According to a report published by EY (Ernst & Young), Indian scheduled commercial banks have reported a credit growth of 11% in calendar year (CY) 2024, owing to a soft demand environment, tight liquidity in the markets, and a complex geopolitical environment. Private capex has not been able to make up the difference but has shown moderate recovery over the course of the year, according to a Deloitte report. Despite some adversities, the Indian debt capital market has proved remarkably resilient to internal and external stressors and continues to hold strong growth potential. The Indian banking industry has been on an upward trajectory, and total bank credit in India for FY 2024 showed a year-on-year increase of 20.2% (as of 22 March 2024).

The private credit deal flow in India during 2024 surpassed the 2023 levels, with 163 deals valued at USD9.2 billion, up from 108 deals worth USD7.8 billion, driven by larger transactions and strong domestic participation. Indian firms have raised a higher amount from the rupee bond markets in 2024 compared to 2023, but growth may have slowed slightly due to a revised tax policy and a slowdown in manufacturing, among other factors. Indian companies raised around INR11.06 trillion (USD126.56 billion) through rupee bonds in FY 2024.

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

• Public sector banks – There are 12 major public sector banks in India, with the State Bank of India being the largest. A public sector bank is a commercial bank owned by the Indian government. Historically, such banks have dominated the lending space in India. Though private banks are now catching up, public sector banks continue to hold a majority share in total credit issued. As of December 2024, public sector banks' share in total credit was 53.5%.
• Private sector banks and branches of foreign banks – Most of the other commercial banks in India are private sector banks that are not owned by the government or branches of foreign banks. These banks are licensed to undertake banking activities and also have a significant presence in the market.
• Non-banking financial companies (NBFCs) – NBFCs are companies registered with the Reserve Bank of India (RBI) and undertake permitted financial activities, such as the provision of loans and advances). They are not licensed as banks, so the financial activities they may undertake are limited. That said, they are also subject to a relatively less stringent regulatory regime than banks. As of 30 June 2024, over 9,300 NBFCs have received a registration certificate – spanning various sectors, including investment and trading companies, asset finance and leasing, factoring, and asset reconstruction.
• Banks and NBFCs are both regulated by RBI, which issues prudential norms and other directions pertaining to their functioning (including their exposure, asset classification, and operations). These banks and NBFCs may invest in debt in the form of loans and debt securities, in each case subject to the prudential limits and other directions applicable to them. Banks may further offer non-fund-based facilities such as bank guarantee facilities and letter of credit facilities.
• Debt funds – India’s key private credit players operate in the following formats.
1. Alternative Investment Funds (AIFs) are funds set up in India and registered with the Securities and Exchange Board of India (SEBI), India's securities market regulator. These funds pool investments and set up schemes for investing in debt or equity securities.
2. Foreign Portfolio Investors (FPIs) are foreign entities registered with SEBI. They may invest in debt and equity securities.
3. Other investors, such as mutual funds.

These investors, who are registered with SEBI, must invest in debt in the form of INR-denominated debt securities and are not eligible to extend loans. Certain criteria also govern the nature and scope of eligibility to invest in debt securities, including minimum tenure or lock-in of funds, concentration norms, and various other restrictions.

As per a report published by EY, in the second half of CY 2024, domestic funds trumped global funds in both total deal value, accounting for 63% of the total private credit deals by value and in terms of deal count. Around 43% of the private credit deals were focused on the real estate sector. Foreign lenders – another avenue available to foreign lenders is to extend financing under the “external commercial borrowings” route. This route is available to any lender which is a resident of a FATF-compliant country (ie, a country that is a member of the Financial Action Task Force (FATF) or a member of a FATF-Style Regional Body or an IOSCO-compliant country and also multilateral and regional financial institutions where India is a member country. Other lenders, such as individuals and foreign branches/subsidiaries of Indian banks, are also permitted to participate in this route, subject to additional conditions.

