides a blueprint for improvement of the maritime sector in India and creation of world class safe, green and sustainable ports. With an envisioned overall investment of INR 3 – 3.5 trillion (~USD 35.54 – USD 41.46 billion), the MIV 2030 aims to unlock an estimated INR 2+ trillion (~USD 23.69+ billion) of potential annual revenue for Indian ports.

The Indian maritime sector has seen an increased participation from private players. The first public private partnership (“PPP”) in the ports sector was formed in July 1997, where the Jawaharlal Nehru Port Trust entered into an agreement with the Nhava-Sheva International Container Terminal. Since then, there has been substantial development of port projects on a PPP basis bolstered by favorable policy changes through the years. As of April 2022, 123 PPP projects have been recognized with an estimated investment of INR 2.63 trillion (~USD 31.16 billion).

The Indian government has permitted 100% foreign direct investment under the automatic route (i.e., without requiring government approval) for port development projects. However, all investments (whether by subscription or transfer) by entities incorporated in a country sharing land borders with India or whose beneficial owners are situated in or are citizens of such a country require prior government approval.

This note sets forth certain recent developments in the ports sector to enable further private participation and highlights key regulatory and contractual considerations relevant for mergers and acquisitions in the ports sector.

KEY REGULATORY DEVELOPMENTS

Public private partnership

The Indian government continues to award projects on a PPP basis by adopting a ‘landlord’ model under which port operations and maintenance is undertaken by private players and the government acts as a landlord and a regulator. This practice has provided flexibility to private players to operate port assets without undue regulatory oversight. In addition, certain state governments have been enthusiastic adopters of PPP for the development of non-major ports, strengthening their trade and economies.

Tariff

One of the primary challenges earlier faced by major ports was the regulatory oversight on tariff imposed by the Tariff Authority for Major Ports (the “TAMP”). The TAMP had the statutory authority to regulate the rates and charges imposed by major ports, thereby subjecting them to price controls, unlike non-major ports that could set and charge market rates. This led to relatively quicker growth of non-major ports. With the introduction of the Major Ports Authorities Act, 2021, the Board of the Major Port Authority (for each major port) has been authorized to frame its own scale of rates in accordance with market conditions, dissolving the power of the TAMP.

MODEL CONCESSION AGREEMENT

In 2021, the Indian government issued changes to the model concession agreement (the “MCA”) for private sector projects in major ports. One key change is that terminal operators are now eligible to apply for renewal of the concession after the expiry of the initial concession period (generally, 30 years). For this purpose, the concessionaire will be provided with the right to match the highest bid obtained in an international competitive bidding process if the concessionaire’s bid is within 10% of the highest bid. The concessionaire will be deemed to be qualified to bid and will not be required to participate in the pre-qualification process. Another significant change is the introduction of a provision for relief through the adoption of a business revival plan where unforeseen circumstances lead to a reduction in cargo handling.

M&A IN PORTS: KEY REGULATORY AND CONTRACTUAL CONSIDERATIONS

Major ports and non-major ports

The ports sector in India is under the administrative control of the Ministry of Ports, Shipping and Waterways (the “MoPSW”). The MoPSW notifies various policies and guidelines that apply to the ports sector.

India has 12 major ports that have been notified as such by the government. Each major port has a Board of Major Port Authority (the “Board”) which is responsible for the administrative control of that port. In addition to central government guidelines, each major port has a master plan and its guidelines and processes.

India has 200+ non-major ports (i.e., ports that have not been notified as a major port). The relevant state government and state maritime boards are responsible for the administrative control of non-major ports and notify policies and guidelines that apply to non-major ports.

Given the multiple port authorities and differing practices adopted by such authorities, mergers and acquisitions in the ports sector in India are associated with unique regulatory considerations that potential acquirers should bear in mind.

Approvals under concession agreements and other project documents

Depending upon the project, port authorities may enter into concession agreements, lease agreements or licenses to enable private participation. These documents typically require prior approval of the relevant port authority (i.e., the Board or the State Maritime Board, as applicable) in case of a change in control and/or change in shareholding beyond a prescribed threshold. It is also critical in this regard to review the correspondence exchanged between the port entity and the port authority to determine any additional conditions that may apply.

The approval process may take approximately six months and requires continuous coordination with the relevant port authority. While granting its approval, the relevant port authority may also investigate any existing dues or disputes and may require their settlement prior to granting an approval.

