Guidelines issued by the Reserve Bank of India (RBI) restrict an Indian bank’s ability to finance the acquisition of equity shares. Generally, a promoter’s contribution towards equity cannot be funded by a bank, and banks cannot finance the acquisition of equity shares other than in exceptional cases. Therefore, financing for a domestic acquisition is generally procured from non-banking financial companies (NBFCs) or by the issuance of non-convertible debentures (NCDs) by the acquirer, which can be subscribed to by foreign portfolio investors (FPIs), mutual funds and alternate investment funds (AIFs).

NBFCs are registered with the RBI and so far enjoy a more relaxed regulatory framework than banks. International banks often lend through their offices outside India to borrowers outside India for acquisitions in India, or they lend to Indian borrowers for Indian acquisitions through the FPI route (discussed in 1.2 Corporates and LBOs and 3.1 Senior Loans).

In the Indian context, cross-border acquisitions are commonly classified into two categories.

• Inbound acquisitions, where an offshore acquirer acquires the shares of an Indian target. A slight variation to this structure is the acquisition of an Indian target by a foreign-owned and controlled operating company (FOCC) incorporated in India (which is a subsidiary of an offshore entity).
• Outbound acquisitions, where an Indian acquirer acquires a company incorporated outside India directly or through a special-purpose vehicle incorporated outside India (Offshore SPV).

For an inbound acquisition where the acquisition is through an offshore acquirer, the lending market essentially comprises international banks, capital markets, financial institutions and offshore debt funds. However, such acquisition finance cannot be secured by a pledge on shares of the Indian target, charge on assets of the Indian target or guarantees from the Indian target due to Indian exchange control regulations. Additionally, Indian banks, Indian financial institutions and domestic funds cannot provide finance to an offshore entity to acquire shares of an Indian company.

For an acquisition by an FOCC, finance cannot be provided by Indian banks, Indian financial institutions or domestic funds, as FOCCs are not permitted to leverage in the Indian market for the acquisition of shares. An Indian company can raise foreign currency financing from offshore lenders in the form of external commercial borrowings (ECB), but these cannot be used for equity investments in India. The primary source of debt funding which an FOCC can utilise is from overseas lenders for the acquisition of an Indian target through the issuance of NCDs, which can be subscribed to by FPIs. FPIs are registered with the Securities and Exchange Board of India (SEBI) under the SEBI (Foreign Portfolio Investors) Regulations, 2019 (the “FPI Regulations”).

For an outbound acquisition, an Indian acquirer can borrow domestically from banks, financial institutions and other lenders if it complies with certain qualitative and quantitative requirements. Additionally, if the acquisition of the offshore target is through an Offshore SPV, the Offshore SPV can borrow funds offshore from offshore lenders, funds, capital markets and other financial institutions. Further, ECB can also be raised by an Indian company from overseas lenders and other recognised lenders for the acquisition of an overseas target. Creating security and providing guarantees are also permitted, subject to certain conditions.

Additionally, the Insolvency and Bankruptcy Code, 2016 (IBC) also enables the acquisition of Indian distressed companies through a statutory process. Such acquisitions domestically, in certain cases, have been leveraged buyouts.

The RBI has also introduced the Prudential Framework for Resolution of Stressed Assets on 7 June 2019, which requires banks to resolve a stressed asset in a time-bound manner and may involve resolution by way of a change of ownership of the borrower. Some leveraged buyouts have also been seen in such restructurings.

At the onset of the COVID-19 pandemic in April 2020, the government of India issued press note 3 of 2020 (“Press Note 3”) and the Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2020 (the “NDI Amendment Rules”) amending certain rules for foreign direct investments from neighbouring countries. These amendments provide that any foreign direct investment:

• from Pakistan, Bangladesh, Afghanistan, Nepal, Bhutan, Myanmar and China (neighbouring countries); or
• where the beneficial owner of any foreign direct investment into India is:
1. situated in a neighbouring country; or
2. a citizen of a neighbouring country;
• requires approval from the Government of India. Press Note 3 and the NDI Amendment Rules do not prescribe any specific threshold in relation to the term “owner” or “beneficial owner”, and, accordingly, no specific threshold is prescribed for investment by an entity (whether direct or indirect) from a neighbouring country.

The Press Note 3 and the NDI Amendment Rules affected new and proposed foreign direct investments from neighbouring countries and, consequently, any financing thereof.

The market swiftly adjusted to limitations posed by COVID-19 and the lockdowns in India. Some initial hiccups were the electronic signing of documents and making stamp duty payments (which must be made before the execution of documents). However, Indian lenders, accustomed to physical signings, adapted to using digital signatures or working on the basis of scanned documents (followed up with wet ink signatures). Also, once the lockdown was eased, procuring stamp papers became easier. Certain timelines for registration of documents and obtaining approvals were relaxed due to the COVID-19 pandemic.

After the onset of the COVID-19 pandemic, the war in Ukraine was a major blow for not just India but also the global economy as a whole, although the impact in India was not as severe as it was in other countries. However, the stock markets showed a downward trend, inflation soared, foreign exchange reserves took a hit and supply chains were disrupted following the global impact of the war in Ukraine.

At the onset of the war in Ukraine, deal activity in the acquisitions and acquisition finance space momentarily slowed down but it was quick to pick up impetus as clarity emerged on the extent of the war’s impact on India.

