Introduction
In project finance, large infrastructure projects are typically housed in special purpose vehicles (SPVs) – separate subsidiary companies set up solely to develop the project. This structure “rings-fences” the project’s assets and liabilities: debt is borrowed by the SPV for the project, and the parent/holding company takes little or no liability on its own books[i][ii]. In practice, this means the project debt stays “off balance sheet” of the sponsors. A financial writer notes that project finance “benefits companies by keeping debt off their balance sheets,” since repayment depends on the project’s cash flows alone.[iii] Similarly, World Bank guidelines explain that a typical project-finance SPV has no prior business and exists only to carry out the project, with “limited or no recourse to the sponsors.” In non-recourse financing, lenders’ claims are primarily on the project’s assets, not on the parent company.
This holding–subsidiary arrangement is deliberately crafted. By placing a project in an SPV, the parent company appears less leveraged and insulated from project risk. Shareholders of the SPV are typically liable only up to their equity investment, while lenders rely on the project’s revenue stream and collateral.[iv] For example, World Bank PPP guidance notes that “project financing may allow shareholders to keep financing and project liabilities off-balance-sheet” so that sponsors can preserve debt capacity for other uses. An Investopedia primer similarly states that project finance “involves creation of an SPV to isolate project risks and keep the debt and liabilities off the parent company’s…balance sheets”. In short, the holding–subsidiary structure is a common strategy to “park” debt in the subsidiary and shield the parent.
Legal Personhood vs. Economic Reality
Under company law, each SPV is a distinct legal entity from its parent. The Supreme Court of India has repeatedly upheld the Salomon principle: a holding company and its subsidiary have independent legal personalities.[v] For instance, in Vodafone the Court held the parent and its wholly owned subsidiary to be “two distinct legal persons,” and that the parent “does not own the assets of the subsidiary”.[vi] In accounting terms, however, the parent must prepare consolidated financial statements. In fact, applicable Indian Accounting Standards (Ind AS 110) require consolidation of subsidiaries, treating the group as a “single economic entity.” As a corporate law analysis notes, a holding and its subsidiaries “can be considered as a single economic entity, with the consolidated balance sheet reflecting the status of the entire business enterprises,” even though the law still treats them separately.[vii]
The Companies Act, 2013 defines “control” in Section 2(27) as the right to appoint a majority of directors or otherwise govern management and policy. This means a parent typically has control over a subsidiary by virtue of its ownership. Still, Section 2(27) reflects the fact that each company is separate. Indian courts will only pierce the corporate veil in exceptional cases of fraud or sham. For example, in State of U.P. v. Renu Sagar, Hindalco’s total control over its subsidiary justified treating them as one concern.[viii] But absent such inextricable linking, the law refuses to equate the entities: mere group affiliation is not enough to hold the parent liable for its subsidiary’s obligations.[ix] In short, company law respects the separate balance sheets of a subsidiary and its holding company.
From the outside, however, a lender may perceive the group as a whole. Creditors often like lending them to group members because they can tap into the group’s reputation and intra-group support. The IBBI Working Group on group insolvency observed that ring-fencing risks in subsidiaries “gives a certain degree of security to the lender of the subsidiary,” since a well-known parent group can improve a subsidiary’s credit appeal. Moreover, group companies can share resources – one subsidiary might pledge its cash flows to support another’s loans. This internal market can indeed make financing more efficient than dealing with each company separately. However, the Working Group also warned of information asymmetry: management (insiders) may have better knowledge of a group’s troubles than external creditors. Intragroup guarantees are common in Indian corporate groups, and management could misuse this to give lenders a “false sense of security”.[x] In short, while group structures can appear supportive, they also create opportunities for shareholders to shift risk onto lenders if things go wrong.
Project Finance Mechanics and Off‑Balance Financing
Project finance is by design capital-intensive and long-term. It typically uses limited-recourse or non-recourse loans. That means lenders can only look to the project’s cash flow and assets, not at the parent’s revenues, unless there is an explicit guarantee. As the World Bank notes, in non-recourse financing the project company (SPV) is usually a special entity such that the lender’s recourse is “limited primarily or entirely to the project assets”.[xi] Consistent with this, the World Bank’s PPP framework explains that debt held in a “sufficiently minority subsidiary” is generally not consolidated onto the parent’s balance sheet. This off-balance-sheet treatment reduces the apparent leverage of the sponsor, letting them preserve borrowing capacity elsewhere.
In practical terms, this means that if a company sponsors multiple projects, each project will live in its own SPV with its own loan. The parent might provide some equity or put up a minor guarantee, but often it takes a hands-off position. For lenders, this creates a clear division: they underwrite the project’s viability, not the balance sheet of the entire conglomerate. If properly structured, this can be efficient – it allocates project risk to those who fund it. However, it also means that a struggling SPV can fail even if the parent remains healthy. If the parent’s business is strong, it may never need to cover its subsidiary’s losses.
