India’s loan market has developed significantly in the recent past, supported by some noteworthy steps taken by the country’s regulators.

The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have both stepped up their vigilance over market participants and activities, intervening wherever they have seen deviations. They have both also adapted to dynamic developments in the financial system and the securities and money markets. Their measures are aimed at bringing about better governance and accountability, reducing systemic risk associated with the capital markets and banking system. While there have been indications of a global slowdown, India remains a highly sought-after market, and has shown consistency in performance and returns over the last several years.

While the world has felt the economic impact of global conflicts such as the Russia-Ukraine and Israel-Palestine wars, the Indian financing market has been relatively insulated and has experienced minimal adverse effects.

Although India has been in conflict with neighbouring countries, its government (Central Government) has imposed checks on equity investments from the countries in question. However, India’s financing market has been largely unaffected by political tensions.

The Indian high-yield market has seen some interesting developments of late. It started out as a fairly active segment with a limited number of lenders and significant demand from borrowers for high-yield debt, particularly on account of “special situations” in various sectors (including real estate). With the recent price stabilisation in real estate and other sectors and the boom in the capital markets space, the high-yield market has seen a reverse trend of excessive supply of capital from lenders with lower demand from a lesser number of quality/reputable borrowers in stressed or special situations, with the result that lenders are now far more selective over borrowers and asset quality (although it must be said that they sometimes have to accept lighter covenants given the quality of assets available and their potential).

India has seen significant growth in alternative credit providers, with continued emergence of various alternative investment funds (AIFs) pooling investments from domestic and overseas investors. The regulatory regime governing AIFs allows some flexibility in the structuring of transactions. In the recent past, venture debt, combining hybrid structures, has emerged as an effective tool for early-stage funding. Equity investment remains an expensive source of capital, so borrowers continue to favour credit from other avenues. This, coupled with the Central Government’s enduring emphasis on “Make in India”, has provided opportunities for borrowers to implement new ideas with lower costs.

The refinancing market has seen an upward trend, and borrowers are increasingly refinancing older, more expensive credit for newer, cheaper credit.

Indian banks are highly regulated and, therefore, not generally open to unique financing techniques, which are far more prevalent in the private credit market. However, foreign banks operating in India (through foreign portfolio investor – FPI – vehicles) do adopt such unique financing techniques, which have evolved over time.

The most commonly used method is a preferred equity structure with the optionality for assured exits. This is more usual in the domestic markets, as there are regulatory issues around these structures for foreign investors.

Fundraising by means of Special Purpose Vehicles (SPVs) is frequently seen with alternate forms of holding company (HoldCo) support in the absence of direct guarantees. Often, new financing structures involve HoldCo or sponsor-level financing with either direct security on underlying assets or covenants in relation to underlying assets without direct security.

Regulatory Developments

India has seen a surge in sustainable finance, with rising enthusiasm among lenders for leveraging green capital. This growth has been stimulated by regulatory developments, policy initiatives and increased voluntary corporate and investor participation. Key developments include the following.

• Minimum mandatory ESG Lending in the IFSC/GIFT City: banking units, finance companies/units established in the International Financial Services Centre (IFSC, a special economic zone in India also known as “GIFT City”), are required to direct at least 5% of gross new loans and advances each financial year towards green/social/sustainable/sustainability-linked sectors or facilities.

• Expansion of ESG debt securities: in August 2024, the SEBI proposed the development of a regulatory framework for different categories of ESG debt securities, including social, sustainable and sustainability-linked debt. The SEBI has broadened its existing framework for “green debt securities” to include categories such as yellow bonds (for solar energy), blue bonds (for the water/marine sectors) and transition bonds (for businesses moving to sustainable practices).

