Banking & Finance 2019 Second Edition Comparisons

Last Updated October 08, 2019

Contributed By Khaitan & Co

Law and Practice


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The financial year 2019-20 has witnessed a slowdown in the loan markets, particularly as a response to shrinking domestic economic growth and global recessionary trends. Banks have been more conservative in undertaking fresh exposure, with the primary emphasis of legislation and monetary policy being on arresting the proliferation of distressed assets and expediting their resolution. On 7 June 2019, the Reserve Bank of India (RBI) issued the ‘Prudential Framework for Resolution of Stressed Assets’ (Prudential Framework) which provides for the early identification and reporting of stress in respect of large borrowers, the complete discretion of lenders with regard to the design and implementation of resolution plans and the mandatory signing of an inter-creditor agreement (ICA) by the lenders.

Presently, all insolvency laws in India have been subsumed under the Insolvency and Bankruptcy Code, 2016 (Insolvency Code). Additionally, the Prudential Framework empowers the RBI to issue directions to banks for initiation of insolvency proceedings against borrowers for specific defaults in such a manner that the momentum towards effective resolution remains uncompromised.

The Insolvency Code itself has effectively proven its effectiveness in resolving stressed assets. The Prudential Framework gives lenders absolute discretion in determining the best strategy for resolving stress in their large loan accounts which may include, inter alia, restructuring, resolution under the Insolvency Code and change in ownership.

In recent years, the high-yield market in India has gradually been emerging into a place of prominence in the Asian market. Most of the high yield bond issues have been made in the overseas markets as a cheaper alternative to domestic bank finance. In the domestic markets, high-yield bonds and a mix of debt-based and equity-based financing options are still available, but mostly in the form of highly negotiated structured finance products, and not as a matter of course. Particularly in 2019, there was a sharp increase in the number of issuances of high-yield bonds by Indian companies in the Asian market.

There are number of alternative credit providers active in the Indian market; primarily non-banking financial companies (NBFCs), microfinance institutions (MFIs) and international financial institutions. NBFCs are the most prominent among them, given that they are free from a number of lending restrictions that are applicable to banks. However, NBFCs continue to be regulated by the RBI and typically do not have as much funding available to them as banks, so they are usually not involved in very large financing transactions. MFIs supply very low-level, short-term credit to poorer sections of society, in order to help individuals set up small businesses and means of making a living. International financial institutions, such as the World Bank, are present in the Indian market, but due to their preference for niche lending areas, their lending range is limited. Under present market conditions, bank finance to NBFCs has significantly dropped, leading to a reduction in their rate of participation in the loan markets.

There has been a rise in the popularity of tailored financial products, which are specially structured keeping in mind the requirements of various interest groups. Preference for raising debt through financial instruments such as debentures rather than through more vanilla lending models has also increased. This is an indication that the Indian loan market is becoming increasingly sophisticated. Owing to more stringent regulatory measures aimed at curbing potential defaults by new borrowers, high-value loans are now characterised by features such as conversion of debt to equity and taking over the management of defaulting entities.

The key developments in the Indian loan market have been the RBI’s initiatives to address the issue of non-performing assets in the Indian banking system through the Prudential Framework (in replacement of the earlier circular for resolution of distressed assets), and the continuing operation of the Insolvency Code.

In May 2016, the much awaited Insolvency Code was finally enacted. The Insolvency Code consolidates the myriad insolvency, reorganisation and liquidation/bankruptcy laws applicable to all persons – individuals as well as corporates – in a single, comprehensive and time bound legal regime. The Insolvency Code serves to eliminate the conflict of insolvency laws, resolves confusion as to the adequate forum for insolvency adjudication and greatly reduces the time limit for successful implementation of rescue procedures and for consummation of winding up of corporates. 

On 4 May 2017, the Banking Regulation (Amendment) Ordinance, 2017 was promulgated, giving extensive powers to the RBI to direct banks to commence insolvency proceedings under the Insolvency Code against defaulting borrowers and take any steps as may be required for resolving stressed assets. Pursuant to the ordinance, an Internal Advisory Committee was constituted by the RBI to look into the issue of stressed assets in the economy. The committee recommended that all accounts with fund and non-fund based outstanding amounts greater than INR50 billion, where 60% or more were classified as ‘non-performing assets’ by banks as of 31 March 2016, should be referred to the National Company Law Tribunal (NCLT) under the Insolvency Code. While it remains to be seen how these proceedings will play out, the current regulatory intent certainly seems to be to take a very hands-on approach in pushing the more significant defaulting borrowers through the insolvency resolution process under the Insolvency Code.