For acquisitions involving schemes of arrangement and/or amalgamation, port authorities may require the draft scheme for their review.

In addition, where any project documents, such as construction contracts or operations and maintenance contracts subsist at the time of the acquisition, it may be useful to review their conditions in order to ascertain any approval requirements. Where the contractor is an affiliate of the transferor, the acquirer may need to consider amendments to such contracts to ensure that terms included by reason of the relationship between the two parties are suitably amended.

The terms of any project financing documents should also be reviewed to ascertain approval requirements from lenders for a change in shareholding, control, and management.

Tender Conditions

Awarding a concession under a competitive bidding process involves an assessment of the participating bidders’ technical and operational experience (such as experience in construction and operation of other ports projects) and financial capacity (such as net worth). These conditions as specified in the tender documents and may continue to apply to the port entity if they are included (by reference) in the agreement executed with the port authority.

An acquirer should review the tender conditions and assess whether it (or if tender documents permit, its affiliates) meets the prescribed conditions since the acquirer may be required to submit supporting documents to the relevant port authority evidencing the fulfilment of these conditions.

Captive status

To encourage private participation in ports, port authorities award dedicated space to port dependent industries for captive use (i.e., import and/or export of cargoes and their storage). In case of major ports, the Indian government has adopted a policy for awarding waterfront and associated land to port dependent industries (i.e., an entity, including its affiliates, which is dependent on a major port for at least 70% of its capacity for import and/or export of cargo and storage). This policy does not apply to non-major ports. Award of captive space in non-major ports is governed by the relevant non-major port’s master plan and state policies and guidelines. In addition, agreements executed with the relevant port authority may also include conditions relating to captive use, such as identifying a group entity that will provide captive cargo, and the shareholding pattern the port entity will need to maintain to continue to enjoy captive status.

If the target port entity is operating a captive facility, an acquirer should carefully assess the captive conditions and consider their impact on the proposed acquisition.

Security clearance

Port authorities in major ports are required to procure a post-transaction security clearance for any change in management control or transfer of more than 10% shareholding in a port entity from relevant security agencies (such as the (Indian) Ministry of Home Affairs). Port authorities in non-major ports are also required to procure a post-transaction security clearance in case of a change in management control. Given that the process and practices vary between ports, it is generally recommended to liaise with the relevant port authority to understand its practice and the way forward.

Competition

Mergers and acquisitions may require notification to, and approval by, the Competition Commission of India (the “CCI”), prior to completion of the transaction in the event the prescribed thresholds on assets and turnover are met and no specified exemptions are available. As a preliminary matter, it can be checked whether target assets or turnover being acquired are below the specified thresholds in which case no further analysis is needed, unless the transaction deal value is more than INR 20 billion and where the target has substantial business operations in India. If this is not the case, any merger or acquisition is tested based on the value of assets and turnover of the parties involved, both at enterprise-level and group-level (group to which the target will belong). If any of the prescribed thresholds is met, such mergers and acquisitions are termed as ‘combinations’, and are required to be notified to, and approved by, the CCI, prior to completion of the transaction.

Due diligence

Given that port projects are considered sensitive from an environment, health and safety perspective, a port entity requires several operational and environmental licenses and permits to operate a port project. It is critical for an acquirer to review these licenses and permits to assess applicable conditions and to ascertain their compliance by the port entity.

In the event a port authority has allotted land to a port entity by way of allotment orders and/or lease agreements, review of land related documents is also important.

As a part of the due diligence exercise, technical diligence may also be considered to assess the technical capabilities of the project.

CONCLUSION

Over the years, the Indian government has taken positive steps to reform the ports sector and steadily increase private participation. With the standardization of tender documents and the MCA for major ports, there is greater certainty with respect to the terms and conditions that an acquirer will need to assess for investments in major ports.

However, a review of existing agreements with port authorities, especially in the context of non-major ports, and all correspondence with port authorities, is crucial to better understand the potential issues that may arise while seeking a prior approval of a port authority and the timelines involved. In case of non-major ports, the approval requirements under such agreements may differ from the provisions of the MCA and may need to be assessed based on policies issued by the government and the practices followed by the relevant port authority.

In addition to agreements executed with port authorities, it is important to assess the technical capabilities of the project and review the project agreements, financing documents and licenses and permits obtained by the port entity to assess approval requirements and compliance status.

As the ports sector in India continues to evolve, strategic investments and acquisitions will play a major role in shaping the future of India’s maritime infrastructure.