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

The onset of the COVID-19 pandemic saw increased scrutiny by the government of India for foreign direct investment (FDI) coming in from countries which share a land border with India (ie, Pakistan, Bangladesh, Afghanistan, Nepal, Bhutan, Myanmar and China) or where the beneficial owner of the investor is situated in or is a citizen of any such country, with prior approval from the government of India being required for such individuals or entities investing in India. Any change due to the transfer of ownership of existing or future FDI that resulted in beneficial ownership falling within the restriction/purview, as mentioned, also requires approval from the government of India.

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

The impact of COVID-19 on India’s lending market was minimal, thanks to the timely and proactive measures taken by the RBI, which facilitated the debt market’s recovery after the pandemic.

Several major occurrences that had taken place in 2024 are outlined below.

• Foreign institutional investors (FIIs) divested their holdings in India over the latter half of CY 2024, with around INR 114 billion worth of stocks being sold over October 2024, which has been attributed to, among other factors, increased stimuli from China that have attracted FIIs. However, domestic institutional investors have supported the market and an increased interest in sovereign gold bonds due to rising gold prices caused by the Middle East crisis. Heightened violence in the Middle East may further impact the markets.
• Foreign portfolio investors (FPIs) pulled out of the Indian market in October and November 2024, made a short return in December 2024, and pulled out again in January 2025. This has been attributed to the shrinking yield spread between US and Indian government bonds. The withdrawal continued over February, attributed to a higher price tag on Indian securities and concerns about India Inc’s sustained growth potential.
• A falling rupee has raised general concerns about the viability of the Indian market. The United States of America has recently expressed its intentions to increase reciprocal tariffs on Indian goods due to dissatisfaction with Indian tariffs, which may also impact the debt market.

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

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

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

Acquisition Finance

A company avails funding specifically for the purpose of acquiring or investing in another company. Commercial banks in India are subject to prudential guidelines that discourage acquisition financing but for some limited circumstances. Therefore, acquisition financing in India is generally availed from NBFCs or by way of issuance of non-convertible debentures by the acquirer, which can be subscribed to by investors through FPIs, mutual funds, and AIFs.

Project Finance

This usually involves funding long-term projects such as public infrastructure, energy, real estate, industrial, and manufacturing projects. The debt is usually paid back from the cash flow generated by the project. Such financing is usually obtained from domestic banks and financial institutions and also from foreign investors by raising external commercial borrowings (ECBs).

Asset-Based Finance

ABL (asset-based lending) is generally less structured and is secured by some collateral. The terms and conditions of asset-based finance depend on the type and value of the assets offered as security. If the asset securing the loan is a highly liquid collateral which can be readily converted into cash on enforcement, then the terms and conditions of the finance may be a bit flexible for the borrower (such as lower interest rates).

Finance for Capital Expenditure

A subset of the above category includes availing debt facilities to meet capital expenditure requirements. In turn, capital expenditure refers to resources spent in acquiring long-term assets or otherwise improving the business and operations of a company for the future. A Crisil report indicated that around INR4000-5000 billion will be required over the next five years to meet capital expenditure needs of Indian companies.

Securitisation

Pooling debt assets and repackaging them into interest bearing securities. Under a securitisation transaction, an issuer designs a marketable financial instrument by merging financial assets. Investors who purchase these securities receive the principal and interest payments of the underlying assets. In India, both stressed and standard assets can be securitised, and the securitisation market is regulated by the RBI. FPIs are one of the major investors in the security receipts issued by securitisation trusts against distressed debt in India.

Refinancing

This involves revising the terms of an existing credit agreement or replacing the same with a new facility. Refinancing is generally coupled with restructuring, resulting in better terms for the borrower. Refinancing may take place in the wake of external factors, such as a reduction of interest rates or due to the inability of a borrower to pay off credit facilities on existing terms. India allows refinancing of credit, though banks and financial institutions that are regulated by the RBI have to follow certain requirements, including provisioning and reporting requirements. According to EY, the second half of CY 2024 saw private credit deals focused on refinancing and stabilisation of assets.

Structuring debt finance depends on various factors, including the lender.

Bank Loan Facilities

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

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

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

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

Some of the advantages of debt syndication are as follows.