The Prudential Framework did away with all existing frameworks of debt restructuring (including Corporate Debt Restructuring, Strategic Debt Restructuring, and the Scheme for Sustainable Structuring of Stressed Assets), as well as the institution of the Joint Lenders’ Forum. Under this circular, banks and financial institutions are required to put in place a board-approved policy for resolution of stressed assets. On the borrower being in default, the lenders are required to undertake a review of the account within 30 days of the date of occurrence of default (Review Period). During the Review Period, the lenders are required to decide on the resolution strategy, including the nature of the resolution plan, the approach for implementation of the resolution plan, initiation of legal proceedings for recovery, etc. The lenders are required to enter into an inter-creditor agreement during the Review Period to ensure a coordinated approach. 

For certain high-value defaulted accounts, the Prudential Framework requires the Review Period to mandatorily commence in relation to a certain reference date (regardless of the lenders’ board approved policy for restructuring). For defaulting borrowers with an aggregate exposure of INR20 billion and above, the reference date is 7 June 2019 and the Review Period must begin immediately upon default. For defaulting borrowers with an aggregate exposure of INR15 billion and above, but below INR20 billion, the reference date is 1 January 2020 and the Review Period must begin immediately upon default thereafter. The RBI is to notify the reference dates for resolving accounts with aggregate exposure below INR15 billion in the near future. 

The Insolvency Code itself has been amended four times – by way of the Insolvency and Bankruptcy Code (Amendment) Act, 2017, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, the Insolvency and Bankruptcy Code (Second Amendment) Act 2018 and the Insolvency and Bankruptcy Code (Amendment) Code 2019. Through the amendments, promoters and related parties of the corporate debtor undergoing insolvency have been sought to be disqualified from participating in the bidding for acquisition of the corporate debtor in its insolvency. Further, the voting threshold for an insolvency resolution plan to be considers as approved by a committee of creditors has been brought down from 75% to 66%. This means there will be a higher number of cases which successfully undergo a corporate insolvency resolution process (CIRP) and which will not end up in liquidation. The 2019 amendment has changed the earlier position which required all financial creditors to be treated at par by a resolution applicant under the proposed resolution plan, and now recognises that creditors may be recognised in the same order of priority as they would enjoy in the liquidation of the company. Post the amendment, secured financial creditors can now be treated in priority to unsecured financial creditors under the terms of a resolution plan.

The business of banking in India is regulated by the RBI. Companies which propose to engage in such business must either be licensed by the RBI as banking companies, or register themselves with the RBI as NBFCs.

The RBI has historically been conservative in issuing banking licences, having issued a total of 12 banking licences in the period between 1993 and 2013. On 2 April 2014, the RBI issued two further universal banking licences, but also decided that all further licences would only be issued for niche banking activities. For example, in November 2014, the RBI introduced guidelines for a new class of banks called ‘payment banks’ which can accept low value public deposits (up to INR100,000).

In order to be eligible for classification as a NBFC, a company must have a net owned fund of INR2.5-20 million. Its financial assets must account for more than 50% of its total assets (netted off by intangible assets), and its income from such assets must account for more than 50% of its gross income.

All banks and NBFCs are required to comply with all directives issued by the RBI.

The RBI regulates loans made by foreign entities to Indian entities and this lending is classified as external commercial borrowing (ECB). Previously, ECB was broadly available to borrowers under two routes – the automatic route, which did not require any prior approvals from any regulators, and the approval route, which requires the borrower to apply for and obtain the RBI’s approval prior to entering into the transaction. In 2015 three separate tracks were introduced under which a potential borrower could avail themselves of ECB (it is no longer possible to approach the RBI for its approval for an ECB transaction which does not fall under any of the three recognised tracks). The tracks were based on the tenor of the ECB, with track one being applicable to foreign currency denominated ECB having a minimum average maturity period of three years and a maximum of five years, track two being applicable for foreign currency denominated ECB having a minimum average maturity period of ten years and track three being applicable for rupee denominated ECB having a minimum average maturity period of three years and a maximum of five years.

On 17 December 2018, the principal regulations governing the ECB policy were rationalised under the terms of the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. As per these regulations, ECB can be raised in any freely convertible foreign currency as well as in Indian rupees or any other currency as specified by the RBI in consultation with the Government of India. The eligible lenders under these regulations have to be a resident of a Financial Action Task Force (FATF) or an International Organization of Securities Commissions (IOSCO) compliant country as defined in the ECB policy, including on transfer of ECB. However, multilateral and regional financial institutions where India is a member country will also be considered as recognised lenders. Further, the RBI, in consultation with the Government of India may specify any other lender or set of lenders under the schedule or amend the existing provisions. For this purpose, foreign branches or subsidiaries of Indian banks are permitted as recognised lenders only for ECB raised in foreign exchange.

From 16 January 2019, under the ECB policy – New ECB Framework, the erstwhile three tracks were merged: tracks one and two have been merged as foreign-currency-denominated ECB and track three and the rupee-denominated-bonds framework have been merged as rupee-denominated ECB. Further the category of, eligible borrowers has been expanded to include all entities eligible to receive foreign direct investment (FDI). ECB are required to conform to a minimum average maturity period (MAMP), which has been fixed at three years for all ECB. However, ECB raised from foreign equity holders are required to have a MAMP of five years. ECB of up to USD50 million per financial year, raised by borrowers in the manufacturing sector, can have a MAMP of one year.