• Green deposit directions and disclosure of climate-related financial risk: the RBI has regulations for priority sector lending (agriculture, education, housing, social infrastructure, renewable energy). It also recently introduced directions on “green deposits”, requiring banks to earmark these proceeds for “green finance” and develop board-approved policies. Additionally, the RBI has proposed the introduction of a framework for disclosure of climate-related financial risk across four thematic areas – governance; strategy; risk management; and metrics and targets (including Scope 3 emissions).
• Sustainable finance:this is prominent in the renewable energy sector (with funding directed towards solar and wind energy projects), supporting India’s commitment to achieving 500 GW green energy by 2030.
• Permissible foreign capital investment: the scope of this under the automatic route for external commercial borrowings has been broadened to include affordable housing (social loans) and energy storage systems (green financing). Green and affordable housing projects are receiving financial support from domestic and foreign lenders.
• Sustainability-linked debt: this is gaining traction for Indian corporates given flexibility of end-use and performance-based incentives using margin ratchets based on achievement of KPIs and SPTs. This approach allows for the practical integration of ESG goals into the corporate borrower’s financing structures.

Indian companies can obtain financing from banks, non-banking financial companies (NBFCs, including housing finance companies), AIFs, FPIs, and other eligible foreign lenders.

Banks

Banking companies are governed by the Banking Regulation Act (BR Act), which sets out how these companies are created and licensed. A company must obtain a licence issued by the RBI under the BR Act to carry out banking activities in India.

Foreign entities seeking to carry out banking activities in India via wholly-owned subsidiary (WOS) must comply with the provisions set down in the RBI’s “Framework for setting up of Wholly Owned Subsidiaries by Foreign Banks in India”. The RBI must be satisfied that the banking activities would be carried out in the public’s interest, that the government or law of the country in which the foreign bank would be incorporated would not discriminate against banking companies from India, and that the banking company would comply with the applicable provisions of the BR Act.

Foreign banks may also operate in India via branches. Such banks are required to obtain a licence and have the prescribed amount of capital when their first branch opens in India.

NBFCs

NBFCs are non-banking financial institutions which have as their principal business, inter-alia, the receipt of deposits or lending, and are governed by the RBI’s Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale-Based Regulation) Directions.

To start up or carry out the business of an NBFC, the following are required:

• a certificate of registration issued by the RBI under the Reserve Bank of India Act (RBI Act); and
• a net owned fund in the prescribed amount.

AIFs

Under the SEBI (Alternative Investment Funds) Regulations (AIF Regulations), AIFs are classified as:

• Category I AIFs, which generally invest in start-up or early-stage ventures;
• Category II AIFs, which do not undertake leverage or borrowing other than as permitted by the AIF Regulations;
• Category III AIFs, which employ diverse, complex trading strategies and leverage including through investment in listed or unlisted derivatives; and
• specified AIFs.

AIFs must obtain a certificate of registration from the SEBI under any one of the above categories in accordance with AIF Regulations.

FPIs

In order to buy, sell or otherwise deal in securities as an FPI, an applicant must obtain a certificate from the SEBI (via an Indian Designated Depository Participant, or DDP), in the manner specified in the SEBI (Foreign Portfolio Investors) Regulations (FPI Regulations).

To obtain an FPI-type registration, an application must be submitted to the SEBI, via the DDP, together with necessary documentation and information, as required under the FPI Regulations. Investments made by the FPI are monitored by the DDP and are subject to compliance with various disclosure standards, as well as other conditions. See 3. Structuring and Documentation for further details in relation to lending by FPIs.

Foreign Lenders

Other foreign lenders can make loans to an Indian company under the External Commercial Borrowing (ECB) regime. This is covered by the Foreign Exchange Management Act (FEMA), together with the FEM (Borrower and Lending) Regulations and the RBI’s Master Directions on External Commercial Borrowings, Trade Credits and Structured Obligations (ECB Guidelines). See 3. Structuring and Documentation for details concerning lending under the ECB regime.

ECBs

The ECB Guidelines allow foreign lenders to extend foreign currency-denominated ECBs and Indian INR-denominated ECBs provided that they comply with the criteria applicable for being “recognised lenders”, ie, residents of an FATF or IOSCO-compliant country or multilateral and financial institutions in regions where India is a member country. Individuals who are foreign equity holders of a company can extend facilities to such companies also. In addition, foreign branches or subsidiaries of Indian banks are permitted as recognised lenders only of foreign currency ECBs (except foreign-currency convertible bonds and foreign-currency exchangeable bonds). Eligible foreign lenders providing ECBs to an Indian borrower are not subject to any local licensing or registration requirements.

FPIs

Entities registered with the SEBI as an FPI are permitted to extend debt to Indian companies by subscribing to listed or unlisted non-convertible debentures (NCDs) issued by these Indian companies.

