Debt Finance 2024 Comparisons

As per a report published by EY (Ernst & Young), Indian banks have reported a credit growth of 23% in calendar year (CY) 2023, driven by high credit growth in retail lending and real estate sector lending. The Indian banking industry has been on an upward trajectory, aided by strong economic growth, rising disposable incomes, increasing consumerism and easier access to credit. The total bank credit in India for FY 2023 stood at over USD2.316 trillion.

The private credit deal flow in India during 2023 surpassed the 2022 levels, with 108 deals valued at USD7.8 billion, up from 77 deals worth USD5.3 billion. Further, as per a report published by Reuters on Nasdaq, Indian firms have raised a record amount from the rupee bond markets in 2023, with large-sized issues in recent months driving such borrowings. As per the said report, Indian companies raised around INR914 billion (USD10.97 billion) through the private placement of bonds in November 2023, pushing the overall issuance to INR8.83 trillion for 2023, the highest for any calendar year, according to data from information provider Prime Database.

The major market players in the Indian debt finance sector are as follows.

• Public sector banks – there are 12 major public sector banks in India with State Bank of India being the largest public sector bank. A public sector bank is a commercial bank which is owned by the Indian government. Historically, such banks have dominated the lending space in India. As per a report published by the Reserve Bank of India (RBI), as on December 2022, public sector banks share in total credit was 71.6%.
• Private sector banks and branches of foreign banks – most of the other commercial banks are private sector banks in India that are not owned by the government or are branches of foreign banks. These banks are licensed to undertake banking activities and also have significant presence in the market.
• Non-banking financial companies (NBFCs) – NBFCs are companies registered with the central bank; ie, RBI and undertake permitted financial activities, such as provision of loans and advances. They are not licensed as banks and so the financial activities that they may undertake are limited. That said, they are also subject to a relatively less stringent regulatory regime as compared to banks. Over 9,000 NBFCs have received a certificate of registration – spanning across various sectors, including investment and trading companies, asset finance and leasing, factoring, and asset reconstruction.

Banks and NBFCs are both regulated by RBI, which issues prudential norms and other directions pertaining to their functioning (including on their exposure, asset classification, and operations). These banks and NBFCs may invest in debt in the form of loans and debt securities, in each case subject to the prudential limits and other directions applicable to them. Banks may further offer non-fund-based facilities such as bank guarantee facilities and letter of credit facilities.

• Debt funds – the key private credit players in India operate in the following formats.
1. Alternative Investment Funds (AIFs) – which are funds set up in India and registered with the Securities and Exchange Board of India (SEBI), India’s securities market regulator. These funds pool investments and set up schemes for investment in debt or equity securities.
2. Foreign Portfolio Investors (FPIs) – these are foreign entities also registered with SEBI. They may invest in debt and equity securities.
3. Other investors such as mutual funds.

These investors, who are registered with SEBI, must invest in debt in the form of INR denominated debt securities and are not eligible to extend loans.

As per a report published by EY, in CY 2023, global funds contributed approximately 63% of the total private creditdeals by value, primarily due to their participation in large deals. However, domestic funds led in terms of deal count, accounting for approximately 61% of the deals, due to their focus on the mid-market segment and strong deal origination capabilities. 

• Foreign lenders – another avenue available to foreign lenders is to extend financing under the “external commercial borrowings” route. This route is available to any lender which is a resident of an FATF compliant country (ie, a country that is a member of the Financial Action Task Force (FATF) or a member of a FATF-Style Regional Body; aor IOSCO compliant country, and also multilateral and regional financial institutions where India is a member country. Some other categories of lenders such as individuals and foreign branches/subsidiaries of Indian banks are also permitted to participate in this route, subject to additional conditions.

While all entities eligible to receive foreign direct investment (and some others) are entitled to raise financing under this route both in INR and in a freely convertible currency, borrowings under this route must adhere to other conditions including on end-use, a ceiling on the all-in-cost of borrowing and a minimum average maturity requirement.

At the onset of the COVID-19 pandemic in April 2020, the government of India issued Press Note 3 of 2020 (“Press Note 3”) which provided that any foreign direct investment (FDI) from a country which shares a land border with India (ie, Pakistan, Bangladesh, Afghanistan, Nepal, Bhutan, Myanmar and China) or where the beneficial owner of the investor is situated in or is a citizen of any such country, can invest only with the prior approval of the government of India. It further provides that in the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview as mentioned, such subsequent change in beneficial ownership will also require approval from the government of India. Press Note 3 has altered the FDI market scenario in India as any investment coming into India is subject to enhanced scrutiny specially if coming from a country sharing a land border with India.

