Project Finance 2019 Second Edition Comparisons

Last Updated November 04, 2019

Contributed By J. Sagar Associates

Law and Practice


J. Sagar Associates is a leading national law firm in India, with over 300 attorneys operating out of seven offices: Ahmedabad, Bengaluru, Chennai, Gurgaon, Hyderabad, Mumbai and New Delhi. For over 25 years JSA has provided legal representation, advice and services to leading international and domestic businesses, banks, financial services providers, funds, governmental and statutory authorities, and to multilateral and bilateral institutions. The firm has a distinguished and market-leading banking and finance practice in India. JSA has been involved in several project and project finance assignments for banks, financial institutions, funds, sponsors and corporates in different sectors, including roads, ports, railways, airports, oil and gas, power and renewable energy. With a team of over 35 attorneys in its banking and financing practice, JSA possess the expertise and resources to provide comprehensive, commercially oriented and practical advice and solutions to its clients.

India has an estimated investment requirement of USD777.73 billion in infrastructure by 2022. The government of India (GOI) is making significant budgetary allocations for infrastructure investments, as is evidenced by the Union Budget 2019–20. Alongside this, the GOI is also exerting significant policy-push for implementing mega infrastructure projects. As a result, the average annual investment gap is estimated at USD20–25 billion, conservatively. This helps to explain the extreme importance of private or commercial financing of Indian infrastructure.

Resolving the burgeoning stress in the infrastructure sector, which perhaps makes up 70% of the non-performing loans of the Indian banking sector, has come as a massive challenge for the GOI. The long gestation periods of infrastructure projects have pushed several financial institutions to severe asset-liability mismatches. In this backdrop, the primary policy focus of the GOI has been to ensure continued liquidity in the financial systems, timely resolution of financial stress and time-bound completion of projects. Some of the key points to note in this regard are as follows.

External Commercial Borrowings – Revised Regulations and Framework

To facilitate and encourage the flow of foreign debt financing, the Reserve Bank of India (RBI) has prescribed a revised and liberalised framework for raising foreign currency borrowings or external commercial borrowing (ECB) by companies in India. The list of eligible lenders has been expanded to any entity or person which/who is a resident of a Financial Action Task Force (FATF) or International Organization of Securities Commissions (IOSCO)-compliant country. The end-use norms have also been relaxed, making it more viable for borrowers to access a much wider and cheaper credit market. Illustratively, repayment of more expensive rupee debt has also been permitted as an end-use for ECBs, subject to maintaining specified minimum average maturity periods of seven or ten years, as applicable. Further, for project companies, proceeds of an ECB facility have been permitted for payment of interest-during-construction and ECA guarantee fees.

Strengthening the Bonds Market

The RBI has undertaken several steps to develop and deepen the Indian bonds market, such as launching tax-free infrastructure bonds, and permitting Indian banks to offer partial credit enhancement to bonds issued by non-banking financial institutions and housing finance institutions.

Further, to encourage long-term foreign investments in the Indian bonds market, the voluntary retention route (VRR) has been introduced by RBI. The VRR is a voluntary scheme and provides certain concessions to registered foreign portfolio investors (FPI) from the prudential and other regulatory limits applicable to FPI investments. The minimum retention period is set atthree years for investments made in debt securities by FPIs under VRR. Further, this retention period will be applicable to 75% of the total amount allocated for investment to an FPI by RBI instead of a particular investment in debt security by an FPI.

Statutory Amendments

The recently enacted Insolvency and Bankruptcy Code, 2016 (IBC) has been substantially amended to iron-out difficulties faced by the various stakeholders. Fixing the outer timeline of 330 days for completion of a corporate insolvency resolution process (CIRP), including time spent on pending litigations and clarifying the binding nature of an approved resolution plan even on government entities, will certainly bolster the debt resolution ecosystem in India.

The Specific Relief Act, 1963 has been amended to provide that for infrastructure project contracts, the court shall not grant an injunction in any suit, where it would cause hindrance or delay in the continuance or completion of the infrastructure project. This will certainly go a long way in ensuring timely completion of projects – thus minimising a major implementation risk.   

Prudential Framework for Resolution of Stressed Assets

The RBI introduced the Prudential Framework for Resolution of Stressed Assets Directions dated 7 June 2019 (RBI Directions) for the resolution of stressed assets in a time-bound manner. The RBI Directions provide the utmost discretion to the specified lenders for an out-of-court consensual debt-resolution mechanism. For ensuring the same, the RBI Directions mandate execution of an inter-creditor agreement, which sets out the administrative platform for the resolution process and sets out stand-still provisions with the aim of achieving a co-ordinated resolution plan. To eliminate hold-up problems, a decision taken by lenders representing 75% by value of total outstanding debt and 60% by number will be binding on all lenders. Further, the RBI Directions stipulates that a resolution plan must provide payment of at least the liquidation value to the dissenting creditors and preserve the pre-insolvency security ranking and sharing structures.   