For an FPI to subscribe to NCDs issued by an Indian company, there are two routes available, as follows.

• The General Investment Route (GIR): under this method, an FPI may subscribe to NCDs issued by Indian companies subject to the following conditions:
  1. an FPI may subscribe to NCDs with minimum residual maturity of more than one year;
  2. holdings by an FPI in short-term investments, ie, NCDs with residual maturity of less than one year, must not exceed 30% of the total investment of the FPI in NCDs (as well as any other corporate bonds) on an end-of-day basis; and
  3. investment by FPIs should not exceed 50% of the issue size of any proposed NCD issuance.
• Voluntary Retention Route (VRR): for investments in NCDs under the VRR, the following conditions apply:
  1. unlike investments in NCDs under the GIR, prior to making any investments in NCDs under the VRR, an FPI must apply for limits, through its DDP; once such limits are reached, the FPI must deploy funds by investing in NCDs to utilise at least 75% of the limits allocated within a period of three months from the date of allocation of limits, failing which the limits lapse;
  2. there are no minimum residual maturity or credit concentration norms, and FPIs can subscribe to up to 100% of the issue size of any proposed NCD issuance; and
  3. a minimum of 75% of the total limit allocated for investment by the FPI in NCDs must be retained in India for at least three years, although this does not mean the NCDs cannot be redeemed within this period – but the corresponding sum cannot be repatriated overseas, and the FPI can choose to retain it in its domestic INR bank account or in other eligible securities.

ECBs

Foreign lenders granting ECBs to Indian borrowers may have the benefit of the following security:

• a mortgage over immovable or movable properties;
• hypothecation or charge over movable properties;
• pledge over shares of Indian companies held by Indian residents and non-residents; or
• personal or corporate guarantees from Indian individuals or Indian companies.

The creation of security for the benefit of foreign lenders extending ECBs requires the prior consent of the relevant AD Bank.

FPIs

Security for the benefit of FPI investing in NCDs issued by Indian companies is created in favour of a domestic debenture trustee and does not require regulatory consent, to the extent that the security is created by Indian residents over Indian assets (comprising mortgage/charge over assets or bank accounts, pledge over shares held by Indian residents as well as corporate and personal guarantees issued by Indian residents).

Foreign Lenders to Foreign Entities

Generally, Indian laws do not permit foreign lenders to foreign entities to have security over Indian assets, nor are Indian companies allowed to issue guarantees in favour of foreign lenders extending loans to foreign entities. However, there are exceptions. Foreign lenders extending loans to foreign entities are allowed the benefit of a pledge over shares in Indian companies held by the foreign entities subject to receiving the consent of the relevant AD Bank and so long as:

• the lenders are overseas banks and the proceeds of the loan are not used for investments in India, directly or indirectly; and
• the overseas loan does not result in capital in-flow to India.

However, such Indian companies cannot extend guarantees in favour of such foreign lenders. Subject to financial limits imposed under Indian regulations, in order to secure facilities extended by foreign lenders to foreign entities (where Indian companies have made overseas direct investment in accordance with regulations prescribed under FEMA) and their subsidiaries, Indian companies can pledge shares held in such foreign entities, create security over assets in India or issue guarantees.

India is a foreign exchange-controlled economy and, therefore, unless specifically permitted, any transactions in foreign exchange between Indian residents and non-residents are regulated.

ECBs

All ECB transactions must be routed through an AD Bank. Indian borrowers are required to obtain a loan registration number (LRN) and make necessary filings with the AD Bank which must verify that the proposed ECB complies with the ECB Guidelines.

All ECBs are subject to minimum average maturity period (“MAMP”) conditions. ECBs cannot be prepaid until expiry of the relevant MAMP except by way of a refinancing utilising proceeds of a fresh ECB (subject to conditions under the ECB Guidelines). Call and put options, if any, are not exercisable prior to completion of the MAMP.