The central bank, the RBI in August 2020 introduced a resolution framework for COVID-19 related stress to address the impact of the pandemic in the Indian financial market. The framework allowed lenders to implement a resolution plan in respect of eligible corporate exposures and personal loans, while classifying such exposures as standard, subject to specified conditions. The lenders were required to ensure that the resolution is extended only to borrowers having stress on account of COVID-19. Subsequently, in May 2021 the RBI also introduced a resolution framework in relation to stress of individuals and small businesses.

The disruption caused by COVID-19 on the lending space in India was limited since timely and proactive mitigants adopted by the RBI helped the debt market recover after the pandemic.

The type of debt finance transaction primarily depends on the participants (ie, the lender and the borrower), the purpose of the borrowing and other commercial considerations.

Debt financing is raised primarily through issuance of debt securities which might be bonds (also referred to as “non-convertible debentures”) or securitised debt instruments and availing of loans.

Depending on the purpose of borrowing, the transaction may fall within one of the following categories or may be structured as a bespoke facility tailored to the peculiar commercial needs of the parties.

• Acquisition finance – a company avails funding specifically for the purpose of acquiring another company. Commercial banks in India are subject to prudential guidelines that discourage acquisition financing but for some limited circumstances. Therefore, acquisition financing in India is generally availed from NBFCs or by way of issuance of non-convertible debentures by the acquirer which can be subscribed to by investors such as FPIs, mutual funds and AIFs.
• Project finance – project finance usually involves funding of long-term projects such as public infrastructure, energy, real estate, industrial, manufacturing projects, etc. Usually, the debt is paid back from the cash flow generated by the project. Such financing is usually availed from the domestic banks and financial institutions and also from foreign investors by raising external commercial borrowings (ECBs).
• Asset-based finance – asset based finance is generally less structured and is secured by some collateral. The terms and conditions of an asset-based finance depends on the type and value of the assets offered as security. If the asset securing the loan is a highly liquid collateral which can be readily converted into cash on enforcement, then the terms and conditions of the finance may be a bit flexible for the borrower (such as lower interest rates).
• Securitisation – securitisation involves pooling debt assets and repackaging them into interest bearing securities. Under a securitisation transaction, an issuer designs a marketable financial instrument by merging financial assets. Investors who purchase these securities receive the principal and interest payments of the underlying assets. In India, both stressed as well as standard assets can be securitised and the securitisation market is regulated by the RBI. FPIs are one of the major investors in the security receipts issued by securitisation trusts against distressed debt in India.

Structuring of debt finance depends on various factors – including the lender.

Bank Loan Facilities

The most common form of debt finance is availing a loan facility from a bank. Broadly, the loan facilities can be classified into secured or unsecured loans. Corporate loans typically are in the nature of secured lending and may include one or more of the below types of facilities.

• Working capital loans – working capital loans are extended by banks and financial institutions to help businesses meet their working capital needs. This would include cash credit lines, overdraft facilities and other fund-based and non-fund-based limits.
• Term loans – under a term loan, the borrower is provided with a lump sum cash upfront in exchange for specific borrowing terms. Term loans are usually raised for specific business purposes, such as expanding business operations, purchasing assets or launching new projects. Project loans extended for infrastructure projects fall within this category.
• Non-fund-based facilities – banks regularly provide bank guarantee and letter of credit facilities to borrowers to support their businesses, under which the borrower may request for issuance of such instruments to its suppliers or contracting counterparties.

Bank loans can also be in the nature of syndicated loans. Loan syndication usually takes place when a borrower requires a sum which is either too risky for one lender to bear or the quantum of the loan is too high for one lender to bear. One of the banks from the syndication typically acts as a lender representative to administer the process. Unlike bonds, syndicated loans are not by nature tradable although they can be transferred in secondary market. However, the structure of syndicated loans is more geared to lenders who intend to remain locked into the deal, and take a longer-term view, rather than bondholders who can offload their investment in the market whenever they wish. Another difference which stems largely from their tradability, and from the identity of the investors, is that the bonds are rated and that, apart from high-yield issues, are issued by investment grade companies whereas loans can be lent to any company, although the terms on which they will be made depend on the creditworthiness of the borrower.

Further, the lenders’ rights in a syndicated loan can be several, and each lender can have the right to enforce the debt owed to it individually as compared to debt securities where the subscribers to the debt securities are usually not able to severally enforce the security and all actions are taken via a stated majority and through the trustee.

Some of the advantages of debt syndication are as follows.