Infrastructure Investment Trusts (INVITs)

INVITs offer an early exit option to traditional financiers such as banks, and are thus an effective means to pump back liquidity with such lenders. The Securities and Exchange Board of India (the capital markets regulator) has taken steps to broad-base the investor profile of the units to be issued by INVITs. Additionally, the leverage limits of INVITs has been increased. These should ensure sufficient fund flow to the INVITs.

Other Policy Measures

As a measure for tiding over the liquidity crunch in the banking sector, the GOI has announced recapitalisation of public sector banks by an amount of up to INR700 billion. The GOI also plans to establish an institution for providing credit enhancement for infrastructure projects.

Scheduled commercial banks – both state-owned as well as private – have dominated the space of infrastructure financing for a long time. Alongside banks, non-banking financial companies have also emerged as a major financing source particularly for roads and the renewable energy sector. Given the long horizon of investments, infrastructure debt funds, state-owned specialist institutions such as the National Investment and Infrastructure Fund (NIIF) or India Infrastructure Finance Company Limited (IIFCL) have emerged as alternatives to supplement the traditional financiers.

The Master Direction 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, as updated from time to time (ECB Guidelines) – has been significantly liberalised to encourage overseas lenders from FATF or IOSCO-compliant jurisdictions, and multilateral and regional financial institutions to extend financing. Further, FPIs have also been subscribing to NCDs issued by project companies, particularly in the renewable energy sector.       

The Indian private sector, under the public-private partnership (PPP) framework, continues to be the sponsor for a majority of the Indian infrastructure projects. However, of late, we have witnessed the emergence of newer breeds of sponsors such as overseas sovereign funds, pension funds and private equity funds. 

INVITs have gained currency in India for managing income-generating infrastructure assets, offering investors regular yields. 

PPP projects are leading to faster implementation, reduced life-cycle costs, access to private sector finance and optimal risk allocation. Private management increases accountability and incentivises performance and maintenance of required service standards. Finally, PPPs are resulting in improved delivery of public services and promotion of public sector reforms.

PPP contractual arrangements in India have evolved on the basis of policy initiatives of the central and state governments, state laws and regulations and model concession agreements. The Department of Economic Affairs (DEA), Ministry of Finance (MOF) has been primarily overseeing the development of the central public infrastructure through the PPP model across the country. The DEA has established institutional mechanisms for streamlining and speeding up appraisal of PPP infrastructure projects (setting up the PPP Appraisal Committee), financial support to make PPP infrastructure projects commercially viable – such as the Scheme for Financial Support to PPPs in Infrastructure-Viability Gap Funding (VGF) – supporting the development of a pipeline of bankable PPP projects through the India Infrastructure Project Development Fund (IIPDF) and the efforts of the DEA and the erstwhile Planning Commission to mainstream PPPs through a multipronged approach to standardisation of documents (adaptable to individual projects) to enable easy adoption, capacity building and financial support schemes.

A comprehensive bid document is issued inviting tenders and the contract is ordinarily awarded to the lowest evaluated bidder whose bid is found to be responsive and who is eligible and qualified to perform the contract satisfactorily as per the terms and conditions incorporated in the corresponding bidding document. The MOF has issued guidelines for pre-qualification of bidders for PPP projects, which provides a two-stage bidding process, and these are applicable to all ministries and departments of the central government and to all central public sector undertakings.

Public procurement by central government is governed by comprehensive rules such as General Financial Rules, 2005, the Delegation of Financial Powers Rules, and government orders and guidelines. There are sectoral laws and policies that also guide public procurement – for example, in the telecommunications, oil and gas and power sectors. Further various government departments have evolved their own public procurement system. Certain states in India, such as Tamil Nadu and Karnataka, have enacted laws for public procurement.

In India, the basic principle of public procurement is that every authority delegated with financial powers of procuring goods in public interest has the responsibility and accountability to ensure efficiency, economy and transparency, fair and equitable treatment of suppliers and promotion of competition in public procurement.

The authority that will rule on review applications depends upon the sector. Sometimes, the law governing the sector may provide for setting up specialised tribunals. In the absence of such legislation, review applications are heard by the competent court having jurisdiction. Suspension of the procurement procedure or conclusion of the contract during the pendency of a review application depends upon various factors such as the contents of the legislation or policy, the nature of relief sought, and whether stay has been granted.