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

Some of the disadvantages of debt syndication are as follows.

• Negotiation time is usually longer as multiple lenders have their exposures at stake.
• Difficulty in co-ordination with multiple lenders for the borrower as well as lenders inter se.
• Difficulty in and delays in agreeing to waiver/s, extension/s, amendment/s and/or any other change or restructuring of terms (especially if the syndication is broad-based).

Debt Securities

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

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

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

Loan Transaction

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

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

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

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

NCDs

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

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

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

• ECBs – such borrowing must comply with specific regulations that outline various parameters. These include who is eligible to borrow, who can serve as a lender, the maximum borrowing amount, the minimum average maturity of the loan, the maximum allowable borrowing cost, and the intended purpose of the loan. Borrowings can be raised in Indian Rupees (INR) or in any freely convertible foreign currency. It is important to structure ECB lending with these requirements in mind.
• NCDs issued to FPIs – FPIs can only invest in permitted securities as provided in the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 (“SEBI FPI Regulations”). FPIs are not permitted to extend loans. They may subscribe to NCDs; however, such subscription is subject to certain conditions. An FPI may invest through the general investment route, which has conditions as to minimum maturity, against concentration, etc, or the voluntary retention route, which also has conditions as to investment amount being retained in India for at least three years but relaxes some of the requirements around instrument level maturity and concentration norms.

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

Major institutional lenders, such as Alternative Investment Funds (AIFs), also have various regulations on the nature and scope of investment they are permitted to do in Indian debt, which are typically enforced by the RBI and the Securities and Exchange Board of India.

Exchange control regulations – India is an exchange-controlled economy, and any cross-border lending by an Indian borrower/lender is governed by the Foreign Exchange Management Act, 1999 (FEMA) and allied rules, regulations and circulars. Indian borrowers must comply with the regulations prescribed by the RBI, such as the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, the Foreign Exchange Management (Debt Instruments) Regulations, 2019, RBI – Master Direction on External Commercial Borrowings, etc. These legislations prescribe the terms on which an Indian resident may raise debt from a non-resident party, as well as requirements for tenor, interest, concentration, etc (see 4.2 Impact of Types of Investors for further details).

Special enforcement options – the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) enables certain secured lenders, such as banks, notified financial institutions and debenture trustees for listed NCDs, to enforce the mortgage without court intervention, provided the charge is registered with Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI), which is a central online security interest registry and subject to consent from secured lenders representing at least 60% in value and other conditions. This benefit is particularly significant in India because a court process for enforcement or any other reason is often time-consuming. The SARFAESI Act is available to domestic banks and some select NBFCs (based on pecuniary thresholds for net worth and value of debt) but may also be accessible to other lenders (including FPIs and/or AIFs) who hold listed NCDs. As such, FPIs and/or AIFs investing in debt securities sometimes require the NCDs to be listed to gain this benefit.

Registrations and filings – further, a host of registrations and execution steps are relevant to debt finance transactions, some of which can be found below.

• Stamp duty – any instrument executed in India or received in India after execution must be stamped for the duty payable on such instrument under Indian stamp law. Indian stamp laws vary from state to state and may prescribe a flat duty for some instruments, whereas an ad valorem duty (calculated as a percentage of the transaction value) may be imposed on certain other documents. Certain documents with respect to immovable property must be registered with the Sub-Registrar of Assurances under provisions of Indian stamp law and the Transfer of Property Act, 1908.
• Filing with information utility – parties should register their debt and security with an Information Utility (IU). An IU is a centralised electronic database set up under the Insolvency and Bankruptcy Code, 2016 (IBC), which collects and authenticates the financial information of debtors and security providers. Registering the debt and security with an IU could prove to be crucial to substantiate proof of claim in the insolvency of the borrower/security provider.
• Registration of security – while all forms of security need to be registered with the Registrar of Companies, under CA 2013, in addition to this, there may be additional registration requirements such as security on immovable assets needing to be registered with local land authorities, filing of securities charges with depositories with which they are held, registrations with CERSAI of some forms of security (see 5.1 Guarantee and Security Packages for further details).