• As the risk is distributed between the lenders, the interest rate on the loan facility can be competitive.
• Usually, the syndicated debt is provided under one agreement instead of executing separate agreements with each lender, which saves time and efforts specially during execution of the transaction documents.
• Borrowers enjoy more flexibility in structure and pricing.

Some of the disadvantages of debt syndication are as follows.

• Negotiation time is usually more as there are multiple lenders having their exposures at stake.
• Difficulty in co-ordination with multiple lenders for the borrower as well as lenders inter se.

Debt Securities

Other than bank loans, issuance of debt securities to avail funds has also become a very popular form of raising debt for Indian corporate borrowers. The most common instrument used for this purpose is a “non-convertible debenture” issued under (Indian) Companies Act, 2013 (“CA 2013”), which is an INR denominated bond which may or may not be listed.

A non-convertible debenture (NCD) issuance is structured to have the issuer appoint a debenture trustee to act for the investors. The NCDs are issued to subscribers and the debenture trustee serves as a trustee to hold the security and other obligations associated with the NCDs for the benefit of the holders of the NCDs. NCDs may be secured or unsecured. Other than the retail investors and domestic financial institutions (such as banks, NBFCs, mutual funds, insurance companies, and AIFs), usually the investors in debt securities also include FPIs.

The transaction documentation for debt financing depends on the nature of the finance. The most common forms of transaction documents in a typical loan or NCD issuance are as set out below.

A. Loan Transaction

• Loan agreement – this is a loan/facility agreement.
• Security documents – these include:
1. an agreement to appoint a security trustee or agent if required; and
2. security documents to create security which varies based on the security package offered for the facility (see 5. Guarantees and Security for further details on the security that may be offered).
• Escrow/account control agreements – these are common in project loans and involve trapping or at least monitoring the borrower’s cash flows. Such an arrangement requires the parties to engage an escrow bank or escrow agent which manages the account into which the escrowed cash is remitted.
• Intercreditor agreement – an intercreditor agreement is executed in case the lending is in the nature of a multiple banking lending or consortium lending to determine the inter se rights between the lenders.

Financing documents for loan transactions are typically governed by Indian law, where the lenders are also Indian parties. In such cases, there is no industry accepted format which dictates the terms of the agreement and the financing documents are often negotiated.

Where the lenders are foreign entities, the parties may opt for foreign law (such as, English law) governed loan agreements which follow Asia Pacific Loan Market Association (APLMA) or Loan Market Association (LMA) drafts.

Security and guarantee documents in relation to such debt finance are generally governed by the law of the jurisdiction where the assets are located or the jurisdiction where the guarantors located/incorporated.

B. NCDs

• Debenture trustee appointment agreement – this agreement is executed in relation to appointment of a debenture trustee and governs the rights and obligations of the debenture trustee vis-à-vis the investors.
• Debenture trust deed – this agreement governs the terms and conditions of a debenture issuance between the debenture trustee and the borrower/issuer.
• Placement memorandum/offer document – this document is issued to the prospective investors and details the key terms of the debenture issuance.
• Security documents – these include security documents to create security in favour of the debenture trustee and the security varies based on the security package offered for the facility (see 5. Guarantees and Security for further details on the security that may be offered).
• Escrow/account control agreements – these are common in project loans and involve trapping or at least monitoring the borrower’s cash flows. Such an arrangement requires the parties to engage an escrow bank or escrow agent which manages the account into which the escrowed cash is remitted.

Financing documents for NCD issuances are governed by Indian law. Security and guarantee documents in relation to such debt finance are generally governed by the law of the jurisdiction where the assets are located or the jurisdiction where the guarantors located/incorporated.

India is an exchange controlled economy and as such structuring any cross border financing requires an analysis of the applicable exchange control regulations. Cross border financing can be raised in one of two ways.

• ECBs – such borrowing must be in conformity with the regulations on ECBs, which prescribe, inter alia, certain parameters on who can borrow, who can be a lender, the maximum amount of borrowing, the minimum average maturity of the loan, the maximum cost of borrowing that may be incurred, what the purpose of borrowing may be. Such borrowings can be raised in INR or in any freely convertible foreign currency. The ECB lending is to be structured keeping in mind these requirements.
• NCDs issued to FPIs – FPIs can only invest in permitted securities as provided in the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 (“SEBI FPI Regulations”). FPIs are not permitted to extend loans. They may subscribe to NCDs; however, such subscription is subject to certain conditions. An FPI may invest through the general investment route which has conditions as to minimum maturity, against concentration, etc, or the voluntary retention route which also has conditions as to investment amount being retained in India for at least three years but relaxes some of the requirements around instrument level maturity and concentration norms.