Currently, COVID-19 and the war in Ukraine do not have a major impact on transaction timelines and documentation for acquisition finance in India.

Financing documents for acquisition finance raised by an offshore borrower are typically governed by English law. Financing documents for acquisition finance raised by an Indian borrower domestically and transaction documents in relation to NCD issuance by an Indian company are governed by Indian law. Security and guarantee documents are generally governed by the law of the jurisdiction where the assets are located or the jurisdiction of which the guarantors are nationals or in which they are incorporated.

The choice of foreign law for an agreement is generally upheld by Indian courts unless, in the view of the Indian courts, the choice of foreign law is not bona fide or if the application of foreign law is opposed to the public policy of India. In any proceedings in India, foreign law has to be proved as a matter of fact by leading expert evidence of foreign legal counsel.

In any acquisition financing where the funding is in a foreign currency and obtained from foreign lenders, the credit agreements and intercreditor agreements will generally be based on the latest Asia Pacific Loan Market Association (APLMA) or Loan Market Association (LMA) forms.

For acquisition financings in Indian rupees (INR), where the lenders are Indian NBFCs, funds or FPIs, the nature of documentation varies with every transaction, and there is no industry-accepted market standard. Some banks and NBFCs may have their own formats of facility agreements or debenture documents.

In relation to the issue of NCDs, the Companies Act, 2013 (the “Companies Act”) and its related rules prescribe some prerequisites for the debenture trust deed. The debenture trust deeds are also governed by various SEBI regulations if the NCDs are listed on a stock exchange. In addition, the placement memorandum or the offering memorandum for NCDs must be in a format as prescribed by the Companies Act and applicable SEBI regulations.

There is no market-accepted form of documentation for security documents in relation to assets located in India.

There are no specific legal requirements as to the language in which documentation for acquisition financing is to be drafted. However, all finance documents for acquisition financings, security and guarantee are in English.

Where a finance document is executed by an Indian company, resident or national, standard capacity, authority and enforceability legal opinions are issued. The opinions are issued based on the conditions-precedent documents provided by the borrower/obligors.

Inbound Acquisition Finance: Offshore Acquirer

Typically, the offshore acquirer sets up a special-purpose vehicle outside India (FDI SPV) which acquires shares of an Indian target through foreign direct investment (FDI) into India. The FDI SPV raises debt from offshore lenders in the form of senior loans to finance the acquisition. Such loans are secured by the assets and shares of the FDI SPV (other than the shares of the Indian target and any other Indian asset).

Given that there are restrictions under Indian exchange control laws on pledging shares of an Indian target to secure acquisition finance availed by the FDI SPV, generally, a non-disposal undertaking is obtained in relation to the Indian target shares held by the acquirer, coupled with a pledge on the acquirer shares.

If the Indian target is a listed company and the FDI SPV holds (together with persons acting in concert) 25% or more shares or voting rights in the target, or controls the target, then any enforcement of the pledge on the shares of the FDI SPV may trigger a mandatory open-offer requirement under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the “Takeover Regulations”). A mandatory open offer must be made for at least 26% of the voting shares of the target.

In the case of sponsor financing, the financing may also benefit from an equity commitment letter from the sponsor.

Inbound Acquisition Finance: FOCC

As mentioned previously, an FOCC cannot use acquisition finance from Indian banks, financial institutions or Indian funds, as FOCCs are not permitted to leverage in the Indian market to acquire shares. If the acquisition is through an FOCC, the debt can be raised by the FOCC by issuing NCDs subscribed to by FPIs. NCDs are structured as senior debt and secured by the assets of the FOCC and a pledge on the shares of the target. Further, if the target is a private limited company, security can be created on the assets of the target to secure the acquisition finance. However, such security may need to be shared with the other lenders of the FOCC and the target.

Outbound Acquisition Finance

For an outbound acquisition made directly by an Indian acquirer, the following financing structures are typically adopted.