Implications for Creditors and Investors
For creditors, a holding-subsidiary structure implies a risk‑concentration in the subsidiary, with limited fallback on the parent. By design, a parent makes little commitment to stand behind the SPV’s debt (unless it gives guarantees). As one finance researcher explains, when a division is spun off into a subsidiary and its own debt is issued, “holders of subsidiary debt have a claim on the subsidiary senior to that of the parent’s creditors.” Critically, unless the parent provides a guarantee, those creditors have no recourse to the parent company.[xii] In other words, the group structure effectively shifts the upside to shareholders (if the project succeeds) and magnifies risk for bondholders (if it fails). One study likes non-recourse subsidiary debt to project finance debt: if the subsidiary fails, creditors suffer losses because shareholders’ funds cannot be tapped except in case of wrongdoing.[xiii] Moreover, using cash-rich subsidiaries to fund a parent’s needs, or vice versa, may face legal limits. The Insolvency Code treats the holding and subsidiary as separate estates. Section 5(24) explicitly defines a subsidiary and its holding company as “related parties”, but this does not merge their assets. In fact, the Code’s provisions draw a line: an interim resolution professional (IRP) must take control of the corporate debtor’s assets, including its shares in subsidiaries, but the statutory definitions exclude the subsidiary’s own assets from the debtor’s estate.[xiv] Put simply, if the subsidiary has land or cash, those do not automatically become assets of the parent’s insolvency estate. Similarly, on liquidation, the assets of each remain distinct. This separation can be a pitfall for creditors who assume group solidarity.
It’s worth noting that the debt-to-equity load often remains heavily skewed at the subsidiary level. The Companies Act imposes a post-buyback debt-equity ratio (max 2:1) when companies re-purchase shares.[xv] Analogously, if a subsidiary’s debt soars relative to its own equity, it may violate covenants or laws. Banks typically include covenants in loans to prevent such leverage (for instance, “no distributions if coverage ratio is low”). Yet if the SPV is independent, its covenants bind only that SPV. Creditors to the parent company might not even see the deterioration in the SPV’s coverage ratio. This mismatch can leave lenders exposed: in the words of one analyst, “what gets a company into financial difficulties is not lack of profits, but lack of cash.” A subsidiary that drains cash into service debt and leaves no cushion can collapse even while the parent technically earns profits.[xvi]
Insolvency and Veil Lifting in India
Because of the strict separation of legal personhood, Indian law rarely ignores the corporate veil absent abuse. The Supreme Court reaffirmed in Vodafone that mere group membership does not allow creditors to pierce the veil. If a subsidiary fails, by default its creditors can only claim the subsidiary’s assets. The parent’s obligation ends unless it has explicitly guaranteed the loan or engaged in fraud. The Insolvency and Bankruptcy Code echoes this principle: during the Insolvency Resolution Process (CIRP) of a corporate debtor, its assets and liabilities are limited to that company, excluding subsidiaries’ independent assets.[xvii] In practical terms, a bank financing a project SPV cannot look beyond the SPV’s books, even if its parent is a guarantor; unless the parent has signed on the dotted line, its balance sheet stays separate under the Code.
However, India’s insolvency framework does give creditors certain tools. For example, if the parent has promised support or if subsidiaries were used as fraudulent shells, courts can lift the veil. In Renusagar, the Supreme Court held that Hindalco’s complete domination of its wholly-owned subsidiary justified treating them as “one concern” for duty purposes. Similarly, if a subsidiary was nothing more than an “alter ego” of the parent created to evade obligations, courts will not hesitate to pierce the facade.[xviii] Outside of these exceptions, though, the law generally respects the separate structures. Looking ahead, the Indian insolvency regime is evolving. Recent proposals aim to allow “group insolvency” proceedings so that related companies could be resolved in a coordinated manner.[xix] Under such a framework, an NCLT might order simultaneous CIRPs or asset pooling for affiliated companies and even appoint a single “group resolution professional.”
Case Example: IL&FS Group
A real-world illustration of these issues is the IL&FS conglomerate. Before its 2018 crisis, IL&FS had become a vast infrastructure group of over 300 companies (many SPVs). Its total debt peaked at nearly 99,355 crores.[xx] Creditors of IL&FS Financial Services (the listed flagship) were concerned that much of this debt was actually held by special-purpose subsidiaries in roads, power, and other projects. In the post-crisis resolution, IL&FS repaid a large portion of its dues through project asset monetization and transfers, but the involvement of so many entities complicated recoveries. Some subsidiaries still needed separate resolution proceedings. This episode shows how a holding-subsidiary structure can concentrate liabilities in subsidiaries, forcing creditors to navigate a maze of linked companies.[xxi]
Investors and banks learned the hard way that the corporate form shielded the parent: the government-led resolution process had to sift through a tangled web of SPVs. If just one of those project SPVs had drained cash prematurely (say by paying dividends to the parent), lenders to that SPV would have had a reduced pool to recover from. It underscores the fact that in large projects, “the debt of the subsidiary is senior to that of the parent’s creditors”.[xxii] Indeed, IL&FS’s creditors had to chase recovery across dozens of legal entities, not a single balance sheet.