As to domestic lenders, depending on the type of lenders, there may be considerations on the form of lending (for instance for acquisition finance is often raised through NCD issuance or from NBFCs given complications around bank lending for this purpose).

• Exchange control regulations – India is an exchange-controlled economy and any cross-border lending by an Indian borrower/lender is governed by the Foreign Exchange Management Act, 1999 (FEMA) and allied rules, regulations and circulars. Indian borrowers must comply with the regulations prescribed by the RBI such as the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, the Foreign Exchange Management (Debt Instruments) Regulations, 2019, RBI – Master Direction on External Commercial Borrowings, etc. These legislations prescribe the terms on which debt may be raised by an Indian resident from a non-resident party, requirements as to tenor, interest, concentration, etc (see 4.2 Impact of Types of Investors for further details).
• Special enforcement options – the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) enables certain secured lenders, such as banks, notified financial institutions and debenture trustees for listed NCDs to enforce the mortgage without court intervention, provided the charge is registered with Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI), which is a central online security interest registry and subject to consent from secured lenders representing at least 60% in value and other conditions. This benefit is particularly significant in India because a court process for enforcement or indeed any other reason is often time consuming. The SARFAESI Act is available to domestic banks and some select NBFCs but may also be accessible to FPIs who hold listed NCDs. As such, FPIs investing in debt securities cometimes require the NCDs to be listed for gaining this benefit.
• Registrations and filings – further, there are a host of registrations and execution steps that are relevant to debt finance transactions, some of which include the below.
1. Stamp duty – any instrument executed in India or received in India after execution must be stamped for the duty payable on such instrument under Indian stamp law. Indian stamp laws vary from state to state and may prescribe a flat duty for some instruments whereas an ad valorem duty (calculated as a percentage of the transaction value) may be imposed on certain other documents.
2. Filing with information utility – parties should register their debt and security with an Information Utility (IU). An IU is a centralised electronic database set up under the Insolvency and Bankruptcy Code, 2016 (IBC) which collects and authenticates financial information of debtors and security providers. Registering the debt and security with an IU could prove to be crucial to substantiate a proof of claim in an insolvency of the borrower/security provider.
3. Registration of security – while all forms of security need to be registered with the Registrar of Companies, under CA 2013, in addition to this, there may be additional registration requirements such as security on immovable assets needing to be registered with local land authorities, filing of securities charges with depositories with which they are held, registrations with CERSAI of some forms of security (see 5.1 Guarantee and Security Packages for further details).

Security for debt financing transactions in India may be provided over (i) immovable properties such as land, benefits arising out of land, and (ii) movable properties, which include properties of every description other than immovable properties. The assets of the borrower or a third-party may be provided as security, subject to the conditions mentioned below and under 5.2 Key Considerations for Security and Guarantees.

The typical security and guarantee package in debt financing transactions include the following.

A. Mortgage Over Immovable Properties

A mortgage is the transfer of interest in an immovable property as security for an existing or future debt, and is primarily governed by the Transfer of Property Act, 1882 (TPA). The TPA requires any mortgage (other than an equitable mortgage) securing repayment of a debt exceeding INR100 to be created by an instrument (deed/indenture) which is signed by the mortgagor, attested by two witnesses and registered with the local sub-registrar of assurances.

The prominent forms of mortgage in the Indian market are as follows.

• English mortgage – an English mortgage represents an absolute transfer of the mortgagor’s interest in the mortgaged property, without transfer of possession in favour of the lender/agent and is created by the parties executing a registrable instrument. In an English mortgage, the mortgagee has the power to sell the mortgaged property without court intervention.
• Equitable mortgage – also known as mortgage by deposit of title deeds, it is created by delivery of title documents over the mortgaged property by the mortgagor (or their authorised representative) to the lender/agent, with the intent to create security for repayment of debt. Equitable mortgages may be created only in notified Indian cities. While an equitable mortgage does not require a document for creation, parties generally record the deposit of title deeds by a “Memorandum” which is executed by the lender/agent, and additionally, a “Declaration” which is executed by the mortgagor (or their authorised representative). This form of mortgage may not be enforced without court intervention, unless the lenders have the benefit of SARFAESI Act.

B. Hypothecation Over Bank Accounts, Receivables and Other Movable Properties

A hypothecation is a charge over any existing or future movable property without bailment and is created by way of a deed of hypothecation between the chargor and the lender/agent. Hypothecation may be in the form of a fixed charge or a floating charge and is commonly used to secure the bank accounts, receivables, plant and machinery.