ECBs usually have an MAMP of three years, although the following are exceptions:

• ECBs raised by manufacturing companies for as much as USD50 million or the equivalent per financial year will have an MAMP of one year;
• ECBs raised from foreign equity holders for working-capital purposes, general corporate purposes or to repay INR-denominated loans will have an MAMP of five years;
• ECBs raised for: (a) working capital purposes or general corporate purposes; or (b) on-lending by NBFCs for working capital purposes or general corporate purposes, will have an MAMP of 10 years;
• ECBs raised for: (a) repayment of INR-denominated loans obtained domestically for capital expenditure; or (b) on-lending by NBFCs for the same purpose will have an MAMP of seven years; and
• ECBs raised for: (a) repayment of INR-denominated loans obtained domestically for purposes other than capital expenditure; or (b) on-lending by NBFCs for the same purpose will have an MAMP of 10 years.

FPIs

For restrictions and controls on investment by FPIs in NCDs issued by Indian companies under GIR and VRR, see 3.1 Restrictions on Foreign Lenders Providing Loans.

ECBs

ECB proceeds cannot be used for the following:

• real estate activities;
• equity investment;
• investment in capital markets; and
• on-lending to entities for the above activities.

FPIs

Proceeds raised by Indian companies through issuance of NCDs to FPIs have end-use restrictions (namely, investment in real estate businesses, capital markets and purchases of land) if the NCDs are not listed on a recognised stock exchange in India. It is the responsibility of the DDP of the relevant FPIs to ensure compliance with these conditions.

Agency and trust concepts are well recognised, accepted and practised in India.

For domestic financing transactions, involving a consortium of lenders, it is accepted market practice to create security interest in favour of a security trustee, who holds the security for the benefit of the consortium. There are specialised trustee agencies and companies who provide such services. Facility agents are also commonly appointed, who undertake administrative responsibilities for coordination amongst the members of the consortium.

For ECBs, the security interest is traditionally created in favour of a domestic security trustee or agent, particularly in the case of security interest over immovable and movable properties (including shares) in India.

For an Indian company to issue secured NCDs, appointing a trustee to act on behalf of the NCD holders is mandatory. Accordingly, for issuance of secured NCDs to FPIs, it is standard practice to appoint a debenture trustee and to have all security interest for the NCDs created in favour of the debenture trustee acting for the benefit of the NCD holders.

Under Indian law, subject to contractual restrictions, INR-denominated loans granted by Indian regulated institutional lenders (such as banks and NBFCs) can generally be transferred, in full or in part, with or without underlying security, in accordance with RBI’s Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions (TLE Directions). Loans are transferred in writing by way of novation or assignment, or loan participation.

Transfer of ECB exposures is permitted, subject to the transfer being to recognised lenders and obtaining the consent of the AD Bank. The TLE Directions do not apply to foreign lenders and, therefore, will not apply to the transfer of ECBs.

NCDs held by FPIs may be transferred by FPIs to other FPIs as well as to Indian purchasers. If, however, the FPI has invested in NCDs under the VRR and the NCDs are being sold to Indian purchasers, the amounts received by the FPI that correspond to 75% of the limits allocated under the VRR must remain in India and cannot be repatriated overseas (see 3.1 Restrictions on Foreign Lenders Providing Loans).

While there is no legally recognised concept of “debt buyback” under Indian law, borrowers are permitted to pre-pay loans, usually with a pre-payment premium, or to make whole charges and break costs, and borrowers are permitted to redeem NCDs prior to their maturity. However, (i) NCDs cannot be redeemed prior to expiry of ninety days from the date of issuance; and (ii) listed NCDs cannot be redeemed prior to one year from the date of issuance.

Please also see the restrictions on NCDs held by FPIs set out in 3.1 Restrictions on Foreign Lenders Providing Loans.

Loans/NCDs can be purchased through another entity, including sponsors, subject to the following.

• For the purchase of INR-denominated loans extended by Indian regulated institutional lenders (such as banks and NBFCs), the conditions applicable under the TLE Directions must be complied with. These lenders are generally permitted to transfer loans only to other Indian regulated institutional lenders (such as banks and NBFCs), and not to Indian incorporated private and unregulated/unlicensed entities, although loans in default may be transferred to such entities subject to compliance with additional conditions.
• Foreign sponsors cannot purchase INR-denominated loans, although they may purchase ECBs extended by foreign lenders so long as the acquiring entity is a recognised lender and consent of the AD Bank is obtained.
• Foreign sponsors, who hold an FPI registration, or Indian incorporated private and unregulated/unlicensed entities may purchase NCDs from other FPIs. See 3.6 Transfer Mechanisms for further conditions.

