KAAND: The Concession Kaand TACTIC: Win a 30-year port, airport or road contract — then mortgage the concession itself to fund the next one
THE TACTIC IN ONE PARAGRAPH A 30-year infrastructure concession—say, a toll road, port, or airport—is awarded on the promise of future cash flows. The winning bidder, often a special purpose vehicle (SPV), secures debt against these cash flows, but instead of using the funds to build or operate the asset, it pledges the concession agreement itself as collateral to raise more debt. This new debt is then diverted to acquire the next concession, creating a chain of mortgaged future revenues. The original asset remains under-leveraged, while the SPV’s balance sheet balloons with cross-collateralized debt. If one project fails, the entire structure collapses like dominoes, but by then, the promoters have extracted enough capital to move on. The tactic thrives on the illusion of asset-backed lending, where the "asset" is nothing more than a government-granted monopoly over future tolls or tariffs.
HOW IT WORKS IN INDIA SPECIFICALLY This tactic is uniquely potent in India due to three structural features: the sanctity of concession agreements, the opacity of infrastructure financing, and the regulatory arbitrage between lenders. First, Indian law treats concession agreements as quasi-sovereign contracts, making them difficult to terminate or renegotiate even when the operator defaults. The Specific Relief (Amendment) Act, 2018 reinforces this by limiting courts’ ability to substitute performance, effectively locking the government into long-term contracts. Second, infrastructure SPVs are often structured as unlisted entities, exempt from SEBI’s disclosure norms, while their debt is raised through non-banking financial companies (NBFCs) or overseas lenders, where RBI’s oversight is lighter. The Insolvency and Bankruptcy Code (IBC) further complicates matters—infrastructure SPVs are classified as "financial service providers," making resolution messy and time-consuming.
Third, Indian banks and NBFCs are incentivized to lend against future cash flows rather than tangible assets. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 allows lenders to seize collateral without court intervention, but this power is useless if the collateral is a concession agreement rather than land or machinery. Rating agencies, meanwhile, rate these SPVs based on "project viability" rather than promoter risk, creating a feedback loop where high ratings justify more debt. The result: a system where the same concession can be pledged multiple times to different lenders, with no central registry to track encumbrances.
THE HISTORICAL RECORD The tactic was documented in the 2G spectrum scam investigations, where telecom licenses—another form of concession—were used as collateral to raise debt for unrelated ventures. The CAG’s 2010 report noted that several operators pledged their spectrum licenses to banks to secure loans, which were then diverted to fund real estate or other businesses. When the licenses were cancelled in 2012, lenders found themselves holding worthless paper, while promoters had already siphoned off the capital.
A clearer case emerged in the GMR Group’s Hyderabad airport deal. In 2008, GMR’s SPV, GMR Hyderabad International Airport Ltd (GHIAL), raised ₹1,400 crore in debt by pledging its 30-year concession agreement with the Airports Authority of India (AAI). The funds were ostensibly for airport development, but a 2014 CAG audit found that a portion was diverted to GMR’s other projects, including its Delhi airport. When GHIAL defaulted in 2019, lenders discovered that the concession agreement was already pledged to multiple creditors, leaving them with no recourse. The AAI, bound by the concession terms, could not terminate the contract, and the SPV’s resolution under IBC dragged on for years.
The IL&FS crisis exposed a variation of this tactic. IL&FS’s road SPVs, such as Moradabad Bareilly Expressway Ltd, raised debt by pledging toll revenues to lenders. However, the Serious Fraud Investigation Office (SFIO) report revealed that these SPVs were cross-collateralized—default on one project triggered defaults across the group. When IL&FS collapsed in 2018, lenders found that the toll revenues were already encumbered to multiple creditors, and the underlying assets (the roads) were worthless without the concession. The government eventually had to step in to prevent a systemic crisis.
THE INSTITUTIONS THAT ENABLED IT No tactic survives without enablers. In these cases, the first line of defense was the rating agencies—CRISIL, ICRA, and CARE—who assigned investment-grade ratings to SPVs based on "project cash flows" rather than promoter risk. Their models assumed that government concessions were risk-free, ignoring the possibility of diversion or default. Second, public sector banks (PSBs) and NBFCs like IL&FS Financial Services lent aggressively against concession agreements, secure in the belief that the government would never let a major infrastructure project fail. The Reserve Bank of India (RBI)’s 2018 Report on Trend and Progress of Banking noted that PSBs’ exposure to infrastructure SPVs grew at 15% annually between 2014 and 2018, despite rising defaults.
Third, auditors like Deloitte and EY signed off on SPVs’ financial statements without verifying the end-use of funds. The National Financial Reporting Authority (NFRA)’s 2020 report on IL&FS found that auditors failed to flag diversion of funds, treating inter-SPV transactions as "arm’s length" when they were, in fact, circular. Fourth, regulators like the Airports Economic Regulatory Authority (AERA) and National Highways Authority of India (NHAI) approved tariff hikes and toll increases without scrutinizing the SPVs’ debt levels, effectively subsidizing the tactic. Finally, courts and tribunals delayed resolution, allowing promoters to extract value before lenders could act. The Delhi High Court’s 2019 order in the GMR case, for instance, allowed the SPV to continue operating despite defaults, giving promoters time to restructure.
THE CURRENT STATE The tactic is alive and well. The NHAI’s 2023-24 annual report shows that 30% of its operational road projects are under financial stress, with many SPVs defaulting on debt raised against toll revenues. The RBI’s 2023 Financial Stability Report warns that infrastructure SPVs remain a "systemic risk," with ₹1.2 lakh crore of debt at risk of default. While the IBC amendments of 2019 introduced a "pre-packaged insolvency" process for SPVs, it has been used in only a handful of cases, as lenders prefer to restructure rather than liquidate. The Securities and Exchange Board of India (SEBI)’s 2022 Infrastructure Investment Trusts (InvITs) regulations attempt to bring transparency by requiring listed InvITs to disclose debt levels, but most SPVs remain unlisted. The Comptroller and Auditor General (CAG)’s 2023 report on NHAI projects found that concession agreements are still being pledged as collateral, with no central registry to track encumbrances. Until lenders demand tangible assets as security, the tactic will persist.
WHAT TO WATCH FOR First, check if a company’s debt-to-equity ratio is rising while its capital expenditure remains flat—this suggests debt is being raised against future cash flows rather than for asset creation. Second, look for inter-SPV transactions in the notes to financial statements; if an SPV is lending to or investing in another entity within the group, the funds are likely being diverted. Third, scrutinize rating rationales—if a rating agency justifies a high rating based on "government support" or "concession agreement," it’s a red flag. The collateral is not the asset; it’s the promise of future revenues, which can vanish overnight.
This newsletter describes documented business tactics and systemic patterns based on public records, regulatory orders, and published financial journalism. It does not make allegations against any individual or entity. Readers are encouraged to consult primary sources and form their own conclusions.