C. Pledge Over Shares and Other Securities

A pledge is the bailment of movable property for repayment of debt or performance of promise. Shares and other securities are the most common movable properties secured by way of a pledge. The pledge is created by (i) delivery of the physical security certificates (in case of securities in physical form) together with undated transfer forms pertaining to the security or movable property to the lender/agent, or (ii) where the securities are held in dematerialised form, by marking a pledge over the securities in favour of the lender/agent in the depository by a notice to the depository through the depository participants of pledgor and pledgee. Parties enter into an agreement of pledge to record the terms of pledge.

D. Corporate and Personal Guarantees

A guarantee may be provided by an individual or a body corporate for the repayment of debt and other obligations of the borrower by executing a deed of guarantee.

Formalities

Where the security provider is an Indian company, necessary corporate approvals will need to be procured prior to security creation. These considerations are further discussed under below under 5.2 Key Considerations for Security and Guarantees.

The charge creation documents will have to be stamped by payment of adequate stamp duty in accordance with the Indian Stamp Act, 1899 (“Stamp Act”) and local laws. Additionally, agreements/documents pertaining to security over immovable properties need to be registered with the local land authorities under the (Indian) Registration Act, 1908.

Where the charge creation documents are coupled with a power of attorney (POA) by the security provider in favour of the lender/agent, the POA has to be notarised and adequate stamp duty has to be paid. If the POA is executed by an Indian company possessing a common seal, the common seal has to be affixed to the POA.

Perfection Requirements

Where the security provider is an Indian company, the charge in favour of the beneficiary has to be recorded by the security provider with the Registrar of Companies within a specified period from creation.

In addition, security created by way of hypothecation and mortgage has to be registered with the CERSAI. CERSAI registration enables the lender to enforce its security in a fast-track process under SARFAESI Act.

Corporate Approvals

Where the security provider/guarantor is an Indian company, the CA 2013 requires the company to procure corporate approvals before providing the security/guarantee. Such approvals are in the form of board resolutions, and in special circumstances, approval from the shareholders by a special majority of 75% is required, such as where:

• the debt in connection with which the security/guarantee that is sought to be provided exceeds 60% of the company’s paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more;
• security/guarantee is provided for a loan taken by a borrower in whom any director of the guarantor/security provider is interested and loan has been availed for the principal business activities of the borrower; or
• the security or guarantee limits set by the shareholders of the security provider/guarantor will be exceeded by such security or guarantee.

Corporate Benefit

Consideration is an essential requirement for a valid contract under the Indian Contract Act, 1872. In case of a contract of guarantee/provision of security, Indian courts have held that the consideration between the lender and the principal debtor may constitute sufficient consideration for the surety/security provider to provide the guarantee/security for a group company. Hence, direct consideration for the guarantor, such as guarantee fees are not a strict requirement for a valid guarantee, although they are usually levied in the form of a commission by banks in case of bank guarantees.

Financial Assistance

Public companies are prohibited from providing any direct or indirect financial assistance to any person for acquiring its shares or shares in its holding company under CA 2013. Private companies and companies registered as banking companies in India are not subject to such prohibition.

Agent/Trustee as Beneficiary

Appointment of agents or trustees by lenders to hold the security, preserve the rights of the lenders or for undertaking administrative activities associated with the debt financing is a common practice in India. Indian law recognises the concept of trusteeship, hence parallel debt structures are not required.

Trusteeship or agency arrangements are entered into by executing an appointment agreement with the trustee/agent, which broadly covers the obligations and responsibilities of the trustee/agent. Such arrangements are generally resorted to where:

• there are multiple lenders/beneficiaries of a common security, and the trustee/agent holds the security for their common benefit;
• the financing is through issue of securities such as bonds or debentures – appointment of a debenture trustee is mandatory in certain circumstances, such as under CA 2013, where the issuer company makes an offer to 500 members or more to subscribe to the debentures; or
• in case of a foreign lender, the lender prefers a local trustee/agent to hold the security for its benefit.

Intercreditor arrangements via contractual subordination are primarily used in the Indian debt market to document security and cash flow sharing among multiple lenders. Parties generally enter into an intercreditor agreement or a deed of subordination to document their intercreditor arrangement. Apart from treatment of common security and waterfall for distribution of enforcement proceeds, intercreditor agreements also govern voting rights and thresholds for taking certain lender actions, such as triggering enforcement action on an event of default. Intercreditor arrangements are also found in securitisation transactions where there are different tranches of security receipts/pass-through certificates issued by the securitisation trust. Lenders may also opt for structural subordination in specific circumstances, such as in cross-border debt financings by lending to a foreign equity holder for on-lending to the Indian company, which will involve the need for an intercreditor arrangement.