ECB of up to USD750 million or equivalent per financial year is permitted under the automatic route (ie, not requiring any prior approval from the RBI). The designated authorised dealer (AD) category one bank, while considering the ECB proposal, is expected to ensure compliance with applicable ECB guidelines by their constituents. Any contravention of the applicable provisions will invite penal action or adjudication under the Foreign Exchange Management Act, 1999.

Any type of security (mortgage of immovable or immovable property, pledge of financial securities, etc) may be offered as collateral for ECB. However, upon enforcement of a mortgage on immovable properties, the assets may only be sold to Indian residents. The only procedural prerequisite for security creation is obtaining the consent of the Indian AD bank through which the whole transaction will have to be routed and which will be receiving the funds from the overseas lender.

India remains a country that has significant exchange control regulations and the Indian rupee is not yet freely convertible, as far as capital accounts are concerned. The RBI is currently considering a proposal for allowing the issuance of rupee linked bonds overseas where the investors can hedge both the foreign currency risk as well as credit risk through permitted derivative products in the domestic market. However, it is likely to be some time before this system is implemented.

Restrictions on use of borrowed funds depend largely on the source of those funds. Loans availed from offshore lenders as ECB are subject to much more stringent restrictions than domestic loans. On the domestic front, financing from banks has higher restrictions than funds availed from NBFCs. Bank financing, for instance, cannot be used for land acquisition (excluding housing finance), capital market investments and acquisition financing, while financing availed from NBFCs is free from these restrictions.

On the other hand, the list of purposes for which ECB proceeds cannot be used includes the following:

  • investments in real estate or purchases of land (other than for affordable housing, construction and development of special economic zones, industrial parks or integrated townships);
  • investments in equity or capital markets; and
  • lending for any of the restricted activities.

In respect of long-term ECB availed from equity holders and corporate groups, the list of restricted purposes also includes general corporate purposes and refinancing of rupee loans.

In a typical financing transaction involving a consortium of lenders, the usual practice in India is to have the security in the name of a single entity, acting either as a trustee or as an agent of the lenders, for and on behalf of the entire body of lenders. There are institutions which specialise in providing such trusteeship services. This facilitates ease of security creation, enforcement and release. It also facilitates transfer and assignment of debt between lenders, as the status of the security holder remains unchanged subsequent to such transfers.

Transfer of loans by banks is permitted in India and may be done either with or without the borrower’s consent. The security in such a case is held by a trustee appointed for such a purpose, while the beneficial interest in the security is held by the lenders in proportion of their exposure to the borrower.

Debt buy-back by the borrower is not currently permitted under Indian law.

Acquisition finance is a heavily regulated activity in India and companies are prohibited from directly or indirectly financing the acquisition of their own shares. Consequently, the markets in India have not developed in the directions of acquisition finance and leveraged finance, and the concept of ‘certain funds’ and takeover regulations in respect to financing have not evolved in the Indian context.

Payment of interest on loans attracts withholding tax. In case of resident lenders, a general withholding tax rate of 10% applies to the payment of interest. The withholding tax rates applicable to interest paid to non-resident lenders are 20% (plus applicable surcharge and cess) in cases of foreign currency loans and 40% (plus applicable surcharge and cess) in cases of rupee-denominated loans, subject to lower withholding tax rate under the applicable tax treaty.

However, it should be noted that a concessional withholding tax rate of 5% (plus applicable surcharge and cess) applies on interest on foreign currency loans borrowed between 1 July 2012 and 30 June 2020 from sources outside India (subject to conditions) and interest on the rupee-denominated bonds of an Indian company or a government security payable to a foreign portfolio investor or a qualified foreign investor between 1 June 2013 and 30 June 2020 if the rate of interest in respect of the bond does not exceed the rate as may be notified by the Central Government in this context. The government has extended (retrospectively from financial year 2015-16 onwards), the concessional rate of withholding tax at the rate of 5% (plus applicable surcharge and cess) to the interest on the rupee-denominated bonds of an Indian company issued outside India before 1 July 2020.

In the absence of the lender having a tax registration number in India, a permanent account number (PAN), a minimum withholding tax rate of 20% would be applicable regardless of a lower rate applicable otherwise. However, the said higher withholding tax of at least 20% would not apply if the lender furnishes certain alternate documents or information such as its tax registration number and address in its country of residence and its tax residency certificate issued by the tax authorities.