• Onshore financing – while the RBI guidelines restrict an Indian bank’s ability to finance the acquisition of equity shares of an Indian company, save for exceptional cases, an Indian company can raise loans from Indian banks for an outbound acquisition. Such loans can be utilised by the Indian company towards the acquisition of equity in overseas joint ventures/wholly owned subsidiaries or other overseas companies, new or existing, as a strategic investment. For financing such an acquisition, an Indian acquirer can raise funds from NBFCs in India or by the issue of NCDs, which can, inter alia, be subscribed by domestic mutual funds, AIFs and FPIs.
• ECB – Indian companies can use ECB to acquire shares of an overseas joint venture or wholly owned subsidiary. Further, ECBs can also be used by Indian companies for business and asset acquisitions (subject to certain conditions). The guidelines issued by RBI in relation to ECB (the “ECB Guidelines”) stipulate provisions on various matters that need to be considered by a foreign lender when lending to an Indian borrower. Among other things, the ECB Guidelines regulate:
1. eligible borrowers – entities that can raise ECB include all entities eligible to receive FDI, port trusts, units in special economic zones, the Small Industries Development Bank of India and the Export-Import Bank of India;
2. recognised lenders – ECB can only be extended by the following:
1. a lender who is a resident of the Financial Action Task Force (FATF) or an International Organization of Securities Commissions (IOSCO) compliant country;
2. multilateral and regional financial institutions where India is a member country;
3. individuals who are foreign equity holders or where the ECB is raised by the issuance of bonds/NCDs listed outside India; and
4. foreign branches or subsidiaries of Indian banks are permitted as recognised lenders only for foreign currency ECB (except foreign currency convertible bonds and foreign currency exchangeable bonds);
3. minimum average maturity – the minimum average maturity of an ECB may vary depending on the end use of the ECB; if the ECB is used for overseas investments, the minimum average maturity will be three years. No call or put options can be exercised during such a period; and
4. all-in cost ceilings – the all-in cost ceilings include rate of interest, other fees, expenses, charges, guarantee fees and export credit agency charges, whether paid in foreign currency or Indian rupees, but exclude commitment fees and withholding tax payable in Indian rupees. The maximum all-in cost ceiling allowed for:
1. any new foreign currency ECB is any widely accepted interbank rate or alternative reference rate (ARR) of six-month tenor, applicable to the currency of borrowing plus 500 basis points;
2. transitioning of any existing foreign currency ECB linked to LIBOR whose benchmark is changed to ARR is any widely accepted interbank rate or ARR of six-month tenor, applicable to the currency of borrowing plus 550 basis points; and
3. rupee denominated ECB is the prevailing yield of the government of India securities of corresponding maturity plus 450 basis points.
• Offshore financing – in certain cases, the Indian acquirer sets up an Offshore SPV for acquiring the target in accordance with the guidelines issued by the RBI in relation to overseas direct investments (the “OI Guidelines”). The Offshore SPV then borrows funds from offshore lenders, funds, capital markets and other financial institutions.

Domestic Acquisition Finance

Domestic acquisition finance is generally structured as NCDs availed from NBFCs, FPIs or AIFs or loans from NBFCs. The proceeds of NCDs issued on a private placement basis can be used for equity investments. However, the proceeds of unlisted NCDs cannot be used for capital market investments. Further, the proceeds of a public issue of listed NCDs cannot be used for the acquisition of shares of any person who is part of the same group or under the same management.

Generally, NCDs must have a minimum maturity or duration of one year at the time of investment by the FPI. Any investment by an FPI in NCDs will need to comply with the concentration limits and single or group investor wise limit prescribed by the RBI. It should be noted that:

• investment by any FPI, including investments by related FPIs, shall not exceed 50% of any issue of NCDs;
• in the case that an FPI, including related FPIs, has invested in more than 50% of any single issue, it cannot make further investments in that issue until this requirement is met; and
• FPIs cannot invest in partly paid NCDs.

The RBI has also provided a separate channel, called the Voluntary Retention Route (VRR), to enable FPIs to invest in NCDs. The investments through the VRR are free of the macro-prudential and other regulatory norms applicable to FPI investments in debt markets, provided FPIs voluntarily commit to retaining a required minimum percentage of their investments in India for a specified period. If the FPI invests in the NCDs under the VRR, minimum average maturity, single-borrower limits and concentration norms do not apply to those NCD investments.

Further, NCDs are required to have a minimum maturity of 90 days. However, if NCDs are issued with a maturity of less than one year, they are regulated by guidelines issued by the RBI in this regard (the “RBI NCD Guidelines”). The RBI NCD Guidelines prescribe stringent guidelines for such issuances, including a minimum rating requirement of “A2” as per the rating symbol and definition prescribed by the SEBI and specific eligibility requirements for the issuer.

The NCD route offers greater flexibility on payment of interest to NCD holders, as there are no interest rate caps for privately placed NCDs. However, no call or put option can be exercised in relation to privately placed listed NCDs prior to the expiry of 12 months from the date of their issuance.

Further, under the ECB Guidelines, eligible borrowers who are participating in the corporate insolvency resolution process (CIRP) under IBC as resolution applicants can raise ECB from all recognised lenders, except foreign branches or subsidiaries of Indian banks, for repayment of rupee term loans of the target company with the prior approval of the RBI.

While payment-in-kind (PIK) loans are not very popular in the Indian scenario, where the borrower is an Indian acquirer, PIK loans are generally structured by way of NCDs. Loans from NBFCs can also be in the form of PIK loans. Since the RBI requires banks to charge interest monthly, Indian banks cannot extend PIK loans. However, there have been PIK structures where the borrower is an entity incorporated outside India.

Mezzanine finance is generally raised in the form of compulsorily convertible preference shares, optionally or partially convertible preference shares, compulsorily convertible debentures or optionally or partially convertible debentures. However, if the mezzanine finance is provided by an offshore entity, optionally or partially convertible preference shares or optionally convertible debentures are treated as ECB and must comply with the ECB Guidelines.

Bridge loans for acquisition finance are need-based and are raised pending the tie-up of the final financing for the acquisition. These bridge loans for acquisition finance are generally availed from NBFCs. ECBs cannot be structured as bridge loans due to their minimum average maturity period requirement. Further, NCDs with a maturity period of less than one year are subject to conditions under the RBI NCD Guidelines and are not prevalent.

ECB can be raised from abroad by issuing bonds. Such bonds can be either listed or unlisted. Given that such bonds are required to comply with the all-in cost ceilings under the ECB Guidelines, such bonds are generally not high yield.

Domestically, bonds are issued as NCDs. Where the issuers are not investment grade, the NCDs can be high-yield bonds as there is no interest cap for the NCDs. The return on the NCDs can be linked to the returns on other underlying securities/indices. However, such NCDs must comply with the structured product guidelines issued by the SEBI.