Intercreditor arrangements are also common in debt restructuring transactions. For instance, intercreditor agreements are mandatory in certain scenarios, such as in an RBI-regulated out-of-court restructuring process, as discussed in more detail under 8.1 Rescue and Reorganisation Procedures.

When a company is admitted into insolvency under IBC, any contractual subordination arrangements inter se lenders may be disregarded by the resolution professional (who administers the resolution process) or liquidator. The proceeds from the resolution plan will be distributed in the manner determined by the committee of creditors (CoC) – keeping in mind the minimum entitlement and priority in paying out certain debts, such as costs for running the insolvency process, claims of operational creditors (ie, creditors who have disbursed funds in relation to provision of goods and services), and dissenting financial creditors (ie, creditors who have disbursed funds against consideration for time value of money and have voted against the resolution plan). This distribution mechanism could override any intercreditor or subordination arrangements between lenders and may or may not consider the seniority or security. However, lenders may seek to enforce intercreditor agreements, including turn over provisions, against each other outside the insolvency process.

Lenders/trustees can generally enforce the security/guarantee on occurrence of default of the principal obligations and subject to other contractual terms and conditions. Where the security provider/guarantor has been admitted into corporate insolvency resolution process (CIRP) under the IBC, additional restrictions (such as moratorium on enforcement and litigation) will apply. Further, enforcement of cross-border security/guarantee will require compliance with FEMA and relevant RBI directions.

The general process for enforcement of security is as follows.

Mortgage

• English mortgage – the mortgagee has the power to sell the mortgaged property without court intervention, if conferred in the indenture of mortgage, and subject to providing due notice to the mortgagor.
• Equitable mortgage – mortgagee will have to institute court proceedings and obtain a decree to sell the mortgaged properties. However, where the beneficiary of such security has the benefit of the SARFAESI Act, it may also enforce the mortgage without court intervention.

Pledge Over Securities

Indian law requires the pledgee to provide “reasonable notice” to the pledgor before enforcement of the pledge. There is no statutory guidance as to what reasonable notice may be and it would depend on facts and circumstances. The enforcement steps of pledge will depend on the nature of the asset secured.

• Pledge over physical securities – in such cases, the pledgee will complete the undated share transfer forms to include the name of the transferee and share these along with the share certificates with the company whose shares are pledged to effect a transfer of the shares. The company must then take on record such transfer.
• Pledge over dematerialised securities – this is a much simpler process than enforcement of a pledge of physical securities. This is done by the pledgee simply filing an invocation form with the depository. Post this, the pledged shares move to the account of the pledgee and may be sold from there. Enforcement of a pledge of dematerialised securities is widely seen as the easiest form of enforcement.

There are judicial precedents that hold that the pledgee may not appropriate the pledged assets and until the pledged assets are sold, the pledgor retains the right of redemption.

Where shares in a company are subject to pledge, the transfer pursuant to invocation will also be subject to the constitutional documents of the company and any transfer restrictions or conditions therein.

Additional conditions apply where the company whose shares are pledged is listed – such as the requirement to make disclosures to stock exchanges at the time of creation and enforcement, the requirement to make an open offer if the thresholds prescribed by SEBI for this purpose are breached (subject to some exemptions in favour of banks).

While a court order is not required for enforcing a pledge, the invocation process may result in court/arbitration proceedings owing to practical issues such as the company refusing to take on record the transfer of shares pursuant to invocation or a pledgor alleging that due notice was not served.

Hypothecation Over Bank Accounts, Receivables and Other Movable Property

Enforcement is primarily governed by the terms and conditions of the deed of hypothecation, which generally contemplates either the appointment of a receiver to realise the hypothecated property or instituting court proceedings to obtain a decree to sell the hypothecated property. The SARFAESI Act allows the recognised secured lenders to enforce the hypothecation without court intervention, provided the charge is registered with CERSAI and subject to consent from secured lenders representing at least 60% in value and other conditions.

Where the hypothecation covers bank accounts and/or receivables, co-operation from banks and other relevant parties is necessary, hence notices of enforcement are generally issued to all relevant parties. Banks’ internal processes will have to be complied with by the lender/trustee to take control over the accounts and monies lying therein. It is, however, possible to take steps at the security creation stage, such as recording the security with the bank, incorporating the security holder as a signing authority, etc, to avoid a delay in enforcement on account of the account bank objecting to the enforcement.

Decrees Passed by Superior Courts From Reciprocating Territories

The Code of Civil Procedure, 1908 (CPC) governs the enforcement of foreign court judgments. The CPC provides for a fast-track enforcement of certain decrees passed by superior courts of countries notified by the government of India as “reciprocating territories”. Reciprocating territories include the UK, Singapore and the UAE.