When acquiring a public listed company, the acquirer may be required to make an open offer based on SEBI (Substantial Acquisitions and Takeovers) Regulations (Takeover Code), which stipulate that they must appoint a merchant banker to manage the open offer process. In connection with this process, the acquirer needs to fund an escrow account with the requisite amounts (as security for its obligations to complete the offer), as mandated under the Takeover Code. The funds take the form of cash deposited in an escrow account, a bank guarantee issued by any scheduled commercial bank in favour of the merchant bank to the offer, or the deposit of frequently traded and freely transferable securities with an appropriate margin. If the acquirer proposes to fund the escrow account by obtaining financing, the merchant bank handling the deal may need to be satisfied that the acquirer has access to committed funds. While satisfactory evidence is largely dependent on the opinion of the merchant bank (and it is highly recommended that this be confirmed upfront), committed long-form facility agreements (with minimal conditions to funding) are generally accepted; in certain cases, short-form commitment letters may also be accepted. These documents do not have to be publicly filed, and only need to be delivered to the merchant bank managing the offer process.

RBI has introduced new and revised directions applicable to Indian banks and financial institutions on:

• charging penal interest;
• methods of detection and reporting of instances of fraud by Indian borrowers;
• reporting of defaults in loans; and
• the fair practices code to be adopted by regulated financial institutions which has necessitated changes to legal documentation.

SEBI has also enacted various amendments to regulations governing the issuance of listed NCDs, as well listed entities’ obligations giving rise to changes in NCD documentation.

Usury laws in India apply to private lending, and rules governing charging of interest by banks and financial institutions are governed by the RBI’s directions. There are no rules capping chargeable interest. The RBI requires that banks and financial institutions to be transparent regarding interest rates with borrowers, and rates must be set in accordance with clear internal policies that the RBI audits and reviews regularly.

ECBs are subject to all-in-cost ceilings. Foreign currency ECBs are subject to an all-in-cost ceiling of the aggregate of a benchmark rate (any widely accepted interbank rate or alternate reference rate of six-month tenor applicable to the currency of borrowing) plus 550 basis points (for existing ECBs that are being changed to an alternative reference rate from LIBOR) or plus 500 basis points (for new ECBs). INR-denominated ECBs are subject to an all-in-cost ceiling of the aggregate of a benchmark rate (prevailing yield of the government securities of corresponding maturity) plus 450 basis points.

There are no regulatorily prescribed limits on interest rates chargeable on NCDs issued by an Indian company to domestic investors or FPIs.

See 5.1 Assets and Forms of Security on registration requirements, which entail disclosure of financial contracts for creation of security for Indian assets.

Additionally, encumbrances (a term which has wide import under the Takeover Code and will include pledges, non-disposals, negative pledges and similar covenants or arrangements) over the shares of a listed entity must be disclosed to the Indian target and the relevant stock exchanges.

Listed companies are subject to multiple disclosure requirements under SEBI (Listing Obligations and Disclosure Requirements) Regulations (LODR), particularly with respect to related-party transactions.

Subject to tax treaties, interest (but not principal) payable to a foreign lender by any Indian borrower is subject to tax at the hands of the foreign lender. The Indian borrower is under a legal obligation to withhold tax as per applicable rates while making interest payments and filing necessary withholding tax returns with the Indian income tax authority.

All financing instruments are subject to the payment of stamp duty, which varies based on the Indian state where the instruments are executed.

It is standard practice that the borrower (or guarantor/security provider) is responsible for payment of stamp duty on financing documents; however, it is in the interests of lenders to ensure that adequate stamp duty is correctly paid, since documents which are not adequately stamped are inadmissible as evidence in court unless the deficiency is remedied (with possible penalties).

Documents executed outside India need not be stamped. However, where a document executed outside India is subsequently brought into India, stamp duty may be payable depending on the state in which the document is received. Additionally, if a document is stamped in one Indian state and the original or a copy (including, in some states, electronic copies) is brought into another in which stamp duty is higher, the difference between the two amounts of stamp duty could also be due.