An Offshore SPV may also issue bonds outside India for financing the acquisition of shares of an Indian company.

ECB issued as bonds can be privately placed with the eligible lenders outside India. An offer or invitation to subscribe to privately placed NCDs can be made to no more than two hundred persons on aggregate in a financial year. Unlisted NCDs need to comply with the Companies Act. Further, if the bonds are listed on a recognised stock exchange in India, their issuance should follow the guidelines issued by the SEBI in this regard, in addition to the Companies Act.

As discussed in 5. Security, security can be created (to the extent discussed therein) for various financings that may be availed for funding acquisitions. Acquisition finance (as discussed throughout 3. Structures) can also be asset-backed. The borrower in such structures is usually required to maintain a certain loan-to-value (LTV) ratio or security cover ratio.

Intercreditor agreements are common in the Indian market, where security is shared between multiple lenders. The intercreditor agreements provide for arrangements between various classes of creditors. Generally, the borrower is not a party to the intercreditor agreement. However, it executes an acknowledgement to the intercreditor agreement.

Intercreditor agreements, inter alia, govern the following:

• ranking of security and order of priority amongst the creditors;
• consultation periods before taking any enforcement actions in relation to the security;
• a waterfall for distribution of enforcement proceeds;
• a decision mechanism as to the waiver of events of default;
• voting rights of different classes of lenders;
• collective action and a common approach to security enforcement and exceptions thereto; and
• a mechanism for declaring an event of default and manner of enforcement of security thereafter.

In relation to ECB and acquisition financing, where the acquirer is an Overseas SPV or an FDI SPV, and the funding is obtained from foreign lenders, the intercreditor agreements will generally be based on the APLMA or LMA forms.

In liquidation of the borrower, an intercreditor agreement between lenders setting out equal ranking, which disrupts the order of priority set out under the IBC, is not required to be considered by the liquidator. The SEBI has issued a circular that governs the process to be followed by debenture trustees of listed NCDs to enforce security and execute intercreditor agreements.

The approach remains the same as previously set out. If the security is to be shared between the lenders of the borrower and the bondholders, similar intercreditor agreements must be established.

If the hedges obtained by the borrower are secured with the assets on which other lenders also have security, the hedge counterparties are also parties to the intercreditor agreements. The rights of the hedge counterparty under the intercreditor agreements are synonymous with the ranking of its security.

Security on the assets of an Indian entity and shares of an Indian company is usually created in the following manner.

Immovable Property

Security over immovable property such as land and buildings is created in the form of a mortgage governed primarily by the Transfer of Property Act, 1882 (the “TOP Act”). The common forms of mortgage are an English mortgage (a registered mortgage) and an equitable mortgage (a mortgage created by depositing the title deeds with the lender or security trustee).

The TOP Act provides that a mortgage (other than an equitable mortgage) for repayment of money exceeding INR100 must be created by a registered instrument. The instrument creating the mortgage must be signed by the mortgagor and registered with the land registry where the mortgaged immovable property is situated.

For an equitable mortgage, the authorised representative of the mortgagor deposits the title deeds in relation to the immovable property with the lender or security trustee intending to create a mortgage and provides a declaration at the time of the deposit. The lender or security trustee records the deposit of title deeds by way of a memorandum of entry. In some states, an equitable mortgage needs to be registered or notified to the land registry.

Shares and Other Securities

Security over shares and other securities is typically created through a pledge. A pledge agreement or deed is entered into between the pledgor and pledgee to create and record the pledge. The pledgor also issues a separate power of attorney in favour of the pledgee that allows the pledgee to deal with the pledged shares/securities in an event of default and take other actions on behalf of the pledgor.

Movable Property

Movable property, such as receivables, plant and machinery, accounts and stock, is usually secured by way of hypothecation. Under Indian law, hypothecation generally means a charge over any movable property. The charge created by hypothecation may be a fixed charge over identifiable assets or fixed assets and is usually a floating charge over current assets and stock-in-trade. The security provider executes a deed of hypothecation in favour of the lender or security trustee.

India is an exchange-controlled economy, and the creation of security on the assets of an Indian company in favour of persons outside India or assets of a non-resident Indian in India is ruled by the Foreign Exchange Management Act, 1999 (FEMA) and rules and regulations are framed thereunder. Any cross-border security or guarantee is governed by the FEMA. The security that can be created for the various acquisition finance structures is discussed below.

Inbound Acquisition Finance: Offshore Acquirer

Any acquisition financing availed by an offshore acquirer for the purpose of acquiring the shares of an Indian company cannot be secured by a pledge on the shares acquired by the offshore acquirer without the prior approval of the RBI. Further, no security can be created on the Indian assets of the target or any other person resident in India for securing any such acquisition finance.

Outbound Acquisition Finance

The RBI has recently (22 August 2022) overhauled the framework in relation to overseas investment by an Indian entity (the “New OI Guidelines”) with the intent of liberalising and simplifying the regulatory framework governing overseas investments and with a view to promoting ease of doing business.

In order to provide a financial commitment (which includes security or guarantee) for any borrowing by an overseas entity, an Indian entity must satisfy the following conditions:

• the Indian entity should be eligible to make Overseas Direct Investment (ODI);
• the Indian entity should have made ODI in the foreign entity; and
• the Indian entity has acquired control in such foreign entity at the time of making such financial commitment.