There is growing demand and recommendation for developing an appropriate legislative framework for PPPs, clarification of entry conditions, suitable contractual structures, and clarification of incentives and concessions.

The main issues that need to be considered in project financing transactions in India can be broadly classified as follows:

  • construction or completion of the project;
  • revenue risk;
  • operation risk;
  • input or supply risk;
  • environmental issues;
  • land acquisition and resettlement and rehabilitation issues; and
  • force majeure risk.

While it may not be possible to mitigate all the risks in their entirety, the project finance lenders endeavour to ensure that all risks are well allocated between the parties so that the lenders are protected.       

Some of the foregoing issues and risks are mitigated by:

  • procuring sponsor support for the project, cost overruns and for completion risk;
  • ensuring adequate insurance cover for the project;
  • substitution rights of the lenders (which invariably require consent of the government or the concessioning authority);
  • requiring project developers to enter into fixed-time and fixed-price turnkey project contracts;
  • procuring performance bonds, warranties and guarantees, as applicable, from the project sponsors and the contractors respectively;
  • monitoring project cash flows through a trust and retention account mechanism and ensuring that such cash flows are utilised in accordance with prescribed waterfall;
  • seeking detailed reports during the construction, development and operation of the project;
  • requiring execution of long-term supply contracts, "take or pay" offtake contracts or through adequate payment security mechanisms; and
  • linking disbursements to project completion and land acquisition milestones.

Typically, project companies can offer the following assets as collateral.

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

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

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

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

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

Intangible assets such as rights of the project company under the project documents, insurance policies, licences and approvals, intellectual properties, receivables and other intangible properties can be secured either by way of hypothecation or pursuant to a registered English mortgage.

Further, in PPP projects, concessioning authorities usually grant the project lenders the right to seek substitution of the project company with another concessionaire under a concession agreement in the event of a default by the project company. 


An indenture of mortgage executed for an English mortgage is required to be registered with the local sub-registrar of assurances.

For an equitable mortgage, the mortgagor is required to record the creation of equitable mortgage by providing a declaration at the time of deposit of title deeds. That deposit is also recorded by the mortgagee by way of a memorandum of entry. In some states, an equitable mortgage needs to be registered or notified to the land registry.

Additionally, any mortgage or hypothecation should be registered with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI). Security created by a company should be registered with the relevant registrar of companies (ROC), including for pledge of securities.

For a pledge over dematerialised shares or other dematerialised securities, requisite forms must be filed with the depository recording the pledge created in favour of the lender or security trustee. Additionally, in case of assignment of intellectual property, specific authorities may be required to be informed (for example, for trade mark assignment, notice must be given to the trade mark registry).

While leasehold interest in an immovable property can also be mortgaged, such mortgage usually requires the prior consent of the lessor.

Further, obtaining prior permission of the income tax authorities for creating an encumbrance on specified fixed assets may be required. Further, mortgage of leased immovable properties requires consent of the lessor.

Indian law recognises a floating charge over all present and future movable assets. Usually, such charge is in the nature of hypothecation and created under a deed of hypothecation. Floating charge can be taken over present and future movable assets, receivables, rights under contracts and any other movable properties, whether tangible or intangible. The floating charge automatically crystallises into a fixed charge upon the occurrence of an event of default.

Charge can be created only over present and identified immovable properties. Immovable properties to be acquired in the future cannot be offered as security prior to their acquisition.

Generally, applicable stamp duty on the agreements, deeds, or instruments executed between parties is required to be paid for it to be admissible as evidence in a court of law. Stamp duty rates are determined based on the nature of instrument and differ from state to state. Usually, under most state laws, stamp duty on security documents (eg, mortgage deed or hypothecation deed) is capped.

Additionally, registration fees are required to be paid for registering mortgages with the sub-registrar/registrar of assurances, depending on the state in which the property is located.

The cost of registering the charge with the relevant ROC, CERSAI and the depository are also to be paid. These costs are not significant.

Such costs are typically borne by the borrower.

A generic description of the movable assets proposed to be secured, such as their nature or location, which will help identification of such assets, should be sufficient for creating a valid charge thereon under Indian laws. However, immovable properties and financial securities need to be specifically identified in the security document and the registration forms, for creation of a valid charge thereon.     

A shareholders’ approval by way of special resolution (75%) is required under the Companies Act, 2013 for an Indian company to provide any guarantee or security if certain prescribed thresholds (in terms of paid-up capital and free reserves) are exceeded. However, this approval is not required if the guarantee or security is being provided for a financing utilised by the company’s wholly owned subsidiary or joint venture, for its principal business.