Other than within the context of withholding tax, foreign lenders are not subject to Indian tax laws or regulations for granting loans to Indian borrowers. The quantum of withholding tax is dependent on the nature of interest paid out, and could vary from 9% to 35%, reduced by any bilateral treaty provisions depending on jurisdiction. If, however, foreign lenders were to establish a place of business in India or, in accordance with tax laws, were deemed to be carrying out business in India through a permanent establishment (PE), income attributable to the PE would be liable for tax in India on a net income basis. The existence or not of a PE is fact-specific but may be “triggered” by, for example, having a fixed place of business, or by the presence of employees, or dependent agents in India.

Assets available as collateral to lenders include movable and immovable assets. A brief overview of the common forms of security over assets in financing transactions is provided below.

• Hypothecation is created over movable assets including current assets, fixed assets, receivables etc, where possession of the property remains with the borrower. The charge may be fixed or floating in nature.
• Mortgages are set up for identified and specific movable and immovable properties, with the following three types widely accepted:
  1. simple mortgages – the mortgagor retains the possession and personally binds themself to repay the debt under the indenture of mortgage;
  2. English mortgages – the mortgagor undertakes to repay the debt and transfers the property absolutely to the mortgagee, subject to a provision that, at the time of repayment, the mortgagee will re-convey the property to the mortgagor; and
  3. equitable mortgages (by deposit of title deeds) – involve delivery by the mortgagor of title documents in relation to the immovable property to the mortgagee with an intent to create security.

• Pledges are created over tangible movable assets by delivery of goods by the pledgor.

Lenders may also require contractual comforts from group entities, such as guarantees, shortfall/support undertakings or non-disposal undertakings.

Perfection

• Registration with the registrar of companies (ROC): in accordance with the Companies Act, 2013 (Companies Act) all charges created by an Indian company must be registered with the ROC within 30 days of its creation. A certificate of registration of the charge is provided by the ROC as evidence of this registration. Any subsequent charge registration will not prejudice any right acquired in respect of property before the charge is registered. Where a charge is not registered, it will not be taken into account by the liquidator appointed under the Companies Act or the Insolvency and Bankruptcy Code (IBC) or by any other creditor.
• Registration with sub-registrar: it is compulsory to register certain types of mortgage with the jurisdictional sub-registrar, and within prescribed timelines. A compulsorily registrable document which is not registered will be ineffective and invalid, and will not be received as evidence of any transaction affecting a property.
• Registration with the Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI): lenders are required to file details of charges on the CERSAI portal to gain the additional benefit of enforcement under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI).

Other requirements

Security providers must obtain the appropriate consents/pass the required resolutions, depending on the type of legal entity, quantum of the security/comfort, etc.

Indian law permits a floating charge over all present and future movable assets of a company. In the event of default, this floating charge may crystallise into a fixed charge. The charge document usually provides for the security provider to utilise the assets until then.

Companies in India may provide downstream, upstream or cross-stream guarantees, subject to the following.

• Constitutional documents: the company’s constitutional documents should permit for the provision of such guarantees.
• Board approval: the guarantor (where a company) must obtain board approval with the consent of all directors present at the board meeting.
• Guarantee for an entity where a director is interested: companies are generally prohibited from providing a guarantee in connection with a loan taken by (i) its director; (ii) any director of its holding company; (iii) any partner or relative of such director; (iv) any partnership firm in which any director or relative of such director is a partner.
• Permission: A company may however provide a guarantee in connection with a loan taken out by a “person in whom any director is interested”, where a special resolution is passed by the shareholders and the loan is utilised by the borrower for its principal business activities.

Exceptions include the following:

• 1. a guarantee from a holding company in respect of: (i) loans to its WOS; (ii) loan to subsidiaries from a bank or financial institution; and
  2. a guarantee by a company in its ordinary course of business for repayment of any loan, provided that the interest charged on such loans is not less than the prevailing rate for government securities with a tenor closest to the tenor of the loan.

• Guarantee exceeding certain threshold: a company is not permitted to provide a guarantee exceeding 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more, without obtaining the consent of its shareholders.

Exceptions include the following:

• 1. guarantee by holding company for a loan to its WOS.
  2. any guarantee by banking companies, insurance companies, housing finance companies in the ordinary course of business; and any guarantee by a company established with the object of and engaged in the business of financing of companies or of providing infrastructural facilities.
• Guarantees for the benefit of foreign entity: See 3.2 Restrictions on Foreign Lenders Receiving Security.