It is also important to note that an Indian entity will not be able to provide any financial commitment (including any guarantee or security) for any borrowing by an overseas entity if there is any delay in filing or reporting by the Indian entity in relation to such offshore entity, unless such delay is regularised. Further, if an Indian entity:

• has an account appearing as a non–performing asset;
• is classified as a wilful defaulter by any bank; or
• is under investigation by a financial service regulator or investigative agencies in India, namely the Central Bureau of Investigation or Directorate of Enforcement or Serious Frauds Investigation Office,

then it can make an investment/financial commitment after it has obtained a no-objection certificate from the lender bank/regulatory body/investigative agency. In order to further streamline matters, it also provides for a deemed no objection, where a no-objection certificate is not issued by the lender bank/regulatory body/investigative agency within a period of 60 days.

The following security can be created in the case of an outbound acquisition finance, subject to the Indian entity complying with the conditions and other qualitative and quantitative restrictions set out under the New OI Guidelines after obtaining the approval of the authorised dealer bank (ie, banks in India that have been given special licences to deal with foreign exchange):

• a pledge on the shares of overseas target or the Offshore SPV or the shares of its step-down subsidiary outside India to secure loans availed from an authorised dealer bank in India or a public financial institution in India;
• a pledge on the shares of the Offshore SPV held by the Indian acquirer to secure a facility availed by it from overseas lenders who should not be from a country/jurisdiction in which a financial commitment is not permitted under the New OI Guidelines;
• a charge on the assets of the Indian shareholder of the Offshore SPV, its group company or associate company in India, promoters and/or directors to secure a facility availed by it from overseas lenders who should not be from a country/jurisdiction in which a financial commitment is not permitted under the New OI Guidelines; and
• a security on the assets of the Offshore SPV or the overseas target to secure loans availed from an authorised dealer bank in India.

The value of the facility is assessed as a financial commitment for the Indian party, and the total financial commitment of the Indian party should be within the limits set out in the ODI Guidelines. Currently, this limit is 400% of the net worth of the Indian acquirer, subject to a maximum of USD1 billion in one financial year.

In the case of ECBs, the RBI has permitted authorised dealers to grant permission in relation to the creation of security over movable property, immovable property and financial securities in favour of or for the benefit of an ECB lender.

The acquisition finance availed by an Indian acquirer from Indian banks or financial institutions for an outbound acquisition can be secured by security on the Indian assets of the acquirer or the Indian group companies of the acquirer.

Inbound Acquisition Finance: FOCC

As the acquisition finance availed by an FOCC by way of NCDs is domestic debt, this debt can be secured by Indian assets of the FOCC. Security on Indian assets of the target will be subject to financial assistance rules. However, prior approval of the RBI is required to create a pledge on the shares from the FOCC held by the non-resident shareholder to secure the NCDs.

Subject to applicable foreign laws, pledge on shares of the Offshore SPV of the FOCC or its step-down subsidiary and assets of Offshore SPV and its step-down subsidiaries can also be created to secure the NCDs under the New OI Guidelines.

Domestic Acquisition Finance

Acquisition finance by an Indian entity by way of NCDs or loans from NBFCs is domestic debt, and can be secured by the Indian assets of the acquirer and the Indian group companies of the acquirer.

Subject to applicable foreign laws, pledge on shares of the Offshore SPV of the FOCC or its step-down subsidiary and assets of Offshore SPV and its step-down subsidiaries can also be created to secure the NCDs under the New OI Guidelines. However, the provision of such security is not permitted where the lender is a NBFC.

Generally, the following perfection requirements exist in relation to the security created on the assets of an Indian company:

• any security on movable or immovable assets of a company or pledge on shares held by an Indian company must be registered with the registrar of companies (ROC) within 30 days of the creation of the charge;
• any security by way of mortgage or hypothecation is required to be registered with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India;
• mortgages (except equitable mortgages) of immovable property have to be registered as per the Indian Registration Act, 1908, within four months of the execution of the mortgage deed with the concerned land registry; further, in certain states, equitable mortgages are also required to be registered or notified with the land registry concerned; and
• for shares and other securities held in dematerialised form, forms are required to be filed with the depository participant to create a pledge or a non-disposal undertaking.

See 5.2 Form Requirements for various security perfection and registration requirements. Further, any security created under the New OI Guidelines will also need to be reported to the RBI through the authorised dealer bank in the form prescribed under the New OI Guidelines.

Generally, upstream security can be provided by an Indian company for the indebtedness of its Indian holding company, subject to compliance with the provisions of the Companies Act. See the discussion in 5.6 Other Restrictions in relation to shareholder resolutions and common directors that will need to be complied with to create any such security. The creation of upstream security by an Indian company for financing availed by an offshore holding company is restricted under the FEMA.

However, upstream security on the assets of the target (which is not a private company) may not be possible for a debt used to acquire the shares of the target. See the discussion in 5.5 Financial Assistance.

As per the Companies Act, a public company (whether listed or not) is prohibited from providing any direct or indirect financial assistance to any person for subscription to, or the purchase of, its shares or the shares of its holding company. The term “financial assistance‟ is broad and includes assistance in the form of loans, guarantees and the provision of security. This restriction does not apply to a private company. In view of the foregoing, a target company which is a public company cannot create security or provide guarantees in relation to acquisition finance availed for acquiring its shares.