This avenue of enforcement applies to decrees under which a sum of money is payable (excluding sums in the nature of taxes, charges or penalties).

The decree-holder is required to initiate the execution process by filing a certified copy of the decree before a relevant Indian court, along with certificate from the superior court stating the extent (if any), the decree has been satisfied or adjusted. The Indian court shall scrutinise whether the decree may be considered conclusive and shall refuse enforcement where it is satisfied that the decree:

• has not been pronounced by a court of competent jurisdiction;
• on the face of the proceedings, is founded on an incorrect view of international law or a refusal to recognise the law of India in cases where such law is applicable;
• has not been passed on merits of the case;
• has been obtained by fraud;
• has been obtained under proceedings which are opposed to natural justice; or
• sustains a claim founded on a breach of any law in force in India.

Once the court is satisfied that the decree does not suffer from any of the above issues, it will hold the decree to be conclusive and such decree may be enforced as if it were a decree passed by an Indian court.

The decree-holder can thereafter file an application for execution of the decree before a court of competent jurisdiction.

Other Decrees

For any other judgments or decrees passed by foreign courts, including an interim injunction or any other interim order passed by a superior court of a reciprocating territory, a fresh civil suit may need to be filed before an Indian court of competent jurisdiction along with a copy of the foreign court’s decree for orders.

Aside from resolution via insolvency proceedings, the following rescue and reorganisation procedures are available in India.

Tribunal-Approved Schemes

Where the debtor/obligor is a company, the lenders or members of a company may file an application for initiating a scheme of compromise and arrangement before the National Company Law Tribunal (NCLT) under the CA 2013. On application, the NCLT may direct the convening of a meeting of the lenders and/or members of the company to decide on the scheme.

RBI Prudential Framework

The RBI Prudential Framework for Resolution of Stressed Assets dated 7 June 2019 (“RBI Prudential Framework”) provides for a consensual out-of-court restructuring process between the lenders and the debtor. It is applicable to lenders who are entities regulated by the RBI, such as scheduled commercial banks, financial institutions and certain NBFCs and offers certain benefits to such lenders from the perspective of prudential norms if the lenders can achieve a time-bound resolution. This route is sometimes availed of by Indian banks. The process under this framework requires participants to sign an ICA. Non-signatories to the ICA are not bound by the restructuring process and may choose to initiate parallel proceedings against the debtor. There is no cross-class cramdown (or indeed any cramdown) or moratorium under this process unless so agreed under the ICA.

Contractual Restructuring/Settlements

The lenders and the debtor may choose to enter into restructuring or settlement arrangements which are purely contract-driven, subject to applicable law, including the considerations discussed in 9.2 Regulatory Considerations. Where lenders are entities regulated by the RBI, any compromise settlements or debt write-off must be in compliance with RBI directions.

The primary legislation governing insolvency resolution in India is the IBC. The IBC presently extends to (i) debtors who are corporate persons – also known as “corporate debtors” – and (ii) personal guarantors. The main considerations for a lender from an IBC perspective include the following.

Securing a Seat in the CoC

Financial creditors (FCs) are lenders who have disbursed debt against consideration for the time value of money and include beneficiaries of guarantees. Recognition as an FC is beneficial since FCs who are unrelated to the corporate debtor get a seat at the CoC. Each FC on the CoC has a vote commensurate to their claim amount and the CoC exercises control over many key decisions related to the corporate debtor, including in choosing a resolution plan/bid.

Moratorium on Certain Lender Actions

The IBC imposes a moratorium on the corporate debtor from the date of admission into CIRP till termination of the CIRP (which ends with passing of a resolution plan or liquidation). During the moratorium period, lenders cannot:

• recover monies from the corporate debtor;
• foreclose, recover or enforce their security over the corporate debtor’s assets; or
• continue any pending suits or proceedings against the corporate debtor.

Lenders are not stopped from proceeding against the guarantors or third-party security providers, where the principal debtor is admitted into CIRP. It is advisable for lenders to invoke the guarantee before the guarantor is admitted into CIRP to avoid any risk of litigation regarding admission of their claim qua the guarantor.

Claw-Back Risks

The insolvency professional is required to detect avoidable transactions and file necessary applications before the NCLT. Avoidable transactions include the following.

• Preferential transactions – where the corporate debtor has transferred any property or interest therein for the benefit of a creditor, surety or guarantor on account of an antecedent debt owed by the corporate debtor, and such transfer has the effect of putting such transferee in a beneficial position than it would have been in the event of a distribution of assets in a liquidation of the corporate debtor.