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

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

A lender can ascertain if there exists any previous charge on the assets to be secured, by conducting searches with:

  • ROC, for charges filed by the company prior to the date of security creation;
  • land revenue records, for mortgages created on immovable properties;
  • security interests filed by Indian banks and financial institutions with CERSAI;
  • records of the depository, with respect to pledge of securities that are in dematerialised form; and
  • register of charges maintained by a company in accordance with the company law.

The procedure for release of security depends on the type of security being released, as detailed below.

In case of an English mortgage, a deed of re-conveyance or deed of release is executed between the mortgagor and mortgagee. It must be registered with the relevant sub-registrar of assurances, where the mortgage deed was originally registered.

In case of an equitable mortgage, the title deeds that were delivered to the lender are returned to the security provider. If the equitable mortgage is registered, then a deed of release is executed between the mortgagor and the mortgagee and is registered with the relevant land revenue authority.

For charge created over intangible assets such as intellectual property, release deeds are required to be executed and filed with relevant offices to terminate the security interest.

With respect to pledge of shares, where the shares are in physical form, the share certificates are required to be returned to the pledgor. If the shares are in dematerialised form, the necessary forms should be filed with the depository participant for release.

Additionally, the power of attorney issued under the pledge agreement or the deed of hypothecation is also required to be returned or cancelled.

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

Immovable Property

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

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

Movable Property

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

Pledge over Shares

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

Typically, all concession agreements stipulate consent requirement from the concessioning authority, prior to effecting a change in control of the project company. In the event a pledge enforcement results in change of control, then prior consent of the concessioning authority will also be required for enforcement of the pledge.

Substitution under Concession Agreement

Upon the occurrence of payment defaults, the lenders usually have the right to seek substitution of the concessionaire with a person selected by the lenders, as per the terms of the relevant concession agreement. The lenders’ selectee needs to be a person approved by the concessioning authority.

Enforcement Restrictions under the IBC

If a company is admitted to CIRP under the IBC, no security can be enforced due to the moratorium imposed under the IBC. Where the company is to be liquidated under the IBC, a secured creditor will have an option to realise its security and receive proceeds from the sale of the secured assets as first priority. Additionally, in the case of any shortfall in recovery, the secured creditors will rank junior to the unsecured creditors to the extent of the shortfall.

Indian courts uphold the contractual choice of law and jurisdiction, subject to such choice being bona fide, and bearing real connection with the subject matter of the contract. Therefore, cross-border financing contracts are typically governed by English law. However, if the parties to a transaction are Indian residents and the secured assets are located in India, the transaction documents are governed by Indian law.

Under the Code of Civil Procedure, 1908 (CPC), certain jurisdictions are notified as a "reciprocating territory" and a civil decree issued by a competent court in such jurisdictions will be enforced by Indian courts, provided that the order being enforced is not contrary to Indian laws or public policy without retrying the case on its merits. However, for a decree to be directly enforceable in India, the following conditions are required to be satisfied:

  • it must be a money decree;
  • it must be passed by a superior court of the reciprocating territory;
  • a certified copy of the decree must be filed with a district court in India; and
  • it must be held to be conclusive and not be set aside on any of the grounds mentioned above.

If the decree passed by a court of a reciprocating territory is not a money decree (such as an injunction), a fresh suit is required to be filed in a competent Indian court where the foreign judgment will be admitted only as evidence. A foreign judgment must be brought into India for enforcement within three years from the date such foreign judgment is rendered, failing which the enforcement may be barred by the Indian laws of limitation. Accordingly, the choice of foreign law as governing law and submission to foreign jurisdiction will be upheld in India.

As mentioned in 3.2 Foreign Law, a decree by a foreign court of a reciprocating territory is enforceable in India, subject to certain conditions.

India is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (New York Convention) as well as the Geneva Convention on the Execution of Foreign Arbitral Awards, 1927 (Geneva Convention). If a party receives a binding arbitral award from a country which is a signatory to the New York Convention or the Geneva Convention, and the arbitral award is made in a territory which has been notified as a convention country by India, such arbitral award would then be enforceable in India. As per the Arbitration and Conciliation Act, 1996 (Arbitration Act), the following documents are required to be produced before Indian courts at the time of making an application for enforcement of foreign arbitral award:

  • original award or a duly authenticated copy thereof;
  • original arbitration agreement or a duly certified copy thereof; and
  • evidence required to establish that the award is a foreign award, as applicable.

However, some of the instances when a foreign arbitration award cannot be enforced in India are as follows:

  • the parties to the agreement were under some incapacity;
  • the foreign arbitral award is ultra vires the agreement or submission to arbitration;
  • the composition of the arbitral authority or the arbitral procedure is ultra vires the agreement;
  • enforcement of the foreign arbitral award would be contrary to the public policy of India.

