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Financely · Solar Project Finance · Southern India · Equity Gap Capital
Southern India's commercial solar market is producing a consistent flow of projects where the fundamentals are solid, the PPA is signed, the senior debt is sanctioned, and the transaction stalls because the sponsor cannot fully fund the 30% equity requirement from their own balance sheet. This is the equity gap problem: not a credit failure, not a project failure, but a capital stack problem with a specific and solvable solution. Financely places structured gap capital (preferred equity or subordinated capital sitting between senior debt and sponsor equity) for solar projects from 1 MWp upward across Tamil Nadu, Karnataka, Andhra Pradesh, Telangana, and Kerala. The debt is in place. The project works. We fill the gap.
The standard capital structure for a commercial solar project in India is 70% senior debt from IREDA, a public sector bank, or a DFI, and 30% equity from the project sponsor. This works cleanly when the sponsor has the balance sheet to fund the full equity requirement. The trouble is that it frequently does not. A competent, experienced solar developer with a 5 MWp project at ₹25 crore total project cost needs to bring ₹7.5 crore in equity on top of the debt draw. A 10 MWp project at ₹50 crore requires ₹15 crore in equity. For smaller and mid-size sponsors (the segment generating the majority of the C&I solar deal flow in Southern India) this equity requirement is the binding constraint, not the project's merit or the debt's availability.
The result is a pipeline of solar projects that are technically sound, commercially viable, PPA-backed, and debt-sanctioned, but cannot reach financial close because the sponsor's balance sheet or available liquidity falls short of the full 30% equity injection. The project does not need more debt. It does not need a new lender. It needs a capital partner willing to fill the equity gap on terms that allow the sponsor to retain operational control and the upside of a project they have built.
The equity gap in numbers: On a ₹50 crore project with a 70:30 D/E structure, the senior lender provides ₹35 crore. The sponsor must contribute ₹15 crore. If the sponsor can fund ₹7–8 crore from their own resources, the equity gap is ₹7–8 crore. Financely places this gap capital as preferred equity or subordinated capital with a defined preferred return, a profit participation above the hurdle, and a structured exit over 3–7 years. The sponsor retains management control of the SPV and the project. The lender's security position is unaffected.
Equity gap capital for solar projects can be structured in several ways depending on the senior lender's intercreditor requirements, the sponsor's preference for control, and the investor's return expectations. Financely works with investors who understand solar project cash flows and can structure around the IREDA or PSB security framework without conflicting with the senior lender's covenants.
| Instrument | How it sits in the stack | Key features | Best suited when |
|---|---|---|---|
| Preferred equity in SPV | Sits as equity in the SPV, satisfying the lender's equity requirement in full. Preferred equity holders receive a preferred return from project cash flows before ordinary equity distributions to the sponsor. | Preferred return of 15–18% p.a. on invested capital. Profit participation above hurdle. Buyout right for sponsor after year 3–5. Share pledge in favour of senior lender not disturbed. | Senior lender requires all capital to be in SPV equity. Sponsor wants to demonstrate full 30% equity to IREDA/PSB. Structure is clean for lender covenant purposes. |
| Subordinated loan to SPV | Ranks junior to senior debt but ahead of equity in the repayment waterfall. Counts as quasi-equity for some lender assessments depending on subordination terms agreed with the senior lender. | Interest rate reflective of subordinated risk. PIK (payment in kind) option for construction period where project generates no revenue. Amortisation begins post-COD from available cash flow. | Senior lender accepts subordinated debt within the equity layer. Sponsor wants to retain full SPV equity and prefers a debt instrument to equity dilution. |
| Mezzanine capital with equity upside | Hybrid structure combining subordinated debt with equity warrants or a profit participation right. Provides the investor with a contractual debt return plus exposure to the project's IRR above the hurdle. | Base return from subordinated coupon. Warrant or profit participation gives investor exposure above the base return. Tenor aligned to 3–7 years. Negotiated intercreditor terms with senior lender. | Project has strong projected equity IRR (14–20%) and investor wants to participate in upside. Sponsor willing to offer limited upside participation in exchange for lower cash coupon in early years. |
SEBI AIF framework and Indian private credit: The Indian private credit market reached an all-time high in the first half of 2024, with renewable energy identified as one of the sectors providing significant opportunities for AIF deployment. SEBI amended the AIF regulations in 2024 to permit encumbrance on equity investments in infrastructure companies for the purpose of project finance security, a change that directly improves the ability to structure preferred equity for solar projects within the Indian regulatory framework. Financely structures gap capital through appropriate vehicles compliant with RBI and SEBI requirements.
The senior debt must be at in-principle sanction or term sheet stage from IREDA, a public sector bank, or an approved DFI. We do not provide gap capital ahead of senior debt commitment. The lender's term sheet tells us the debt quantum, security structure, and covenant requirements that the gap capital must work around.
An executed Power Purchase Agreement, or an advanced Letter of Intent with a creditworthy C&I offtaker, is required. The PPA is the project's revenue contract and the primary basis for the lender's sanction and our gap capital assessment. A PPA with a government entity or investment-grade corporate is preferable to one with an unrated counterparty.
Land documents or lease agreements, grid connectivity approval from the relevant DISCOM (TANGEDCO, BESCOM, APEPDCL, TSSPDCL, or KSEB), statutory environmental clearances, and the EPC contract or EPC tender are required for the full assessment. We review all project documentation as part of the gap capital underwriting.
