Introduction

Project finance in India has undergone a significant transformation in 2025–2026, driven by a confluence of regulatory overhaul, evolving capital markets infrastructure, increasing emphasis on sustainable finance, and the continued expansion of India’s infrastructure ambitions. 2026 marks a pivotal juncture: the Reserve Bank of India’s (RBI) comprehensive directions on Project Finance, which came into force on 1 October 2025, have begun reshaping lender conduct, provisioning practices and resolution frameworks.

RBI has also introduced significant regulatory reforms in the external commercial borrowing (ECB) regime under the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026 overhauling the existing ECB framework.

The insolvency ecosystem under the Insolvency and Bankruptcy Code, 2016 (IBC) continues to play a critical role in the resolution of stressed project assets, with important adjudicatory developments in 2026.

Alongside these regulatory developments, the project finance landscape in India has been further shaped by the increasing adoption of sustainable finance instruments such as green bonds and sustainability-linked loans, the growing role of Infrastructure Investment Trusts (InvITs) as a capital recycling and refinancing mechanism, and the evolving regulatory framework under the International Financial Services Centres Authority (IFSCA) for cross-border project financing.

Project Finance Directions: A Paradigm Shift

Background

RBI introduced the Reserve Bank of India (Project Finance) Directions, 2025 on 19 June 2025, setting out a framework for the financing of projects in infrastructure and non-infrastructure (including commercial real estate and residential housing) sectors by Regulated Entities (including commercial banks, non-banking financial companies and All India Financial Institutions). The directions came into effect on 1 October 2025 and have subsequently been subsumed under several other directions, notified separately for commercial banks, non-banking financial companies and All India Financial Institutions (as the context may admit, “Project Finance Directions”). Notably, the directions are not applicable to projects where “Financial Closure” (defined below) has been achieved as of 1 October 2025.

Definitional reforms

The Project Finance Directions introduced a definition of “Project Finance”, requiring, inter alia, that:

• the predominant source of repayment (at least 51%) of a loan in respect of the project must be from cash flows arising from the project;
• primary security for the loan must be cash flows of the project; and
• all lenders must have a common agreement with the debtor.

The Project Finance Directions codify a principle-based approach, distinguishing Project Finance from corporate lending for project-like activities.

The directions also define “Financial Closure” as the date on which the capital structure of the project (equity, debt, grant, as applicable), accounting for at least 90% of the total project cost, becomes legally binding on all stakeholders.

Conditions relating to sanction of loans

The Project Finance Directions prescribe strict pre-financial closure and pre-disbursement conditions, including requirements such as:

• setting out the original date of commencement of commercial operations (DCCO) (to be the same for all lenders) in the loan agreement;
• setting out the project completion stage-linked disbursement schedule in the loan agreement;
• the availability of applicable clearances for implementing/constructing the project prior to Financial Closure; and
• the availability of sufficient land/rights of way (at least 50% land for infrastructure projects under the PPP model, and at least 75% for all other projects and as decided by the lenders for transmission line projects) prior to the disbursement of funds.

Regulated Entities are also required to ensure that disbursals are proportionate to the stages of project completion as well as progress in equity infusion, to be certified by the lender’s independent engineer (LIE)/architect. The post-DCCO repayment schedule, designed to factor initial cash flow, is also required to not exceed 85% of the economic life of the project.

The directions also prescribe strict exposure limits for the lenders, requiring them to have exposure of not less than 10% for projects under construction with aggregate exposure of lenders up to INR1,500 crores. For projects where the aggregate exposure of lenders is more than INR1,500 crores, each lender is required to have exposure of not less than 5% or INR150 crores, whichever is higher.

The above requirements to ensure compliance prior to Financial Closure and disbursements under the Project Finance Directions have drastically impacted the conduct of lenders and borrowers when entering into project finance arrangements.

Provisioning requirements

Another impactful change in project finance is the revised standard provisioning requirements up to a maximum of 1%, as applicable to respective projects during their construction and operational phases. In addition, for standard accounts that have utilised DCCO deferment, lenders are required to maintain additional specific provisions of 0.375% per quarter of deferment for infrastructure projects and 0.5625% per quarter of deferment for non-infrastructure projects.

Harmonised resolution framework

The Project Finance Directions have also introduced a harmonised framework for the resolution of stressed assets. While the Project Finance Directions are not applicable to projects that have achieved Financial Closure as of 1 October 2025, the resolution framework under the directions applies to such projects where the resolution of a fresh Credit Event (defined below) and/or a change in the material terms and conditions in the loan contract has occurred after 1 October 2025.