Security for debt financing transactions in India may be provided over:

• immovable properties such as land, benefits arising out of land; and
• movable properties, which include properties of every description other than immovable properties. The assets of the borrower or a third party may be provided as security, subject to the conditions mentioned below and under 5.2 Key Considerations for Security and Guarantees.

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

Mortgage Over Immovable Properties

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

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

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

Hypothecation Over Bank Accounts, Receivables and Other Movable Properties

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

Pledge Over Shares and Other Securities

A pledge is the bailment of movable property for repayment of debt or performance of promise. Shares and other securities are the most common movable properties secured by way of a pledge. The pledge is created by:

• delivery of the physical security certificates (in case of securities in physical form) together with undated transfer forms pertaining to the security or movable property to the lender/agent; or
• where the securities are held in dematerialised form, by marking a pledge over the securities in favour of the lender/agent in the depository by notice to the depository through the depository participants of pledgor and pledgee.

Parties enter into an agreement of pledge to record the terms of the pledge. Under recent jurisprudence, a pledge (including one over securities held in dematerialised forms) is only enforced upon the sale of the pledged securities to a third party, and recording the name of a pledgee as “beneficial owner” of such securities in relevant records does not amount to enforcement of the pledge (but, rather is only considered as the first part of a two-step enforcement process).

Corporate and Personal Guarantees

An individual or a corporate body may execute a deed of guarantee to provide a guarantee for the repayment of debt and other obligations of the borrower.

Recent jurisprudence under the (Indian) Insolvency & Bankruptcy Code, 2016, has some observations raising questions as to:

• (i) the nature of guarantee obligations as ‘financial debt’ absent inflow of funds to the guarantor,
• (ii) rights to submit claims (for insolvency resolution) based on uninvoked guarantee obligations.

While the market is largely aligned that the observations under (i) may be fact-specific and so should not be applied broadly, the position as to the issue under (ii) is not yet settled, and so some investors include alternate and stronger triggers under relevant guarantee and security documents. 

Formalities

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

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

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

Perfection Requirements

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

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

Corporate Approvals

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

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

Corporate Benefit

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

Financial Assistance

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

Agent/Trustee as Beneficiary

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

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

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

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

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

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

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

The general process for enforcement of security is as follows.

Mortgage

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

Pledge Over Securities

Indian law requires the pledgee to provide “reasonable notice” to the pledgor before enforcement of the pledge. There is no statutory guidance as to what reasonable notice may be and it would depend on facts and circumstances (and so ‘reasonable’ notice period may be pre-agreed between the parties). The enforcement steps of pledge will depend on the nature of the asset secured.

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

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

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

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

Although a court order is not necessary to enforce a pledge, invoking it may lead to court or arbitration proceedings. This can happen due to practical issues, such as the company refusing to acknowledge the transfer of shares following the invocation or a pledgor claiming that they were not given proper notice.

Hypothecation Over Bank Accounts, Receivables and Other Movable Property

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

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

Decrees Passed by Superior Courts From Reciprocating Territories

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

This enforcement avenue applies to decrees for monetary payments, excluding taxes, fines, or penalties.

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

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

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

Other Decrees

For other judgments or decrees passed by foreign courts (not being courts in a reciprocating territory) and an interim injunction or any other interim order passed by a superior court of a reciprocating territory, a fresh civil suit may need to be filed before an Indian court of competent jurisdiction. The foreign judgment or interim order will be submitted as an evidentiary document in the case. A decree issued by the Indian court in this matter (subject to any appeals and their final outcomes) can then be enforced in India.

Foreign Arbitral Awards

In terms of the (Indian) Arbitration and Conciliation Act, 1996 (“Arbitration Act”), any foreign arbitral award made:

• pursuant to an arbitration agreement to which the Convention on the Recognition and Enforcement of Foreign Awards, 1958 (“New York Convention”) applies; and
• in a country notified (by the Indian Government) as a reciprocating territory to which the New York Convention applies,
• can be enforced in India in accordance with Part II of the Arbitration Act.