As far as other tax considerations are concerned, if the interest payable to a non-resident lender does not fall within the purview of the provisions extending concessional withholding tax rates of 5% under the domestic tax law, that lender may consider extending the loan from a jurisdiction which has a favourable tax treaty with India providing for a more beneficial withholding tax rate. In this context, it may be noted that India has amended its tax treaty with Mauritius whereunder withholding tax on interest is capped at 7.5% on the interest payments to Mauritian tax residents having a valid tax residency certificate. Also, it is vital to take note that by virtue of the General Anti Avoidance Rules in India which are in force with effect from 1 April 2017, the tax authorities in India may deny treaty benefits available to the lender, if the arrangement is an impermissible avoidance arrangement, and the main purpose of the arrangement is considered to be obtaining a tax benefit.

An offshore transfer of rupee-denominated bonds, which are issued overseas, from one non-resident to another will not be regarded as a taxable transfer and accordingly, not attract tax in India.

In addition, if the lender and the borrower are associated enterprises (AE) as defined under the Indian transfer pricing regulations, all the transactions between them including lending would need to be undertaken on an arm’s length basis and prescribed compliances and documentation would need to be maintained. In a situation where the lender and the borrower are otherwise unrelated parties, the lending itself may result in them being deemed as AE if the loan advanced by the lender to the borrower constitutes 51% or more of the book value of the total assets of the borrower.

India has thin capitalisation rules (introduced by the Finance Act, 2017) If an Indian company, or a permanent establishment of a foreign company in India, (collectively, the borrower) has borrowed money from its non-resident associated enterprise (NR AE) and if that Borrower pays interest exceeding INR10 million towards such loan(s), then the maximum amount of deduction available to the borrower in respect of the interest payments to its NR AE would be capped at 30% of its earnings before interest, taxes, depreciation, and amortisation. Loans which have been extended to the borrower by a third-party lender, on the implicit or explicit guarantee of its NR AE, will also be covered under this provision. However, if the interest is not eligible for deduction in a particular year, it can be carried forward for eight years and the same shall be allowed to the extent of maximum allowable interest expenditure for the relevant year. These rules do not, however, apply to an Indian company engaged in the business of banking or insurance or a permanent establishment of a foreign company which is engaged in the business of banking or insurance.

Since the RBI regulates the operations of all banks and NBFCs, usury laws in India are targeted more towards unregulated institutions and lenders. An archaic legislation exists in the form of the Usurious Loans Act, 1918, which empowers the Indian courts to determine any rate of interest, that the court in its discretion deems to be excessive, as unenforceable. While no specific cap has been prescribed under this Act and it remains for the courts to determine what rates are usurious on a case-by-case basis, in practice this Act is rarely invoked and only in instances of manifest draconian interest provisions. As far as foreign lenders, who are not subject to the jurisdiction of the RBI, are concerned, the ECB regulations prescribe that the rate of interest payable on ECB (under all tracks) and rupee-denominated bonds is capped at the London Inter-bank Offered Rate (LIBOR) plus 450 basis points.

Typically, the most common forms of security taken are mortgages over immovable properties, hypothecation of movable properties (including fixed and current assets), and pledges over shares. All types of security creation over the assets of any company requires registration of the charge to be made with the Registrar of Companies within 30 days of charge creation. If this is not done, the charge will not be taken into consideration at all if the company goes into liquidation. A mortgage of immovable properties has to be registered with the concerned local sub-Registrar of Assurances for the area where the mortgaged property is situated within four months of security creation. The mortgage is not enforceable until the registration has been made. However, this is not compulsory in some states if the mortgage is in the form of an equitable mortgage effected through the deposit of title deeds. In respect of a pledge of shares, if the shares are in dematerialised form, a pledge creation form has to be filed with the depository before the pledge will be effective. There are no significant costs involved for form filings with the Registrar of Companies, a very small amount is charged as nominal fee. However, there is a stamp duty payable to the government at the time of execution of any instrument, and as registration fees post execution in respect of mortgages. The rates of payment differ from state to state. In some states, these duties are capped, while in others they are charged as an ad valorem percentage on the amount of debt being secured without an upper limit, thereby significantly pushing up transaction costs. The lenders or trustees, in whose favour any security over movable or immovable properties (but excluding any pledge of shares or other financial instruments) has been created, are also required to mandatorily register their charge with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) within 30 days of security creation.

Typically, the current assets of a borrower are subjected to a floating charge which crystallises upon the occurrence of any event, such as a default, which renders the security enforceable. The charge which exists over the movable fixed assets and immovable assets of the borrower is more in the nature of a fixed charge.

It is possible for Indian companies to give downstream, upstream and cross-stream guarantees so long as they relate to the obligations of domestic entities and passing of some corporate benefit can be demonstrated.

Indian companies are restricted from directly or indirectly financing or leveraging the acquisition of their own shares. Further, banks are also restricted from engaging in acquisition financing. Owing to these regulatory restrictions, leveraged buyouts are not strictly possible in India. Funds for acquisition financing are raised from sources other than banks, such as NBFCs, private equity investors or investors for debenture issuances and are typically secured against the acquired shares of the target entity and not against any security of the target itself.