Remittance outside India of any proceeds of a judgment may require the permission of the RBI from the perspective of exchange control laws even if a lender has a valid claim against an Indian party and successfully establishes it in court. However, this is not applicable in cases of enforcement proceeds of securities, for which specific permission is available.

Litigation can be a tedious and an expensive process in India. Courts in India are heavily backlogged with multiple matters, which makes litigation long, drawn-out and inconvenient.

The IBC offers a much swifter, time-bound and predictable insolvency resolution mechanism to foreign and domestic lenders alike. A foreign lender usually faces no issue in pursuing its remedies under the IBC. 

Restrictions under ECB Guidelines

Any loans or credit facilities by a foreign lender to an Indian borrower are governed by the Foreign Exchange Management Act, 1999, as amended (FEMA), and rules and regulations issued under FEMA including the ECB Guidelines.

The ECB Guidelines provide for two forms of ECB: foreign currency denominated ECB, and rupee-denominated ECB.

A foreign lender should meet the following criteria in order to be an eligible under the ECB Guidelines:

  • the lender should be resident of FATF or an IOSCO-compliant country;
  • multilateral and regional financial institutions where India is a member country;
  • individuals who are foreign equity holders of a company can extend facilities to such subject company; or
  • foreign branches or subsidiaries of Indian banks are permitted as recognised lenders only for foreign currency ECB (except foreign currency convertible bond and foreign currency exchangeable bonds).

An eligible foreign lender providing an ECB to an Indian borrower is not required to obtain any consent or licence in India to lend to an eligible Indian borrower or to enforce its rights under any loan agreement.

Restrictions under FPI Regulations

Under Indian law, entities registered with the SEBI as FPI are permitted to subscribe to NCDs issued by Indian companies. There are two routes in which an FPI may subscribe to NCDs issued by an Indian company – the general route and VRR.

General route

Under the general route, an FPI may subscribe to NCDs issued by an Indian company subject to the following conditions:

  • an FPI may subscribe to corporate bonds with minimum residual maturity of above one year only – however, an FPI may invest in securities with residual maturity of up to one year if such investment does not exceed 20% of the total investment of such FPI in corporate bonds on an end-of-day basis;
  • investment by an FPI should not exceed 50% of the issue size of a corporate bond;
  • an FPI cannot have an exposure of more than 20% of its corporate bond portfolio to a single corporate; and
  • proceeds of unlisted NCDs have certain end-use restrictions.


The RBI introduced the VRR for subscription of NCDs issued by an Indian company by FPIs. Unlike the general route, under the VRR there is no minimum residual maturity prescribed for subscribing to NCDs by an FPI. Further, there are no limits to subscribing to corporate bonds by FPIs – ie, an FPI may subscribe to 100% of the corporate bonds. The minimum retention period is set at three years for investments made in debt securities by FPIs under VRR. Further, this retention period will be applicable to 75% of the total amount allocated for investment to an FPI by RBI instead of a particular investment in debt security by an FPI.

In case of an ECB, consent from the authorised dealer bank is required for creating any security interest or for providing any guarantee.

The authorised dealer bank needs to ensure compliance with the following conditions prior to granting its consent:

  • the underlying ECB should comply with the extant ECB Guidelines;
  • there exists a security clause in the loan agreement as per the terms of which an ECB is availed;
  • a no-objection certificate from the existing lenders for creation of charge, if applicable, is to be obtained.

Creation of security interest on Indian assets for the benefit of FPIs holding NCDs of Indian companies does not require any regulatory consents. Such security is usually legally held by a debenture trustee, for the benefit of the NCD holders.

Foreign lenders are not permitted to assume ownership of immovable properties in India. They can only cause a sale of secured immovable properties to domestic entities and seek a repatriation of the enforcement proceeds. Any sale of pledged shares/securities by a foreign lender also needs to be made in compliance with the extant foreign investment control laws.   

India is still a capital-controlled economy. However, the policy framework on foreign investment in India is transparent, predictable and easily comprehensible.

A non-resident entity may invest or participate in India in the following ways:

  • foreign direct investment – the GOI has progressively liberalised this regime by bringing most sectors under the automatic investment route;
  • through debt-financing under the ECB route;
  • as a registered FPI under the Portfolio Investment Scheme;
  • as a registered foreign venture capital investor (FVCI) under the venture capital route;
  • as a holder of American global depository receipts (ADR) and global depository receipts (GDRs) under the ADR/GDR Scheme; and
  • as a non-resident Indian (NRI), overseas citizen of India (OCI), or a company, trust and partnership firm incorporated outside India and owned and controlled by NRIs or OCIs, on a non-repatriable basis.