The directions have introduced a definition of “Credit Event” to include:

• default with a lender;
• any lender determining a need for the extension of the original/extended DCCO;
• the expiry of the original/extended DCCO;
• the project facing financial difficulty; and
• the lender determining a need for the infusion of additional debt.

As per the framework, lenders are required to monitor the performance of the project and any build-up of stress on an ongoing basis. Any occurrence of a credit event during the construction phase triggers the collective resolution of the project as per the framework, which may include the signing of an intercreditor agreement and a decision to implement a resolution plan. A resolution plan when implemented may involve the extension of the DCCO (within the permitted timelines prescribed – ie, up to three years for infrastructure projects and up to two years for non-infrastructure projects) while the project continues to be classified as standard. As a part of the resolution plan, the lender may also institute a cost overrun associated with the permitted DCCO deferment of a maximum of 10% of the original project cost.

ECB Regime: Significant Reforms

Background

RBI has introduced the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026 (“ECB Amendment Regulations”), aiming to rationalise the previous ECB regime. The ECB Amendment Regulations have comprehensively overhauled the ECB regime, as follows.

• An increase in the pool of recognised lenders, to include all persons resident outside India (including Non-Resident Indians), as compared to the earlier requirement regarding individual lenders being foreign equity holders or lenders being resident of a FATF or IOSCO-compliant countries (as applicable).
• Expanded eligible borrowers: against a limited list under the earlier regime, the ECB Amendment Regulations provide that all persons resident in India (incorporated under any Central Act or State Act, except individuals) are eligible for ECB. Furthermore, entities or organisations (except individuals) under restructuring/corporate insolvency resolution processes are also permitted to utilise ECBs, if permitted under the restructuring/resolution plan.
• Permitted end uses: the negative end uses list has been clarified under the ECB Amendment Regulations, with the intention of reducing ambiguity. Most importantly, the utilisation of ECB proceeds for construction development projects and for transactions undertaken by an Indian entity for corporate actions such as merger, demerger, amalgamation, arrangement or acquisition of control as per the relevant act under which the entity is incorporated has been clarified and allowed.
• Borrowing thresholds: borrowing limits have been increased from a maximum of USD750 million or equivalent per financial year to up to the higher of outstanding ECB up to USD1 billion or total outstanding borrowing (external and domestic) up to 300% of net worth as per the last standalone audited balance sheet.
• Aligning borrowing costs with prevailing market conditions: compared to the previous regime where the all-in-cost was linked to a benchmark rate, the cost of borrowing now has been brought in line with the prevailing market conditions.
• Minimum average maturity period (MAMP): the MAMP for ECB has been standardised to three years (except for the manufacturing sector, where MAMP can be one to three years), with clarity on cases where MAMP is not required to be met.
• Borrowing currency: unlike the previous regime where ECBs could be raised only in any freely convertible currency or INR, ECBs can now be raised in any foreign currency or INR.
• Reporting requirements: periodical reporting requirements have now been replaced with event-based reporting requirements, thereby simplifying reporting-related compliances.

The revised framework for ECBs has had a significant impact on project financing in India. Since the liberalisation of the ECB regime, there is comparatively easy availability of loans in the form of ECBs, also considering that the restrictive all-in-cost and MAMP requirements have been relaxed. In addition, borrowers who are facing difficulties in availing project finance under the Project Finance Directions, inter alia, due to sanction and disbursement-related conditions such as the availability of land and the obtaining of all approvals prior to disbursements are also exploring availing of loans in the form of ECBs.

Emerging Trends: Sustainable Finance, InvITs and IFSCA

Sustainable finance

The Securities and Exchange Board of India’s (SEBI) framework for the issuance and listing of green bonds has gained significant traction in the project finance space, with several renewable energy and infrastructure projects accessing green bond financing. Furthermore, sustainability-linked loans (SLLs), where pricing is tied to the achievement of pre-agreed sustainability performance targets (SPTs), are increasingly being adopted in project finance transactions, particularly in the renewable energy, waste management and green hydrogen sectors. RBI’s inclusion of renewable energy and sustainable infrastructure within its priority sector lending guidelines has further incentivised green project lending by banks.

Infrastructure Investment Trusts (InvITs)

InvITs have emerged as a significant capital recycling tool in the Indian project finance ecosystem. With SEBI’s continued regulatory refinements, InvITs are increasingly being used by infrastructure developers and sponsors to monetise operational road, transmission and renewable energy assets, thereby releasing capital for reinvestment in new projects. The growing investor base for InvITs, including participation by domestic institutional and retail investors, has deepened the capital markets infrastructure available for project finance exits.