Shareholders’ approval by way of special resolution (75%) is required under the Companies Act for an Indian company to provide any guarantee or security if certain prescribed thresholds (in terms of paid-up capital and free reserves) are exceeded. However, this approval is not required if the guarantee or security is provided for a financing utilised by the company’s wholly owned subsidiary or joint venture.

As per the Companies Act, a company (lending company) cannot give loans, provide security or extend any guarantee to or on behalf of any other company in which the directors of the lending company are interested or control a certain percentage of voting rights unless such a loan, guarantee or security falls within the exemptions prescribed under the Companies Act. Certain relevant exceptions to this rule are:

• loans made by a holding company to its wholly owned subsidiary company or any guarantee given, or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company, if the loans are utilised by the wholly owned subsidiary for its principal business activities;
• a guarantee given or security provided by a holding company in respect of loans made by any bank or financial institution to its subsidiary company, if the loans are utilised by the wholly owned subsidiary for its principal business activities;
• if the lending company, in the ordinary course of its business, provides loans or guarantees or security for the due repayment of any loan and in respect of those loans, an interest is charged at a rate not less than as specified under the Companies Act; or
• if the lending company obtains the approval of at least 75% of its shareholders for any guarantee or security provided, and the loans availed by the borrower are utilised by it for its principal business activities.

Generally, a lender may enforce its security on the occurrence of an event of default. The process to be followed to enforce the security is briefly set out below.

Immovable Property

If the mortgage is an English mortgage, the mortgagee has the power to sell the mortgaged property without the intervention of the court, subject to certain notification requirements. Where the mortgage is an equitable mortgage, the mortgagor must apply to the court for a decree to sell the mortgaged property to recover the debt.

Indian banks, certain notified financial institutions and debenture trustees for listed and secured NCDs can enforce a mortgage under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), which provides for a quicker mode of enforcement of security.

Movable Property

The rights and remedies of a hypothecatee are entirely regulated by the deed of hypothecation between the hypothecator (security-provider) and enforced either by appointing a receiver and selling the charged assets or obtaining a decree for the sale of the movable property. Indian banks, certain notified financial institutions and debenture trustees for listed and secured NCDs can enforce hypothecation under the SARFAESI, which provides for a quicker mode of enforcement of security.

Pledge Over Shares

A pledgee may enforce a pledge by giving reasonable notice of enforcement to the pledgor. The pledgee does not need to obtain a court order to sell the pledged shares. If the pledged shares are held in physical form, the pledgee must submit to the company whose shares are pledged the executed share transfer forms held by the pledgee. The company will then need to approve the transfer of shares in the name of the lender or third-party transferee at its board meeting. If the company refuses to approve the transfer of shares, the lender or third-party transferee will need to approach the competent courts and tribunals to challenge that refusal.

If a company is admitted to the Corporate Insolvency Resolution Procedure (CIRP) under the IBC or a pre-packaged insolvency resolution process commences against a company under the IBC, no security can be enforced, due to the moratorium imposed under the IBC. Where the company is to be liquidated under the IBC, a secured creditor will have an option to realise its security and receive proceeds from the sale of the secured assets as a priority. Additionally, in the case of any shortfall in recovery, the secured creditors will rank junior to the unsecured creditors to the extent of the shortfall.

Generally, a guarantee is obtained from the holding or group company of the acquirer or the target (where financial assistance rules are not attracted). If the guarantee is issued by a non-resident entity for an NCD, that guarantee will need to comply with the following key conditions:

• any such guarantees can be issued by eligible non-resident entities (such as multilateral financial institutions, regional financial institutions and government-owned (either wholly or partially) financial institutions and direct or indirect equity holders);
• the borrower should be eligible to raise ECB under the automatic route;
• the NCD should have a minimum average maturity of three years, and no call or put options are permitted during that period; and
• guarantee fees and other costs in respect of the guarantee cannot exceed 2% of the principal amount involved.

Indian entities cannot provide guarantees for the obligations of their overseas parent company.

An ECB can be guaranteed upon obtaining a no-objection certificate from an authorised dealer, as per the ECB Guidelines. If the guarantee is issued by a non-resident entity, the guarantor must fulfil the qualification of a recognised lender under the ECB Guidelines.

Under the OI Guidelines, an Indian company which holds shares in an Offshore SPV (Indian Party) can provide a guarantee or procure a guarantee from:

• a group company of the Indian company in India, being a holding company (which holds at least 51% in the Indian company) or a subsidiary company (in which the Indian company holds at least 51%) or a promoter group company, which is a body corporate;
• personal guarantee by the resident individual promoter of such Indian company; or
• bank guarantee, which is backed by a counter-guarantee or collateral by the Indian company or its group company as above, and issued, by a bank in India,

subject to certain qualitative and quantitative requirements specified in the OI Guidelines, including the following:

• the guarantee should not be open-ended – the amount and the validity period of the guarantee should be specified upfront;
• all the financial commitments undertaken by an Indian entity, including all forms of loans, guarantees, investments and creation of charge must be within the overall ceiling prescribed for the Indian Party under the New OI Guidelines (currently, 400% of the “net worth‟ ‏of the Indian Party as defined under the Indian Companies Act and which should also not exceed USD1 billion (or its equivalent) during a financial year);
• where the guarantee is extended by a group company, it is required to be counted towards the utilisation of the financial commitment limit of such group company independently and in case of a resident individual promoter, the same is required to be counted towards the financial commitment limit of the Indian entity; and
• further, the conditions discussed in 5.1 Types of Security Commonly Used (Outbound Acquisition Finance) in relation to provision of financial assistance by an Indian party will also apply.