A 25-year project financial model showing P50 and P90 generation scenarios, DSCR over the loan tenor, equity IRR with and without the gap capital, and the full cash flow waterfall including preferred return payments. If you do not have a model, Financely can build or review one as part of the mandate.
Three years of audited accounts for the sponsoring entity, the proposed SPV incorporation documents, KYC and background information for all principal promoters, and a clear description of the sponsor's equity contribution and the size of the gap.
A clear statement of how much equity the sponsor can contribute from their own resources, what the total equity requirement is under the senior debt terms, and therefore the exact size of the equity gap. The simpler and cleaner this calculation is presented, the faster the assessment process.
Submit project details, PPA, debt term sheet, and equity gap size. Response within 1 business day.
Project fundamentals, PPA quality, lender covenants, and gap size reviewed. Go/No-Go memo issued.
Preferred equity, sub-debt, or mezz structure designed around senior lender intercreditor requirements.
Gap capital placed with appropriate investor from Financely's network. Term sheet issued to sponsor.
Investment documents drafted. Intercreditor terms agreed with senior lender. Equity injected at financial close.
Tell us the project capacity, location, PPA status, senior debt position, your equity contribution, and the size of the gap, and we will come back within one business day with a clear view of whether we can fill it and what the terms would look like. Minimum project size 1 MWp. Minimum gap capital ₹5 crore.
Equity gap financing fills the shortfall between the senior debt available to a solar project (typically 70% of project cost under IREDA or PSB lending norms) and the full equity requirement that the sponsor cannot meet from their own resources. Under a standard 70:30 D/E structure, the sponsor must contribute 30% of project cost as equity. If the sponsor can only fund 15% from their balance sheet, the equity gap is the remaining 15%. Financely places this gap as preferred equity or subordinated capital from an investor, sitting between the senior debt and the sponsor's equity in the capital stack, with a defined preferred return and a structured exit.
No. Gap capital is structured to preserve the sponsor's operational control and day-to-day management authority over the SPV and the project. The gap capital investor receives a preferred return from project cash flows and governance rights consistent with their minority economic position: typically information rights, approval rights over major decisions, and a buyout mechanism after a defined period. The sponsor retains the EPC relationship, the O&M oversight, the PPA management, and the upside above the investor's preferred return. The structure is designed so that the sponsor builds the project as planned, and the gap capital exits through a cash flow sweep, a refinancing, or a sponsor buyout at a pre-agreed valuation.
Gap capital investors in Indian solar projects typically target a preferred return of 15 to 20% per annum on invested capital, reflecting the subordinated position and the risk profile of the equity layer. This return is structured as a preferred cash distribution from the project's free cash flow after debt service, ahead of any distributions to the sponsor's equity. In mezzanine structures with equity participation, the base coupon may be lower (12 to 15%), with the investor receiving a profit participation above a hurdle rate that provides upside exposure to the project's full equity IRR. Exact terms depend on the project's DSCR profile, the PPA offtaker quality, the sponsor's track record, and the size of the gap relative to total project cost.
Yes, and this is critical. The senior lender (IREDA, a PSB, or a DFI) must be informed of and must approve the gap capital structure. The intercreditor agreement between the senior lender and the gap capital investor governs the relative priority of claims, any restrictions on the gap capital instrument during the loan tenor, and the conditions under which the gap capital can be repaid or the investor can exit. IREDA and most PSBs require that all equity in the SPV is committed and contributed before the first debt disbursement. Gap capital structured as preferred equity in the SPV satisfies this requirement. Subordinated debt may require specific lender consent. Financely manages the intercreditor negotiation as part of the placement process.
Yes, in some cases. If a project is under construction and the sponsor has run short of equity before completing the full equity contribution schedule, gap capital can be structured to complete the equity injection and allow debt drawdown to proceed. This is a more complex situation than pre-construction gap funding because the investor is entering a partially-committed project, and the structure must account for construction risk, existing EPC contractor relationships, and the senior lender's current disbursement position. These situations are assessed on a case-by-case basis and typically require faster execution than pre-construction mandates.
The minimum project size is 1 MWp with a minimum gap capital requirement of ₹5 crore. There is no maximum project size. Larger projects generating larger equity gaps are equally eligible. Geographies covered are all five Southern Indian states: Tamil Nadu (TANGEDCO/TEDA), Karnataka (BESCOM/KREDL), Andhra Pradesh (APEPDCL/APSPDCL), Telangana (TSSPDCL/TSREDCO), and Kerala (KSEB/ANERT). Within each state, projects in grid-connected zones with established net metering or open access frameworks are preferred. Projects in areas with grid connectivity challenges or pending DISCOM approvals are assessed on the specific status of approvals at the time of submission.
If your project has a signed PPA, a sanctioned senior debt facility, and a defined equity shortfall: submit it. We respond within one business day.
Disclaimer: This page is published for informational purposes only. All gap capital terms are indicative and subject to full project assessment, credit review, KYC, AML, and sanctions compliance. Financely Group provides advisory and arrangement services and does not guarantee specific financing outcomes. Return parameters quoted are indicative market ranges and not a commitment. Nothing on this page constitutes a regulated financial promotion. Services are strictly business-to-business.
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