IFSCA and cross-border project finance

IFSCA has been progressively developing a regulatory framework to facilitate cross-border financing activities from GIFT City, Gujarat. The IFSCA (Finance Company) Regulations and related circulars have enabled IFSC-based entities to participate in ECBs, syndicated lending and fund-based structures for Indian infrastructure projects. IFSCA’s fund management regulations have also attracted global infrastructure-focused funds to set up operations in GIFT City, providing an additional pool of capital for project financing in India.

IBC Amendments

Background

The Insolvency and Bankruptcy Code (Amendment) Act, 2026 (“IBC Amendment Act”), seeking to substantially amend the Insolvency and Bankruptcy Code, 2016, received the assent of the President of India on 6 April 2026. Some provisions have been suitably notified and have been in effect since 26 May 2026.

Said amendments have clarified certain provisions, including:

• the definition of “security interest”, which shall exist if it creates a right, title or interest or a claim to a property pursuant to an agreement or arrangement by the act of two or more parties and not by operation of law;
• the adjudicating authority has no discretion to reject an insolvency petition filed by a financial creditor if it fulfils the requirements under Section 7(5)(a) of the IBC; and
• the timelines to be followed for completion of the insolvency process.

The amendments have also expanded the definition of “Resolution Plan” to include resolution through one or more plans submitted by one or more resolution applicants subject to stipulated conditions, to provide statutory support for tailored deal structures in large and complex Corporate Insolvency Resolution Processes (CIRPs), where bidders may prefer to bid for specific businesses, asset clusters and geographies, instead of acquiring the entire corporate debtor.

The amendments have also introduced provisions regarding the Creditor-Initiated Insolvency Process (yet to be notified by Central Government), wherein the eligible financial creditors (notified institutional financial creditors) may – with prior approval of at least 51% of eligible financial creditors representing at least 51% of debt value – initiate the insolvency resolution process against the corporate debtor in a debtor-in-control model. In a creditor-initiated process, the initiating financial creditor appoints the resolution professional, and the entire insolvency resolution process shall be run by the resolution professional as per the provisions under the IBC and other applicable rules and regulations, including applying for a moratorium to the adjudicating authority and the constitution of a committee of creditors. The resolution professional shall be required to file an application to the adjudicating authority for approval of the resolution plan.

The IBC Amendment Act has also introduced (yet to be notified by Central Government) provisions regarding group insolvency of corporate debtors forming part of the same group, and provisions enabling Central Government to formulate a framework for conducting cross-border insolvency proceedings.

The real estate sector continues to occupy a significant position in the Indian insolvency landscape. While there have been some enabling amendments previously to the IBC and regulations which facilitate reverse CIRPs or project-specific CIRPs (a unique form of CIRP devised by tribunals to suit the resolution of distressed real estate companies), a comprehensive legislative enactment is still required. In Mansi Brar Fernandes v Shubha Sharma [(2026) 4 SCC 271], the Supreme Court recently issued directions for the resolution of real estate insolvency on a project-specific basis, and for IBBI and RERA to constitute a council to frame real estate-specific insolvency guidelines.

Impact and Outlook

The regulatory developments instigated by the Project Finance Directions bring in a more harmonised, principle-based and risk-sensitive framework for project finance in India, providing for greater provisioning discipline, harmonised project finance norms across Regulated Entities, enhanced lender accountability with minimum exposure floors, mandatory pre-disbursement conditions and monitoring obligations. The overhaul of the ECB regime, on the other hand, opens up another avenue for both lenders and borrowers to transact in ECBs, especially in cases where borrowers face challenges in complying with the Project Finance Directions and are open to exploring financing with more flexible terms.

Furthermore, the growing adoption of sustainable finance instruments and the deepening of the InvIT ecosystem signal a maturing project finance market, where developers have access to a broader array of financing and exit options. The IFSCA’s evolving framework is expected to further facilitate cross-border capital flows into Indian infrastructure. Collectively, these developments position India’s project finance landscape for sustained growth, while also requiring market participants to navigate an increasingly complex and multi-layered regulatory environment.

The IBC continues to serve as the primary mechanism for the resolution of stressed project finance assets, with the NCLT and NCLAT actively handling infrastructure and real estate insolvency proceedings. The trend toward project-specific CIRP proceedings in real estate is a particularly significant development.