See also 5.6 Other Restrictions in relation to the restrictions under the Companies Act for issuance of guarantees.

See 5.6 Other Restrictions in relation to the restrictions under the Companies Act for issuance of guarantees.

It is not mandatory under Indian law for the borrower to pay a guarantee fee to the guarantor. Prior approval of the RBI may be required for payment of any guarantee fees by a person in India to a person outside India in relation to a guarantee issued by that person for an INR loan.

The IBC provides for a payment waterfall for the creditors in the event of the liquidation of a company. The priority waterfall for distribution of liquidation proceeds, prescribed under the IBC, is as follows:

• the costs of the insolvency resolution (including any interim finance);
• secured creditors (who are not enforcing their security outside the liquidation), together with workmen’s dues for the preceding 24 months;
• any unpaid dues owed to employees other than workmen and wages for 12 months preceding the liquidation commencement date;
• financial debts owed to unsecured creditors;
• amounts payable to the central and state governments for the preceding 24 months, and unrealised dues of secured creditors outside the liquidation;
• any remaining debts and dues;
• preference shareholders, if any; and
• equity shareholders or partners, as the case may be.

The National Company Law Tribunal (NCLT), in one of the cases under the CIRP, has also held that the unsecured intra-group debt from a related party should be treated as an equity contribution rather than an intra-group loan. These intra-group loans should rank lower in priority than the same obligations between unrelated parties. Further, the Supreme Court has held that there is no provision under the IBC which mandates that a related party should be paid in parity with an unrelated party and a differential payment to different classes of creditors in the resolution plan is subject to the commercial wisdom of the Committee of Creditors (CoC).

The different preference periods or reasons for claw-back during insolvency or the CIRP of an Indian company are set out as follows.

Preferential Transaction

Under the IBC, a corporate debtor shall be deemed to have been given preference if:

• there is a transfer of property or an interest therein of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or other liabilities owed by the corporate debtor; and
• that transfer has the effect of putting the creditor or a surety or a guarantor in a more beneficial position than it would have been in the event of distribution of assets being made in liquidation of the corporate debtor.

However, the following are not considered as preferential transactions:

• transfer in the ordinary course of business or financial affairs of the corporate debtor and the transferee; and
• any transfer creating a security interest in property acquired by the corporate debtor, if:
1. that security interest secures new value and was given at the time of, or after the signing of, a security agreement that contains a description of the property as a security interest and used by the corporate debtor to acquire that property; and
2. the transfer was registered with an information utility on or before 30 days after the corporate debtor received possession of the property.

The claw-back period in relation to a related party (other than being an employee) is two years preceding the insolvency commencement date (ICD) and for a non-related party is one year preceding the ICD.

Undervalued Transaction

A transaction (other than a transaction in the ordinary course of business of the corporate debtor) is considered undervalued where the corporate debtor makes a gift to a person or enters into a transaction with a person that involves the transfer of one or more assets by the corporate debtor for a consideration, the value of which is significantly less than the value of the consideration provided by the corporate debtor.

However, the following transactions are not considered undervalued:

• any interest in property that was acquired from a person other than the debtor and was acquired in good faith, for value and without notice of the relevant circumstances; and
• a person received a benefit from the transaction in good faith, for value and without notice of the relevant circumstances, unless they were a party to the transaction.

The claw-back period in relation to a related party is two years preceding the ICD, and for a non-related party, one year preceding the ICD.

Undervalued Transaction Defrauding Creditors

An undervalued transaction (as previously discussed) entered into by a corporate debtor is considered to be entered into for defrauding the creditor if the NCLT is satisfied that the corporate debtor deliberately entered into the transaction to keep the assets of the corporate debtor away from any person entitled to make a claim against the corporate debtor, or to affect the interest of that person in relation to the claim adversely. No specific claw-back period is specified for such transactions.

Extortionate Credit Transaction

Extortionate credit transactions are transactions where the corporate debtor is a party to a transaction involving the receipt of financial or operational debt during the period within two years preceding the ICD and where the terms of the transaction:

• require the corporate debtor to make exorbitant payments in respect of the credit provided; or
• are unconscionable under the principles of law relating to contracts.

However, any debt extended by any person providing financial services that comply with the law is not considered an extortionate credit transaction.

Stamp duty is required to be paid on a facility agreement and security documents at the time of or prior to execution. An insufficiently stamped document is not admissible as evidence in a court of law. Stamp duty differs from state to state and is determined based on the nature of the document.

Currently, the applicable rate of withholding tax on interest payable by an Indian company to a non-resident lender (situated outside India) on an ECB (where loan agreement is entered into before 1 July 2023) and Rupee Denominated Bonds issued before 1 July 2023 is 5% (plus applicable surcharge and cess), subject to the satisfaction of certain conditions and provision of prescribed documents. This tax is withheld from the interest payable to the lender and deposited on the lender’s behalf with the Indian government. The tax withholding rate of 5% is not applicable if the lender is a branch of a foreign bank located in India.