Indian foreign-exchange-control guidelines regulate the provision of any credit enhancement by an Indian entity to an offshore entity. As such, Indian companies can provide guarantees and security as collateral for the obligations of an overseas joint venture or subsidiary company (regardless of the level of step-down) to foreign banks, provided that the total financial commitment of the Indian company towards all of its overseas joint ventures and subsidiaries does not exceed 400% of its own net worth. Group companies, sister concerns, associate concerns, individual promoters or directors of the Indian joint venture partner or parent company are also allowed to provide security for the obligations of the overseas joint venture or subsidiary. A permission from an AD category one bank in India is required in order to create any form of security under this route, but this is more in the nature of a procedural formality than a restriction. Most major banks carrying out business in India are licensed to act in this capacity and issue this permission, and it is through this bank that all funds must be routed. No permissions are required for the issuance of a guarantee.

The procedure for release of security depends on the type of security being released. In respect of immovable properties, since the most common form of mortgage used in India is an English mortgage, a written reconveyance deed is executed for releasing the charge. In respect of pledge, a form has to be filed with the depository confirming the release of the pledged shares. In respect of movable properties or an equitable mortgage, no instrument is necessary, but the banks typically issue a written letter confirming the satisfaction of dues and release of charge. This has to be filed with the Registrar of Companies within 30 days of release of security to remove the charge from the public records. If the mortgage has been registered with any Sub-Registrar of Assurances, the reconveyance deed has to be presented before the same authority for recording the release.

As a general principle under Indian law, a security interest created at a prior point of time is subject to, and subordinate to, a security interest created earlier. However, this may be contractually varied, with lenders having the option to provide their consent for the creation of a pari passu charge, or even a superior charge, at a subsequent point of time. Until the Insolvency and Bankruptcy Code (Amendment) Bill, 2019 (Insolvency Code)was passed, the priority of charges held by secured creditors was not relevant in the insolvency of a borrower, as all financial creditors were required to be treated at par. With the passing of the amendment, secured creditors may now be treated on priority to unsecured creditors. However, the question as to how contractual priority of charges inter se the secured creditors will be treated, has not yet been tested.

Secured lenders may enforce their security interest in the event that the borrower fails to repay any amounts due and payable to the secured creditors as per their contract. While there are no procedural requirements as to invocation of a pledge or guarantee, it is slightly more difficult to enforce charge over assets that are not in the lender’s physical possession, such as a mortgage over immovable assets or a hypothecation over movable assets.

Banks, financial institutions and NBFCs which satisfy a minimum net worth criteria have been granted a statutory right to enforce their security interest over any assets and conduct a forced sale without court intervention through the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESI). However, other classes of secured lender, such as foreign lenders which do not have a branch in India, need to approach the courts and obtain an order for the seizure and sale of the assets of a defaulting borrower. Given that the judiciary is often backlogged, and the borrower has opportunities to appeal at different stages of the proceedings, this can potentially delay the actual enforcement by months.

With the enactment of the Insolvency Code, all enforcement measures against a borrower will be subject to the moratorium period of 180 (potentially extendable to 330) days that is statutorily imposed while a restructuring plan is being worked out.

It is common for Indian entities to enter into contracts governed by foreign laws –eg, English law or New York law. Further, under Indian law, there are certain notified jurisdictions with which there is a reciprocity arrangement (Aden, Federation of Malaya, Fiji Islands, Hong Kong, Papua New Guinea, Singapore, Trinidad and Tobago, United Kingdom, United Arab Emirates, Victoria (Australia), Bangladesh, Western Samoa, New Zealand and the Cook Islands). Indian courts will enforce civil decrees issued from a competent court in these jurisdictions (provided that the order being enforced is not contrary to Indian laws or public policy) and vice versa, without retrying the case on its merits. Accordingly, the choice of foreign law as the governing law by the parties will be upheld in India. However, there have been cases where the courts have not interpreted such a governing law clause to mean that the jurisdiction of Indian courts has been completely ousted. Also, practically, even after a party has obtained an award from a foreign court, they still have to approach the Indian courts to get the order enforced (as the public authorities in India will only act upon the order of an Indian court), which requires separate proceedings to be initiated.

As discussed above in 6.2 Foreign Law and Jurisdiction, the judgments of foreign courts in certain notified jurisdictions with which India has a reciprocity arrangement are, with certain provisos, enforceable in India.

Even when a lender has a valid claim against an Indian party and successfully establishes it in court, remittance of any proceeds of a judgment-debt outside India may require the permission of the RBI from the perspective of exchange control laws. This is not applicable in cases of enforcement of securities, for which a specific permission is available. Also, from a procedural perspective, Indian courts are often heavily backlogged with multiple matters, which makes litigation a long, drawn-out and inconvenient process. A delinquent borrower can take advantage of this in order to delay the bureaucratic proceedings and cause delays by making frivolous appeals to higher courts.