Returns on foreign investments in India are repatriable (net of applicable taxes) except in the cases where:

  • foreign investment has been in certain specific sectors that have a minimum lock-in period;
  • the investment made by non-resident Indians into specific non-repatriable schemes; and
  • dividend payments are permitted through a designated authorised dealer bank, subject to payment of the dividend distribution tax.

The payment of principal, interest or premiums on loans or debt securities held by parties in other jurisdictions must be carried out through an authorised dealer bank. In case of ECBs, remittance of the above amounts is required to be made in accordance with the provisions of the ECB Guidelines (such as compliance with minimum average maturity period). An authorised dealer bank may impose agency fees, commitment charges and structuring fees for remittance but such charges are not statutory.

As per the FPI Regulations, an FPI is required to appoint a branch of a bank authorised by the RBI for opening a foreign currency denominated account and special non-resident rupee account before making any investment in India.

An Indian project company may maintain an offshore foreign currency account as per the Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015 (FEM Account Regulations). As per the FEM Account Regulations, an Indian company or a body corporate registered or incorporated in India is permitted to open, hold and maintain a foreign currency account with a bank outside India for the purpose of normal business operations in the name of its office (trading or non-trading) or its branch set up outside India or its representative stationed outside India. The account is to be used for normal business operations of the account holder, subject to a remittance limit. The account is not permitted to be operational for more than six months from the date of opening of such account. The opening of such accounts is also subject to the terms and conditions of the current RBI regulations.

As mentioned in 2.3 Registering Collateral Security Interests, typically, applicable stamp duty on the agreements, deeds, or instruments executed between parties is required to be paid in order for such document to be admissible as evidence in a court of law. Stamp duty rates are determined based on the nature of instrument and differ from state to state; stamp duty also needs to be paid on the deed, agreement or document, depending on the state where it is executed.

Any document which creates or purports to create any security interest in immovable properties in India must be registered with the relevant sub-registrar of assurances (a revenue authority) within whose jurisdiction the immovable property is situated. Accordingly, registration fees are required to be paid for registering mortgages with such sub-registrar of assurances depending on the state in which the property is located.

Additionally, in terms of the procedural requirements under Indian laws, any company creating security interest on its assets must register the charge created on its assets with the relevant ROC. If such a charge is created but not registered with the ROC, the charge-holder will not be considered as a registered charge-holder and its claim will not be recognised by the liquidator or other charge-holders of the borrower company.

Certain sectoral regulators, such as the National Highways Authority of India (NHAI), mandate filing of project and financing documents with it, for ensuring compliance of these documents with the terms of the concessions granted by such authority to the project company. 

Non-residents are not permitted to own land in India. While in general Indian companies have full authority to own land, certain restrictions are imposed by governmental authorities in case of special categories of land – for example, agricultural land or land situated in sensitive geographical areas.

The ownership of natural resources (eg, coal) vests with the government and the right use such natural resources will be subject to the terms of licences granted by the government. Each concerned governmental department applies its own procedures and criteria to determine the terms of award of such licence. 

Such licences with respect to natural resources cannot be held directly by a foreign entity. However, such licences may be held by an Indian entity owned or controlled by a foreign entity subject to applicable law.

Concepts of agency and trust are recognised and widely developed in India. In a typical financing transaction involving a consortium of lenders, for ease of security creation and enforcement the usual practice in India is to create the security interest in the name of a trustee who holds the security for the benefit of the consortium of lenders. Generally, such a trustee company specialises in providing trusteeship services. The terms of appointment of a trustee are captured in a security trustee agreement.

Typically, in a financing arrangement in India involving a consortium of lenders, a facility agent is also appointed for the lenders as per mutually agreed terms, who is responsible for co-ordinating the loan disbursement and administration process.

Debts may be raised by a borrower by way of secured loan or unsecured loan. In the absence of any contract to the contrary, the debts due to secured lenders would be paid first (unless such secured creditor has enforced their security outside liquidation), followed by debts due to unsecured lenders; security which is created prior in time will rank in priority to security that is created later. Where a security agreement is required to be registered under the Registration Act, 1908, if multiple security is created pursuant to different agreements on the same asset, the agreement that is entered into prior in time will have priority over the security interest over the assets, even if such prior agreement is registered later, but as long as such prior agreement is validly registered.

Moreover, a first ranking charge will have priority over a second ranking charge at the time of enforcement of security.

