This is the second of a two-part series on foreign strategic investment in India’s downstream refining and petrochemical sector. The first part considered the FDI regime, the regulatory environment, land allocation and the principal risks that shape such investments. This article examines the structuring choices available to an investor once the project moves beyond entry, pipeline access, funding, secured offtake and the regulatory treatment of the commercial arrangements that follow.
The first part of this series explained why liberalised FDI does not, by itself, make a refinery investment straightforward. The complications do not end with entry or land allotment. Pipeline rights, approvals, capital deployment and the investor’s commercial rights must each be addressed before the relevant decisions become difficult to reverse. Where the risks are spread across different statutes, authorities and timelines, the answer is structural sequencing conditions precedent, linking drawdowns to identifiable milestones and allocating regulatory exposure before it becomes capital exposure.
There is yet another land-related issue, but this time it entails access, not ownership. This is why a diligence exercise that goes no further than the boundary wall of a refinery is considered incomplete. Pipelines connect refinery complexes to ports and centres of consumption. These in turn are regulated by a wholly different statute, namely the Petroleum and Minerals Pipelines (Acquisition of Right of User in Land) Act, 1962 (“PMPA”). Under the PMPA, an entity acquires a right of user for laying pipelines while the ownership continues to vest with the original landowner. This requires extensive due diligence over large corridors, often running across districts and states and payment of compensation. Furthermore, the site of the refinery may have come either through acquisition under LARR Act or allotment by a state corporation while the pipeline arrives under the PMPA, an entirely different legislation with its separate process. They run on different timelines before different authorities and are open to objection by an entirely different set of people. And then there is the petroleum pipeline itself, which is regulated by the Petroleum and Natural Gas Regulatory Board (“PNGRB”) with the stated object of optimum utilisation of pipeline infrastructure.
Thus, the certainty of availability of land - be it allotment or right to use - does not turn on a single event, but is spread across multiple legislations, several authorities and over years. This has a significant impact on funding and it has to be resolved in such a manner so as to balance the project’s need for capital while limiting the exposure of the investors. This can be achieved with a full equity commitment by the investor and a staged drawdown tied to identifiable milestones i.e. allotment executed and possession taken (significant, given squatters), corridor right of user acquired for defined stretches, transfer consents etc. This ensures certainty of funding so essential for large-sized projects (construction, equipment purchase, awarding EPC contracts) while at the same time the investor’s exposure tracks the milestones, allowing a pause or exit in a Nanar-like scenario.
Foreign refiners rarely invest in such long gestation projects for a passive equity return. What they want is secured offtake, crude supply rights or product marketing rights that often exceed their equity stake because the strategic value of the investment lies in locking in demand for their own crude or downstream products. Given the commercial significance of such arrangement(s), it is worth keeping in mind the potential exposure to not one but four different authorities.
Firstly, the sectoral regulators. Authorisation to market transportation fuels is granted by the Ministry of Petroleum and Natural Gas under its Resolution of November 8, 2019, which the Ministry has since placed under review. Then comes the PNGRB Act, 2006, which requires the PNGRB to promote competitive markets, to prevent restrictive trade practices and enforce marketing service obligations in notified products, and to regulate non-discriminatory open access to the common and contract carrier pipelines through which the product must move. A tied offtake that operates as a captive marketing channel for the foreign partner has to be tested against both.
Secondly, (and these arrangements are not uncommon) offtake agreements, supply agreements etc. between the foreign party and the Indian entity it has invested in, would ordinarily be related-party transactions (a partner holding 20% or more of the voting power, or otherwise participating in the investee’s business decisions, makes the investee its “associate” under the Companies Act 2013,) that fall within the mischief of Section 188 of the Companies Act, 2013 and, where the investee is listed, Regulation 23 of the SEBI listing regulations as well. Thirdly, the same agreements will also face scrutiny under the transfer pricing provisions of the Income-tax Act, 2025 (which replaced the 1961 Act, effective April 1, 2026), and mandate arm's length pricing between associated enterprises on cross-border transactions. Needless to say, this would have an impact of preferential pricing and therefore the justification should be built on day one at the structuring stage rather than defended later.
Fourthly, we are once again confronted with competition law. Supplying crude to, and lifting product from, an entity in which one holds equity is considered a vertical arrangement. Vertical arrangements are not presumed anti-competitive per se under the Competition Act, 2002, but are prohibited if they cause or are likely to cause an appreciable adverse effect on competition. Indian downstream is concentrated. Public sector refiners account for roughly three- fifths of installed refining capacity, and the three PSU oil marketing companies operate around nine in ten of the country’s retail outlets. In such a concentrated market, a tied offtake foreclosing a material share of throughput or marketing capacity could well be called to question. This would mean that CCI, having already reviewed (and cleared) the transaction under merger control (see Part 1 of this series), is likely to test again here.
In projects the instinct is, and reasonably so, to tackle a problem as you arrive at it. The difficulty with a project of this nature is that the bridges are not ahead of you but behind you. Take land, where acquisition at the outset is undone years later by political considerations. Or where consent lies buried deep in state corporation allocation. Or contracts that are negotiated commercially between parties but examined years later. The question, therefore, is of timing - when does one decide? The test of timing is (theoretically speaking), straightforward. It is that moment after which a decision cannot be changed. This is the crucial difference between “what do we do now?” and “what do we have to live with."
With land the moment comes before siting - the land allocation regime to be chosen, the political history of the area, the viability of a pipeline corridor etc. Then comes the term sheet with a detailed list of consents which are conditions precedent, a clear articulation of where control sits, pricing principles for offtake, apportioning of roles and responsibilities of partners and the clear milestones for release of capital contributed. Then comes the definitive documents, where decisions already taken are recorded.
Agreed, none of the above would make the project safe. It decides how much of your capital stands exposed when a risk, not provided for, appears. As India's refining and petrochemical buildout continues to seek foreign capital at scale, it will be the quality of legal structuring around these specific points, more than liberalisation of the FDI regime, that determines how much of that capital India is able to absorb.
About the authors: Chandrasekhar G. Tampi is a Partner at Luthra and Luthra Law Offices India.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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