Outside of the Insolvency Code, the only remaining reorganisation procedure left to lenders is restructuring in terms of the Prudential Framework. It provides for a very generic restructuring framework which allows the parties to decide the terms of the restructuring for themselves, but binds them with mandated timelines and provisioning rules within which the corporate debtor must demonstrate strict adherence to the restructuring proposal without any defaults. Furthermore, the Prudential Framework stipulates that any decision agreed by lenders representing 75% by value of total outstanding credit facilities (fund-based as well non-fund-based) and 60% of lenders by number shall be binding on the dissenting minority. However, it remains open to any lender to initiate CIRP under the Insolvency Code at any time at all, which would override the entire restructuring process. 

Under the new Insolvency Code, any creditor of a borrower-company which has a financial debt or an undisputed debt of any other kind may initiate insolvency proceedings by filing an insolvency application before the NCLT. The NCLT has 14 days to either admit or dismiss the application. In the event the NCLT admits the application, a moratorium is declared on all other recovery proceedings against the debtor until the insolvency proceedings are concluded. The Insolvency Code requires the insolvency resolution process to be completed within a period of 180 days from initiation, which may be extended up to a maximum period of 330 days; and the moratorium period would be co-extensive with this process.

The Insolvency Code sets out the following order of waterfall for payment of debts of an insolvent company:

  • cost of the insolvency, resolution process and liquidation;
  • secured creditors who choose to relinquish their security enforcement rights and workmen’s dues relating to a period of 24 months preceding the liquidation commencement date;
  • wages and unpaid dues of employees (other than workmen) for a period of twelve months preceding the liquidation commencement date;
  • financial debts owed to unsecured creditors;
  • statutory dues to be received on account of the Consolidated Fund of India or Consolidated Fund of a State (relating to the whole or part of the two year period preceding the liquidation commencement date) and debts of secured creditors (remaining unpaid after enforcement of security);
  • remaining debts and dues;
  • dues of preference shareholders; and
  • dues of equity shareholders or partners (as may be applicable).

The Insolvency Code identifies certain cases where a payment made to a creditor can be reversed. Where a transaction entered into by the corporate debtor is deemed to have been undervalued, fraudulent, extortionate, or giving undue preference to any creditor over the others, then the NCLT may potentially order the transaction to be reversed.

For lenders, commencement of insolvency proceedings against a company is a cause for concern because of the moratorium period of 180 days (extendable to 330 days) following the admission of an insolvency application against a corporate debtor. During this time, the lender would be unable to bring any fresh proceedings or initiate any recovery action against the debtor. By the end of the moratorium period, the lenders to the borrower are required to convene a committee of creditors (CIC) to collectively work out a restructuring or rescue plan in respect of the borrower’s accounts. If approved by 66% of the financial creditors comprised in the CIC, the plan would become binding on all the lenders. If any particular lender opts to participate in the insolvency resolution process with all the other creditors of the borrower, it would be bound by any decision taken by a 66% majority of the financial creditors in the CIC, who may decide that the borrower should undergo restructuring rather than enforcement and recovery proceedings, and that the lenders should accept haircuts in the process. Alternatively, an individual lender may remain outside the insolvency process and pursue any alternative remedies it has against the debtor in terms of enforcing guarantees or collateral provided by third parties. However, once such remedies are exhausted, and if there are still balance amounts due to the lender, it will be paid out at a lower priority to other unsecured creditors of the borrower in the liquidation process.

In India, the mode of project finance varies according to the nature of the project. Based on the assessment of the lenders and other factors such as the financial strength, project execution skills and the track record of the project sponsors, there have been projects where sponsors have assumed the entire construction risk rendering the transaction a full recourse financing during the construction stage. Upon completion of construction, full recourse to the sponsor generally falls away or is limited. In some cases, recourse to the sponsor is limited at both the construction stage and the operational stage until the discharge of debt.

Project financing is also governed by those sector-specific norms and regulations that are applicable to the project concerned such as telecom, power, roads, ports or airports. Additionally, the terms and conditions of tender documents in cases of public-private partnership (PPP) projects will apply.

Sector specific regulations may result in additional consent requirements prior to any enforcement by the lenders.

The government, while granting concession for a project may also provide tax benefits under the concession agreement to the parties. Currently, certain infrastructure projects, including the renewable energy sector, enjoy a ten-year tax holiday.

Following the 1991 economic reforms, sectors that were previously only open to public (government) institutions were opened up to private participation. With the liberalisation of the Indian economy, PPPs were boosted in India. Several projects were undertaken both at the federal and state government level. While there is no central PPP legislation in place, various state governments do have their own PPP laws and policies in place. The Government of India through the Cabinet Committee on Economic Affairs, under the Ministry of Finance, had approved the procedure for approval of PPP projects in the year 2005. Subsequently, the Government of India constituted the PPP Appraisal Committee (PPPAC) in 2006, which is responsible for appraising PPP projects, eliminating delays and adopting international best practice in a uniform and time efficient manner.

