The project, which has a total cost of Rs314 billion, involves the development of a fully integrated aluminium operation comprising bauxite mining, an alumina refinery, captive power generation and an aluminium smelter. On completion, Vedanta will have a refining capacity of 5 million tonnes per year (tpy) at the existing 1 million tpy Lanjigarh refinery, a 1.75 million tpy smelting facility at Jharsuguda, captive power plants with a total capacity of 1.5GW, and bauxite sourced from the nearby Niyamgiri mine.

The project will be implemented in phases and is expected to generate cash before it reaches completion. Therefore, a portion of the early cashflow could be used to fund the equity portion. In the case of any shortfall in internal cashflow, Vedanta will inject quasi-equity into the project.

The use of local bauxite is key to the project. The existing Lanjigarh refinery, which began operations in September 2007, is reportedly losing $90 on every tonne of alumina it produces, owing to high input costs, since bauxite is imported from Chhattisgarh, Jharkhand, Madhya Pradesh, Andhra Pradesh, Gujarat and Maharashtra at an average cost of $180 per tonne. This compares to bauxite costs of around $15 per tonne if Niyamgiri were operational.

The Niyamgiri mine project is owned by Orissa Bauxite Mining Corporation, a joint venture that Vedanta Resources subsidiary Sterlite (74%) and the state-owned Orissa Mining Corporation (26%) formed in 2008.

As it stands, Lanjigarh has made total losses of around Rs5 billion since its 2007 start date. Vedanta's solution to this problem is to finance the Niyamgiri project and to integrate it into the expanded smelting and refining operations, so that transport costs will be more or less removed from the equation.

The project debt, which has been oversubscribed by a reported 70%, breaks down into an already-closed tranche of Rs19 billion, a new tranche of Rs100 billion and a green-shoe (or over-allotment) tranche of Rs73 billion. Rs124 billion of equity is coming in by way of share capital, quasi-equity and internal cashflow from the interim operations of the project.

The debt has a 10-year tenor that includes a two-year construction period, a six-month grace period and a 7.5-year quarterly repayment period. Pricing is just below SBI's prime lending rate of 11.75%, and there is a fee of 20bp. The margin is reset annually, and the project company can prepay the loan on the reset dates without any prepayment penalty.

The 25-strong local lending group on the new debt comprises State Bank of India, Canara Bank, Punjab National Bank, UCO Bank, Union Bank of India, Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Allahabad Bank, Bank of Baroda, United Bank of India, State Bank of Hyderabad, State Bank of Patiala, Syndicate Bank, Punjab & Sind Bank, Andhra Bank, Federal Bank, Indian Bank, State Bank of Bikaner & Jaipur, State Bank of Mysore, State Bank of Travancore, Jammu & Kashmir Bank, Vijaya Bank, Bank of Rajasthan and Dena Bank.

The lending group on the already-closed tranche comprises Bank of Maharashtra, Corporation Bank, ICICI Bank, Indian Bank and Life Insurance Corporation of India. Luthra & Luthra Law Offices is legal adviser to the lenders.

In the middle of March, reports came out that Vedanta Aluminium's parent company Vedanta Resources, which is London-listed, is planning to demerge the Orissa aluminium project into a separate entity in an effort to get a better valuation (of around $19 billion) for the business. Morgan Stanley, Credit Suisse and JPMorgan have been mandated to put together a plan that would result, if approved by shareholders and creditors, in Vedanta Aluminium being listed in India on the NSE and BSE.

This will add more time to the deal. Beyond getting shareholder approval, the demerger proposal would also require clearance from a high court, which could take around three months. Added to that, the demerger proposal has come at a time when the project is under regulatory scrutiny for alleged environmental and human rights transgressions.

One of the project's main hurdles is that Indian government officials have accused the company of violating environmental guidelines detailed in the Forest Rights Act 2006 at its planned mining site in the Niyamgiri Hills. The allegation has come in response to the fact that the company had completed the road to the mines and started to construct the columns for a long-distance conveyor belt in a forested area before full consent was given to start operations. The company has denied wrongdoing, but the investigation of the claims and how they are dealt with will take time.

The other hurdle is the issue of land rights. The Dongria Kondh tribe, for which the Niyamgiri Hills is ancestral territory, claims that Vedanta has not included it in its plans for the aluminium development. Its claims, backed by Amnesty International and Survive, include threats to its way of life and the fear of forced resettlements. What the follow-up actions connected to these allegations might be is unclear, but any delay is a serious problem for the mounting losses at the Lanjigarh refinery, which wants access to the bauxite in the hills.

Despite its problems, Vendanta Aluminium's three-tranche debt model, featuring a green-shoe facility, has elicited strong appetite from a broad lending base. The project aims at taking the regional bauxite processing industry to unprecedented levels of production. Those involved in the deal – on the financial and legal sides, as well as a senior executive at Vedanta – expect it to close over the next month, and reason that any deal of this size that opens up new territories is bound to throw up similar issues.