The enforcement proceeding for the foreign arbitral award may be filed before the High Court within whose jurisdiction the subject matter/ assets sought to be attached are located. Enforcement may be refused on narrow and limited grounds under the Arbitration Act (which does not include a review of the foreign award on merits). If the court holds the foreign arbitral award to be enforceable, the award will be binding on the parties and can be executed as a decree in India.

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

Tribunal-Approved Schemes

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

RBI Prudential Framework

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

Contractual Restructuring/Settlements

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

The primary legislation governing insolvency resolution in India is the IBC. The IBC presently extends to:

• debtors who are corporate persons (also known as “corporate debtors”); and
• personal guarantors.

The main considerations for a lender from an IBC perspective include the following.

Filing an Application for Insolvency

Financial creditors (FCs) are lenders who have disbursed debt against consideration for the time value of money and include beneficiaries of guarantees. Operational creditors (OCs) are lenders who are owed money in relation to the supply of goods and services. Both FCs and OCs may file an application to commence insolvency of a corporate debtor. Where debt has been disbursed through debentures, either the debenture trustee or the debenture holders may apply to commence insolvency of a corporate debtor. Additionally, claims of debenture holders may be filed by the debenture trustee or the individual debenture holders.

Securing a Seat in the CoC

Recognition as an FC is beneficial since FCs unrelated to the corporate debtor get a seat at the CoC. Each FC on the CoC has a vote commensurate to their claim amount, and the CoC exercises control over many key decisions related to the corporate debtor, including choosing a resolution plan/bid.

Moratorium on Certain Lender Actions

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

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

Lenders may pursue guarantors or third-party security providers when the principal debtor enters CIRP. To avoid any risk of litigation regarding admission of their claim to the guarantor, lenders should invoke the guarantee before the guarantor is admitted into CIRP.

Claw-Back Risks

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

Preferential transactions

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

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

Undervalued transactions

Where the corporate debtor has made a gift or entered into a transaction that involves the transfer of its assets for a consideration that is significantly less than the value of consideration provided by the corporate debtor.

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

The look-back period is not limited to where the corporate debtor entered into an undervalued transaction to defraud creditors.

Extortionate credit transactions

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

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

Order of Payment

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

Dissenting FCs are statutorily provided to be entitled to at least a value equivalent to liquidation value under the payment waterfall (discussed below) in any resolution plan. The interpretation of this statute has given rise to multiple orders. The Supreme Court in India Resurgence ARC Pvt. Ltd. v Amit Metaliks Limited and Anr. (Amit Metaliks) has held that dissenting FCs need not be paid the value of their security interest. However, the Supreme Court in DBS Bank Limited Singapore v Ruchi Soya Industries Limited and Anr. has differed on this point, holding that dissenting FCs should be entitled to the value of their security as liquidation value. The latter case has been referred to a larger bench for adjudication. Until the reference is decided, Amit Metaliks will remain lawful.

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

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

Treatment of Related Parties

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

Withholding Tax

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

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

Thin-Capitalisation Rules

When a company has a high level of debt in its capital structure, the interest payments will be substantial, which reduces the company’s taxable income. This, in turn, can erode India’s tax base. In contrast, when a company relies more on equity, the dividends paid to shareholders are subject to taxation. To address the issue of base erosion caused by excessive debt and interest deductions, limitations on interest deductibility were introduced in the IT Act.

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

Stamp Duty

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

• Types of lenders and their permitted activities – each type of lender discussed in 1.2 Market Players and 4.2 Impact of Types of Investors must comply with specific regulatory restrictions. This guide has discussed some of these, such as foreign lenders’ eligibility and bank lending restrictions for acquisition financing.
• Purpose/end-use and borrower’s sector – additional regulatory considerations apply based on the end-use of the facility as discussed in 2.1 Debt Finance Transactions (which also includes consideration of the borrower’s sector of business).
• Cross-border considerations – as discussed, any cross-border debt financing transaction must be in compliance with FEMA.

Other than those outlined in the foregoing, there are no other crucial issues in debt finance transactions from a jurisdiction-specific perspective to highlight.