Transfers made in the ordinary course of business or financial affairs of the corporate debtor or transferee do not constitute preferential transactions. The look-back period for such transactions is one year preceding insolvency commencement date and, in case of transactions with related parties, two years preceding insolvency commencement date.

• Undervalued transactions – where the corporate debtor has made a gift or entered into a transaction which involves transfer of its assets for a consideration which is significantly less than the value of consideration provided by the corporate debtor.

Such transactions in the ordinary course of business of the corporate debtor do not constitute undervalued transactions. The look-back period for such transactions is one year preceding insolvency commencement date and, in case of transactions with related parties, two years preceding insolvency commencement date.

Where the corporate debtor had entered into an undervalued transaction to defraud creditors, there is no limit on the look-back period.

• Extortionate credit transactions – where the corporate debtor has been a party to an extortionate credit transaction, excluding any transaction where debt had been extended by a person provided financial services in compliance with applicable law. The relevant look-back period is two years preceding insolvency commencement date.

Where NCLT is satisfied that an impugned transaction is avoidable, it can pass necessary orders based on the type of avoidable transaction, which may include requiring any person to discharge any security interest created, reimburse any monies and/or retransfer any property received from the corporate debtor pursuant to such transaction.

Order of Payment

The manner of distribution of resolution proceeds is a matter of determination for the CoC, which may in its commercial wisdom adopt any distribution mechanism within the contours of the IBC, keeping in mind the minimum entitlements and priority of certain payments, such as insolvency costs and payments to dissenting FCs.

The IBC provides for a payment waterfall for distribution of recoveries in a liquidation scenario, which requires payments to be made to stakeholders in the order of priority below:

• the insolvency resolution costs (including any interim finance);
• secured creditors (who have agreed to not enforce their security outside the liquidation) and work-person’s dues (for the past 24 months);
• employees’ dues and wages (other than work-people) for 12 months preceding the liquidation commencement date;
• unsecured FCs;
• governments dues for the preceding 24 months, and unrealised dues of secured creditors who have enforced their security outside the liquidation;
• any remaining debts and dues;
• preference shareholders; and
• equity shareholders or partners.

Treatment of Related Parties

The IBC makes distinction between related and unrelated creditors of the corporate debtor. Related party FCs are not provided a seat on the CoC. The Supreme Court of India has permitted resolution applicants to make differential payments to related and unrelated creditors of the corporate debtor, including providing no payment to related party creditors.

Withholding Tax

Subject to tax treaties, as per the Income Tax Act, 1961 (“IT Act”), interest payable to a non-resident lender by any person in respect of any debt incurred for the purposes of a business carried by such person in India is deemed to accrue and arise in India and is subject to tax in the hands of the non-resident lender. In such a case, the IT Act imposes the obligation on the borrower to withhold tax as per the applicable rates while making interest payments and filing necessary withholding tax returns with the Indian income tax authority.

In case of securitisation structures, the IT Act confers tax pass-through status on all income generated by the securitisation trust and is taxed at the hands of the holder of the security receipts/pass-through certificates. Any distributions by the securitisation trust will be subject to withholding tax, and the rates apply based on the tax residency of the holder of the security receipts/pass-through certificates.

Thin-Capitalisation Rules

In terms of the IT Act, where an Indian company or permanent establishment (PE) of a foreign company in India, incurs any expenditure by way of interest or similar payments, exceeding INR10 million (approximately USD120,000), in respect of any debt owed to a non-resident, which is an Associated Enterprise (AE), the said interest is not deductible in computation of income to the extent such interest is in excess of 30% of borrower’s EBITDA or the interest paid or payable to AEs during the relevant year, whichever is less. Further, where the debt is owed to a lender who is not an AE, but one of the AEs of the taxpayer provides an explicit or implicit guarantee to the lender, then such debt is deemed to have been issued by an AE and is subject to the aforesaid limitations.

Stamp Duty

See 4.3 Jurisdiction-Specific Terms for the discussion on payment of stamp duty.

Types of lenders and their permitted activities – each type of lender discussed in 1.2 Market Players and 4.2 Impact of Types of Investors must comply with specific regulatory restrictions. Some of these have been discussed in this guide, such as eligibility of foreign lenders, and restrictions on banks lending for acquisition financing.

Purpose/end-use and borrower’s sector – additional regulatory considerations apply based on end-use of the facility as discussed in 2.1 Debt Finance Transactions (which also includes consideration of the borrower’s sector of business).

Cross-border considerations – as discussed, any cross-border debt financing transaction must be in compliance with FEMA.

See 4.3 Jurisdiction-Specific Terms.