Creditors’ Takeaway
For creditors and investors, the key lesson is vigilance. A holding–subsidiary finance structure is legally sound, but it can obscure true risk. Lenders should carefully analyze consolidated disclosures and seek clarity on which entity legally owes which debt. Covenants should be crafted to address group complexity (for example, requiring cross-default clauses or security pledges across group companies). Rating analysts often view group structures warily: backing a subsidiary loan with a thin parent is recognized as increasing default risk, even if it boosts shareholders’ returns when projects succeed.[xxiii]
Regulators also caution against hidden risks. The IBBI Working Group notes that while group companies may seem creditworthy, “if both belong to a group, the creditors of one may be misled into thinking the whole group will honor the debt,” when actually each entity is ring-fenced.[xxiv] Corporate law provides some remedy only in cases of fraud or sham. As one legal commentator observes, unless there is evidence of misuse, “legitimate corporate structuring cannot be equated with wrongdoing.” However, Parliament and the courts have built in some cross-checks (such as related-party rules and solvency tests).
Ultimately, whether company law truly reflects who controls and benefits is a nuanced question. On paper, the law honors the separate-company doctrine: each subsidiary has its own debts and assets, and its directors owe duties only to it. In substance, a business group operates as one network. Modern finance exploits this separation to allocate risk. For large infrastructure sponsors, it can be an efficient tool – but it is not without controversy. When the chips are down, the bankable reality is that lenders can typically only chase the project, not the parent’s treasury.
Conclusion
In summary, the holding–subsidiary structure in project finance is a double‑edged sword. By design, it protects the parent company and its shareholders from the project’s failures, while letting the subsidiary carry the loan. Statutory rules (and accounting standards) try to balance this by requiring disclosure and solvency checks. But in practice, debt parking in SPVs remains common. For creditors, the policy is clear: examine such transactions closely, demand transparency, and use all available covenants. A parent’s financials might look strong on paper, but lenders must remember the project’s cash flow, and the true depth of group liabilities. In tough times, a large buyout or dividend payout from an SPV could serve shareholders – but leave creditors empty-handed. In the end, project-finance groups prosper only so long as their underlying projects do.
References:
[i] https://www.investopedia.com/terms/p/projectfinance.asp
[ii] https://ppp.worldbank.org/financing/project-finance-concepts
[iii] https://ppp.worldbank.org/financing/project-finance-concepts
[iv] Ibid
[v] https://corporate.cyrilamarchandblogs.com/2024/03/when-is-a-holding-company-liable-for-the-acts-and-omissions-of-its-subsidiary-a-jurisprudential-analysis/
[vi] Ibid
[vii] Ibid
[viii] Ibid.
[ix] https://corporate.cyrilamarchandblogs.com/2024/03/when-is-a-holding-company-liable-for-the-acts-and-omissions-of-its-subsidiary-a-jurisprudential-analysis/
[x] https://ibbi.gov.in/uploads/whatsnew/2019-10-12-004043-ep0vq-d2b41342411e65d9558a8c0d8bb6c666.pdf
[xi] https://ppp.worldbank.org/financing/project-finance-concepts
[xii] https://www.sciencedirect.com/science/article/abs/pii/S0304405X09001263
[xiii] https://ibbi.gov.in/uploads/whatsnew/2019-10-12-004043-ep0vq-d2b41342411e65d9558a8c0d8bb6c666.pdf
[xiv] https://ibclaw.in/status-of-subsidiary-company-vis-a-vis-holding-company-under-the-insolvency-law-by-chidambaram-ramesh/
[xv] https://ibclaw.in/section-69-of-the-companies-act-2013-transfer-of-certain-sums-to-capital-redemption-reserve-account/
[xvi] https://www.investopedia.com/articles/stocks/10/share-buybacks.asp
[xvii] https://ibclaw.in/status-of-subsidiary-company-vis-a-vis-holding-company-under-the-insolvency-law-by-chidambaram-ramesh/
[xviii] https://amlegals.com/group-insolvency-proposed-framework-and-its-significance/
[xix] https://amlegals.com/group-insolvency-proposed-framework-and-its-significance/
[xx] https://www.livemint.com/companies/news/ilfs-group-clears-rs-48-463-crore-debt-achieves-nearly-80-of-target-11764143744656.html
[xxi] https://www.livemint.com/companies/news/ilfs-group-clears-rs-48-463-crore-debt-achieves-nearly-80-of-target-11764143744656.html
[xxii] https://www.sciencedirect.com/science/article/abs/pii/S0304405X09001263
[xxiii] https://www.sciencedirect.com/science/article/abs/pii/S0304405X09001263
[xxiv] https://ibbi.gov.in/uploads/whatsnew/2019-10-12-004043-ep0vq-d2b41342411e65d9558a8c0d8bb6c666.pdf
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