Interest payments by an Indian company on money borrowed or debt incurred in foreign currency on or after 1 July 2023 shall be subject to tax withholding at 20% (plus surcharge and cess), while in other cases, tax withholding at 40% (plus surcharge and cess) would apply. This is subject to the availability of Tax Treaty benefits and compliance with the requisite conditions for availing such benefits.

Foreign banks that have a branch in India can apply for and obtain a certificate allowing the borrower to deduct tax at a lower appropriate rate, having regard to the overall tax liability of the Indian branch of the foreign bank. Upon sharing such a certificate with the borrower, the borrower can withhold tax at the rate prescribed therein.

The act of withholding tax is an obligation of the borrower, who must file a tax withholding return and issue a certificate evidencing the tax withheld and deposited. The lender can claim the credit of the tax withheld on interest to meet its tax liabilities in India as well as in the country of residence.

Interest paid on debt incurred to acquire equity or preference shares (held as a capital asset and not as stock-in-trade) is not considered deductible for tax purposes.

Provisions dealing with thin capitalisation in respect of other interest payments are embodied in the Indian Income Tax Act 1961 (the “IT Act”). These impose limitations on the deduction of excess interest (ie, any amount that exceeds 30% of the earnings before interest, taxes, depreciation and amortisation of the Indian company or permanent establishment (PE)) incurred by way of interest or payments of a similar nature by an Indian company or a PE of a foreign company to its associate non-resident enterprise in respect of debt borrowed.

The thin-capitalisation rules are also applicable in instances of interest payments to third-party lenders who provide a loan on the basis of an associated enterprise, either providing an explicit or implicit guarantee to that third-party lender or depositing a corresponding amount with that lender.

Thin-capitalisation provisions do not apply to Indian companies and PEs of non-residents engaged in the business of banking or insurance or notified NBFCs.

The above rules are applicable only where the interest or payments of a similar nature exceed INR10 million. The interest expense that is disallowed against income shall be allowed to be carried forward and allowed as a deduction against profits and gains of any business or profession carried out for up to eight assessment years, subject to the limits mentioned.

Other than in relation to the acquisition of a listed target (see 9.2 Listed Targets), there are no specific regulatory requirements to demonstrate certain funds. Indian sellers may, in certain cases, expect bidders to demonstrate that they have binding commitments before selecting a winning bidder and executing definitive documentation.

Under the IBC, a resolution applicant (bidder for the company under a CIRP) is required to submit performance security after approval of its bid. The performance security will be forfeited if the resolution applicant fails to implement the resolution plan.

If the acquisition of a listed company triggers the requirement of making an open offer by the acquirer under the Takeover Regulations, the acquirer must fund an escrow account with the required funds in accordance with these regulations. The funds can be provided in cash deposited in an escrow account, a bank guarantee issued in favour of the manager to the offer by any scheduled commercial bank or the deposit of frequently traded and freely transferable securities with an appropriate margin. Where the acquirer proposes to fund the escrow account by availing financing, the manager of the offer may need to be satisfied that the financing is available.

Disclosure of an Encumbrance on Listed Shares

Under the Takeover Regulations, shares taken by way of an encumbrance are treated as acquisitions and are required to be disclosed. Similarly, shares released from an encumbrance are treated as a sale and also must be disclosed.

The Takeover Regulations have been amended and define “encumbrance” widely to include:

• any restriction on the free and marketable title to shares, by whatever name called, whether executed directly or indirectly;
• pledge, lien, negative lien, non-disposal undertaking; or
• any covenant, transaction, condition or arrangement in the nature of encumbrance, by whatever name called, whether executed directly or indirectly.

Disclosure requirements apply to:

• any acquisition of shares or voting rights in excess of 5% and thereafter any change in shares or voting rights so disclosed where that change is above 2% when compared to the last disclosure; and
• any encumbrance created by the promoter on the shares of the listed entity.

The SEBI, in its frequently asked questions on the Takeover Regulations, clarified that the promoter of a listed company has to disclose, within specified timelines, detailed reasons for an encumbrance on the shares of the listed company if the combined encumbrance by the promoter along with persons acting in concert with the promoter equals or exceeds either 50% of their shareholding in the listed company or 20% of the total share capital of the listed company, to the listed company and every stock exchange where the shares of the company are listed.

Therefore, covenants or other conditions in the financing documents that create an encumbrance on the shares or voting rights of the listed company may require disclosures under the Takeover Regulations. Any such covenants may include any borrowing limits linked to the value of listed shares, a requirement to hold a specific number or value of the listed shares and a consent requirement for disposal of the listed shares.

Issuance of Listed NCDs

SEBI has issued the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (the “NCS Regulations”), which consolidate regulations in relation to:

• public issuances of non-convertible debt securities and non-convertible redeemable preference shares;
• private placements of non-convertible securities; and
• listing of commercial papers.

As per the NCS regulations, issuers who have been in existence for less than three years are permitted to issue and list their debt securities on a private placement basis subject to the conditions that:

• the issuer discloses its financial statements for such period of existence;
• the issue is made on the electronic book platform; and
• the issue is made only to qualified institutional buyers.

The NCS Regulations provide that no call or put option can be exercised in relation to privately placed listed NCDs prior to the expiry of 12 months from the date of their issuance.