Nevertheless, statutes such as the National Highways Act, 1956 empower the central government to enter into any contract with any person for the development and maintenance of national highways. Similarly, the Airports Authority of India Act, 1994 permits the Airports Authority of India (AAI) to lease the airport premises for the development of airports.

The PPP models that are prevalent in India comprise:

  • Build–operate–transfer (BOT) and its variants such as build–lease–transfer (BLT), build–own–operate–transfer (BOOT) and design–build–finance–operate–transfer (DBFOT). BOT models comprise user fee-based models, as well as annuity-based models;
  • maintenance contracts; and
  • modified design–build (turnkey) contracts.

There is no government approval required specifically for undertaking project finance. As stated before, different infrastructure sectors are regulated by different regulators which operate as per their own regulations and internal policies. However, if the mode of financing is through cross-border funds, then the borrower may require approvals where such financing does not fall under the parameters of the permitted modes of raising offshore debt or equity.

There are no separate registration requirements in respect of project-finance documents; any document which creates any kind of security for the financing would have to be registered in the same manner as explained in 8.1 Introduction to Project Finance above.

Oil & Gas

The Ministry of Petroleum and Natural Gas manages and oversees upstream exploration and production and midstream and downstream activities in the oil & gas sector in India. The Directorate General of Hydrocarbons advises the ministry on the offering of oil & gas blocks for exploration and production. The Petroleum and Natural Gas Regulatory Board is the principal regulator for the downstream sector and authorises entities to lay, build, operate or expand pipelines and natural-gas-distribution networks (city or local). The Oilfields (Regulation and Development) Act, 1948 and the Petroleum & Natural Gas Rules, 1959 provide the framework for the granting of exploration licences and mining leases with respect to hydrocarbons. The Petroleum Act, 1934 empowers the government to frame rules regarding import, transport, storage, blending, refining and production of petroleum.


The Ministry of Power is responsible for policy and planning in relation to thermal and hydropower generation and the transmission and distribution of electricity. The Ministry of New and Renewable Energy is the agency for the promotion of grid-connected and off-grid renewable energy. The Electricity Act, 2003 provides a framework for generation, transmission, distribution and trading of electricity. Under this Act, commissions have been constituted at the central and state level to regulate the generation, distribution and transmission of electricity. The Central Electricity Authority stipulates technical standards and safety requirements for the development of power plants and grids.


The Ministry of Mines is responsible for the surveying and exploration of minerals. The Ministry of Coal and the Ministry of Steel are responsible for regulating the mining of coal and iron ore, respectively. The Indian Bureau of Mines is responsible for the inspection of mines, geological studies, the scrutiny and approval of mining plans and conducting environmental studies. The Mines Act, 1952 regulates health and safety measures for workers employed in mines, these are administered by the Directorate General of Mines Safety which is a regulatory agency under the Ministry of Labour and Employment.

Form of the Project Company and Modes of Financing

Project finance is generally made available in the form of domestic-term loans, ECB, working-capital loans or foreign direct investment (FDI) into Special Purpose Vehicles (SPVs), which are entities incorporated for the sole purpose of developing a particular project. It is also common to obtain financing through issuance of debt instruments, such as non-convertible debentures, or by acquiring credit from the Export Import Bank of India. Using an SPV model provides the advantage of ring-fencing the operation and assets in relation to the project.

Cross-border Financing Regulations

Cross-border finance in the form of ECB is regulated by the RBI under the terms of the ‘Master Directions on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers’ dated 26 March 2019 (and as may be amended, updated or reissued by the RBI from time to time). These regulations identify the conditions under which any Indian borrower may raise ECB. Any form of financing which does not conform to these conditions would require the prior approval of the RBI. For example, infrastructure companies may avail themselves of ECB up to USD750 million under the automatic route (ie, without requiring any RBI approval), but any borrowing in excess of this amount would require the prior consent from the RBI.

Cross-border equity investments in India are regulated by the ‘Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2017’ of the RBI and the ‘Foreign Direct Investment Policy’ (FDI Policy) issued from time to time by the Department of Industrial Policy & Promotion, Ministry of Commerce and Industry, Government of India (DIPP). The FDI Policy is periodically updated and sets out sectors in which FDI is permissible, along with the respective shareholding caps for foreign investors. Where a proposed investment does not fall under the automatic route, the prior consent of the Foreign Investment Promotion Board (FIPB) is required. Recently, the government has proposed dissolving the FIPB and transferring the authority to approve applications for permitting foreign investments under the approval route to the relevant ministries of the government.


Cross-border project finance in India is governed by several treaties which provide investor protection in case of foreclosures as well as other incentives, such as tax benefits, to foreign investors. For example, India is a signatory to several Bilateral Investment Promotion and Protection Agreements (BIPAs), Free Trade Agreements (FTAs), Comprehensive Economic Partnership Agreement (CEPAs), Comprehensive Economic Cooperation Agreement (CECAs), Preferential Trade Agreements (PTAs) and Double Taxation Avoidance Treaties (DTATs).