Contractual subordination is also seen in the Indian loan market where lenders contractually agree among each other on whose debts would be paid in priority over others. Contractual subordination may take place either through a subordination deed or through intercreditor agreements. Contractual subordination is also common between lenders and promoters/group companies, where promoters/group companies have provided debt (either by way of unsecured loans, debentures or preference shares) to the borrower entity.

Generally, development of projects requires the project company to be incorporated in India. The most preferred legal form is a limited liability private company. Given the imperative of bankruptcy remoteness of the project company, such project companies are usually organised as special purpose vehicles incorporated for the sole purpose of developing a particular project.

The Companies Act sets out detailed provisions for arrangements and reorganisations for companies, both between it and its members and/or creditors and/or any class(es) of them. The process is administered by the National Company Law Tribunal (NCLT), and adoption/implementation of a scheme of reorganisation requires consent of at least three-quarters (75%) by value of the concerned class of creditors and/or members. Usually, the NCLT is mandated with ensuring procedural propriety and does not interfere in the commercial terms of a restructuring plan, unless a scheme is prejudicial or inequitable.     

In case of payment defaults by a company to banks and certain other specified lenders, such company can be reorganised or restructured under the RBI Directions. The RBI Directions allow absolute discretion to the lenders to determine and implement any resolution plan including restructuring by way of change of control, sale of exposure or regularisation. The RBI Directions also state 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. Dissenting lenders are required to be paid a minimum of liquidation value. The lenders have been given an option to refer the company to insolvency if restructuring fails under the RBI Directions.

The IBC provides a single comprehensive insolvency framework to deal with insolvency and bankruptcy processes related to companies. Under the provisions of the IBC, an insolvency resolution process of a company can be commenced by filing an insolvency application before the NCLT, when a corporate debtor has committed a default in relation to the payment of a debt of at least INR100,000 (rupees – one lakh) owed to a creditor.

Once an application filed before the NCLT is admitted, then a moratorium is declared on all enforcement or recovery proceedings against the borrower and its assets until the completion of the insolvency resolution process.

However, this moratorium does not prohibit the lenders for seeking remedies against third-party guarantors or third-party security providers. 

The IBC provides for an order of payment of debts in the cases of debt resolution pursuant to a resolution plan as well as during the liquidation of a company.

The Insolvency and Bankruptcy Code (Amendment) Act, 2019 (2019 Amendment) provides that the non-financial creditors are to be paid an amount that is the higher of:

  • the amount such operational creditors would have received in the event of a liquidation of the corporate debtor as per Section 53 of the IBC; or
  • the amount such operational creditors would have received if the amount distributed under the resolution plan was distributed in accordance with the priority specified as per the liquidation waterfall under Section 53 of the IBC.

The 2019 Amendment further provides that payments to financial creditors who do not vote in favour of a resolution plan will be determined in accordance with regulations framed by the Insolvency and Bankruptcy Board of India (IBBI), but will not be less than the amount that would have been paid to such creditors in the event of liquidation of the corporate debtor. Additionally, the 2019 Amendment clarifies that such payments made to operational creditors as well as dissenting financial creditors under the resolution plan should be as "fair and equitable" to such creditors.

If the corporate debtor goes into liquidation, the following order of priority is followed for the distribution of proceeds arising out of the liquidation estate:

  • insolvency resolution process costs and liquidation costs;
  • equally between secured creditors (who choose to relinquish their security enforcement rights) and workers' dues for a period of 24 months preceding the liquidation commencement date;
  • wages and unpaid dues of employees (other than workers) for a period of 12 months preceding the liquidation commencement date;
  • financial debts owed to unsecured creditors;
  • equally between statutory dues to be received on account of a consolidated fund of India or a consolidated fund of a state (relating to a two-year period, in whole or in part, preceding the liquidation commencement date) and debts of secured creditors (to the extent remaining unpaid after separately enforcing security on assets secured in their favour);
  • remaining debts and dues;
  • dues of preference shareholders; and
  • dues of equity shareholders (for a company) or partners (for a limited liability partnership).

As discussed in 3.1 Enforcement of Collateral by Secured Lender ("Enforcement Restrictions under the IBC"), borrowers which are admitted into CIRP enjoy a moratorium against all recovery actions against such borrower and its assets. All financial creditors thereafter are mandatorily required to participate in the process, in accordance with the provisions of the IBC.

All significant decision-making in a CIRP requires consent of at least 66% by value of the financial creditors. Accordingly, lenders without any significant voting share may remain subject to the decisions taken by the specified majority. 

Financial service providers such as banks and non-banking financial companies have been excluded from the purview of IBC. At present, the legal framework governing insolvencies of financial institutions, such as banks and non-banking financial companies, lacks certainty and predominantly remains under the control of the financial regulator, the RBI.   