Typically, the documentation structure for a debt-based project finance transaction would be as follows:

  • loan agreement;
  • security documents comprising: 
    1. mortgage documents (indenture of mortgage or memorandum of entry and director’s declaration) creating a charge over land, permanently-fixed structure and project documents;
    2. deed of hypothecation creating a charge over movable assets, current assets including cash and bank accounts; and
    3. share pledge agreement or non-disposal undertaking;
  • sponsor undertaking or guarantees (personal or corporate);
  • trust and retention account agreement or escrow account agreement;
  • inter-creditor agreement (in cases of multiple lenders);
  • direct agreements;
  • security trustee agreement (on a case-to-case basis); and
  • facility agent agreement (on a case-to-case basis).

One of the major sources of financing the development of projects is promoters’ equity contribution. Many government tender documents stipulate minimum equity investment to be brought in by the promoters in a project. Apart from equity, projects are typically financed by way of term loans by domestic and foreign banks. Project finance can also be acquired from NBFCs and sector-specific lenders like the Rural Electrification Corporation, the Power Finance Corporation and the Indian Renewable Energy Development Agency. ECB and foreign investment into the project entity are the other major sources of financing. The government also operates schemes such as viability-gap funding for specific projects.

Financing may also be obtained through debentures and bonds. Recently, India has seen issuance of rupee-denominated bonds known as masala bonds and green bonds. Bond markets help companies acquire funding options which may have less restrictive covenants than bank loans.

The Export Import Bank of India, an export credit agency, provides financial assistance to exporters and importers in the form of buyers’ credit, lines of credit and execution of projects abroad. The Export Credit Guarantee Corporation offers credit-risk insurance cover to exporters against losses in export of goods and services and overseas-investment insurance to Indian companies investing abroad.

The primary source of funds for operating projects are the proceeds from the project itself, along with working-capital loans from banks and financial institutions.

As a general rule, the right of ownership and exploitation of natural resources lies with the government. However, as far as commercial exploitation of natural resources is concerned, the Supreme Court of India has held that the state does not possess proprietary right over minerals found on private property. The state is, however, empowered to regulate mining activities through the grant of mining licences and the levying of royalties under applicable mining legislation. The government also provides private parties with concessions or licences to exclusively exploit any natural resource, subject to payment of any fee or royalty or any other term as specified in the contract, including profit sharing. In the oil and gas sector the government has given licences to parties for exploration purposes and the right to extract and market natural resources, subject to a profit sharing agreement. The Krishna Godavari gas basin pipeline is an example of government granting a licence to exploit natural resources to a private company. Even in the mining sector, the government allocates coal blocks to private companies through tenders and grants exclusive mining rights subject to the conditions of a mining lease deed.

The Environment Protection Act, 1986 is the umbrella legislation in India for environmental law. Any infrastructure project in the country requires environmental approval from Ministry of Environment and Forests (MOEF). The relevant parties may be required to prepare an Environment Impact Assessment report (EIA) with respect to their projects and suggest methods to mitigate any harmful impact on the environment. The MOEF studies the EIA and if deemed acceptable, grants an approval subject to applicable modifications.

Further, consent from state pollution control boards is required under the Water (Prevention and Control of Pollution) Act, 1974, the Air (Prevention and Control of Pollution) Act, 1981 and the Hazardous Wastes (Management and Handling) Rules, 1989 for setting up any industrial activity and handling and discharge of potentially hazardous waste materials. In cases where the project is situated in forests and there is a threat to wildlife then the permission of the concerned forest department and wildlife board is also required.

The health and safety standards in India are governed through various pieces of labour welfare legislation, applicable at both central and state level. There is legislation to govern minimum wages, workmen's compensation, maternity benefit, provident fund contributions, health insurance, etc.

Islamic Finance has not really taken off in the Indian banking market since there is no organised market for it and the regulations of the RBI do not contemplate Islamic Finance based structures.

Because of the absence of Islamic finance from the Indian banking market there is no relevant regulatory and tax framework.

Because of the absence of Islamic finance from the Indian banking market there are no Shari'a-compliant products worth mentioning.

Because of the absence of Islamic finance from the Indian banking market, questions of the treatment of claims of Sukuk holders do not arise.

Because of the absence of Islamic finance from the Indian banking market there have been no notable recent cases in the area.

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Khaitan & Co is a full-service legal practice in the truest sense, with capabilities across all core practice areas, niche capabilities traditionally not found in Indian law firms and a matrix approach offering sector-specific expertise. Established in 1911, it is a heritage firm of lawyers and trusted advisers to leading business houses, multinational corporations, global investors, financial institutions governments and international law firms. Khaitan & Co is amongst the leading full-service law firms in India, boasting a pan-Indian presence with offices in Mumbai, Delhi, Bengaluru and Kolkata, with over 570 professionals – including 130 partners and directors – with diverse skills and experience on high profile and path breaking engagements.