Only Indian insurance companies registered with the Insurance Regulatory and Development Authority of India (IRDAI) are permitted to undertake insurance business in India and provide risk covers for assets located in India. Investment by foreign insurance companies are subject to regulatory restrictions on ownership by foreign players. Goods and service tax will be applicable on such policies, based on nature and quantum of such policies.

A lender (including a foreign lender) can be named as beneficiary of an insurance policy and consequently, the proceeds out of an insurance claim may be credited (after meeting the cost of repairs, damages and losses sustained) to a foreign lender for the prepayment of the foreign currency loans granted by it to the borrower. However, any remittance of insurance proceed outside India is subject to the extant foreign exchange regulations of the RBI.

As detailed in 4.2 Restrictions on the Granting of Security or Guarantees to Foreign Lenders, creation of security in case of an ECB requires prior approval of the authorised dealer bank. As part of the enforcement proceedings that may be undertaken by or on behalf of the foreign creditors, the foreign creditors may enforce the security created over the insurance policies and obtain the benefit of the same.

Currently, the applicable rate of withholding tax on interest payable by an Indian company to a non-resident lender (situated outside India) on ECB and rupee-denominated bonds issued overseas is 5% (plus applicable surcharge and cess), subject to the satisfaction of certain conditions and the provision of prescribed documents. This tax is withheld from the interest payable to the lender and deposited on the lender’s behalf with the government. The tax withholding rate of 5% is not applicable if the lender is the branch of a foreign bank located in India. 

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

The act of withholding the tax is an obligation of the borrower, who is also required to issue a certificate evidencing this. The lender can take the credit of the tax withheld on interest to meet its tax liabilities in India as well as in the country of residence.

Under Indian law, stamp duty is required to be paid on loan agreements, guarantee deeds and security documents. The stamp duty payable on the documents varies from state to state. Typically, the obligation to pay the stamp duty is on the borrower, guarantor or security provider (as the case may be). If inadequate stamp duty has been paid on a document, the document would be inadmissible as evidence in court unless the deficient stamp duty with any penalty thereon has been paid on such document.

Normally, stamp duty is paid prior to or at the time of execution of a document in India. Payment of stamp duty is often a determinative factor in choosing the location of executing documents. However, if a document is stamped in one state but the original or a copy of it is brought into another state that levies a higher stamp duty, the differential stamp duty may need to be paid in this other state depending on the nature of the document and the stamp law in this other state.

Further, if a document is executed outside India, no stamp duty is required to be paid on such document under Indian law prior to execution. However, if the document or copy thereof is received in India, then stamp duty may be payable on such document depending on the state where the document is received and the nature of the document.

For rupee loans by Indian banks or financial institutions, there is no ceiling on the amount of interest that can be charged. However, the interest rate is linked to the cost of funds of such institution. The RBI mandates absolute transparency by banks and institutions in determination of their interest rates.

The all-in cost ceiling in case of foreign currency ECB is capped at a six-month London Inter-bank Offered Rate (LIBOR) plus 450 basis points. The benchmark rate in case of rupee-denominated ECB is the prevailing yield of the GOI securities of corresponding maturity.

There is no all-in cost ceiling in case of issuance of NCDs by an Indian entity to a domestic entity or an FPI.

Project agreements are typically governed by Indian law in cases where the parties are Indian residents. In case of one or more foreign counterparties – for example, in case of export contracts – project agreements may be governed by foreign law. 

Financing agreements are typically governed by Indian law in cases where the borrower avails a loan from a domestic lender. However, in case of borrowings from a foreign lender, English law is usually preferred as the governing law. For subscription of NCDs by a domestic entity or an FPI, the debenture trust deed is typically governed by Indian law.

Typically, creation and enforcement of security interest on assets situated in India is governed by Indian law.

J. Sagar Associates I advocates & solicitors

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Law and Practice in India


J. Sagar Associates is a leading national law firm in India, with over 300 attorneys operating out of seven offices: Ahmedabad, Bengaluru, Chennai, Gurgaon, Hyderabad, Mumbai and New Delhi. For over 25 years JSA has provided legal representation, advice and services to leading international and domestic businesses, banks, financial services providers, funds, governmental and statutory authorities, and to multilateral and bilateral institutions. The firm has a distinguished and market-leading banking and finance practice in India. JSA has been involved in several project and project finance assignments for banks, financial institutions, funds, sponsors and corporates in different sectors, including roads, ports, railways, airports, oil and gas, power and renewable energy. With a team of over 35 attorneys in its banking and financing practice, JSA possess the expertise and resources to provide comprehensive, commercially oriented and practical advice and solutions to its clients.