A target (when a public company in India) is prohibited from providing any financial assistance by way of loans, guarantees, security or other means for the purchase/subscription of its own shares or those of its holding company. This prohibition does not apply to a private company.

Indian targets cannot grant security, guarantees or financial assistance for the acquisition of their own shares by offshore investors for loans received from foreign lenders.

The approval requirements mentioned in 5.3 Downstream, Upstream and Cross-stream Guarantees in relation to a guarantor also apply to a security provider, with additional considerations as follows.

• Related-party transactions: Under LODR, transactions carried out by listed companies or their subsidiaries with or for the benefit of related parties may require: (i) audit committee approval at listed company level; and (ii) shareholder approval of the listed company (where the related-party transactions are “material”). Therefore, where listed companies or their subsidiaries provide guarantee/security to a third-party for a related party’s loan, the above approval requirements may be triggered. Interestingly, in a shareholder meeting, related parties (whether or not a related to a given transaction) are not permitted to vote on related-party transactions.
• Disposalof undertakings: where it is proposed that security be provided by a company over the whole or most of its undertaking/s, the company must obtain a special resolution followed by board approval. In some cases, this approval requirement does not apply to private companies.

These typical forms of security are generally released as follows.

• Mortgage: where a mortgage is registered with the jurisdictional sub-registrar, parties would execute a deed of re-conveyance or a release deed (depending on the type of mortgage), which is also registered with the same sub-registrar. Further, where title deeds are deposited with the mortgagee, they are returned by the mortgagee to the mortgagor.
• Hypothecation: the release of a charge created via hypothecation is governed by the provisions contained in the hypothecation deed. Parties may enter into a deed of release, depending on the provisions of release in the deed of hypothecation.
• Pledge: to release pledge over dematerialised securities, the pledgee must file release forms with their depository participant. To release a pledge over securities in physical form, the security certificates which were delivered at the time of pledge creation must be returned to the pledgor. For the shares of a listed company, disclosure and additional requirements may apply, both at the time of the creation and release of encumbrances.

Where a charge is registered with the ROC and CERSAI, charge satisfaction forms must be filed with these authorities.

The matters of priority of claims and subordination may be contractually agreed among creditors and the underlying instrument should provide the ranking of the claim. The terms of any transaction documents which prescribe ranking of claims/ subordination of claims between creditors may be enforced as a contractual arrangement.

Under IBC, during the corporate insolvency resolution process, the committee of creditors (COC) may take into account the priority and value of the security interest of a secured creditor. The priority of claims is left to the wisdom of the COC. In case of liquidation, on the other hand, a pre-defined waterfall dictates distribution of assets of the corporate debtor. Under this waterfall, while the secured creditors are given a superior ranking (senior to all unsecured creditors and only subordinate to insolvency resolution process/liquidation costs), it does not discriminate among secured creditors. There are judicial precedents that support the view that, inter se, priority among secured creditors is lost upon relinquishment of the security to the liquidation estate. Further, IBC also requires that a liquidator disregard any contractual arrangements between creditors who are otherwise ranked equally under the liquidation waterfall, if the contractual arrangement disrupts the order of priority set out under the liquidation waterfall.

Under the Transfer of Property Act, any security created previously has priority over newly created security. However, parties may contract out of this arrangement by the mutual consent of all involved.

Under section 281 of the Income Tax Act, during the pendency of any income tax proceedings, a charge created by the security provider without the consent of the assessing officer will be void against claims in respect of any tax or other sum payable as a result of the completion of the proceedings or otherwise. To overcome this, lenders will require the borrowers to obtain a no-objection certificate from an assessing officer in the income tax department.

Under the Indian Contract Act, banks have a general lien over all deposits and securities in their possession, even where no specific security is created. This right of lien may not, however, be available where it is either contractually waived or where such assets have been pledged with the bank for a specific purpose.

A secured lender may enforce collateral in case of default by the obligors of their legal or contractual obligations. Depending on the type of lenders and collateral available, lenders may consider seeking enforcement under SARFAESI, recourse under IBC, and recovery through the debt-recovery tribunal.

• Mortgage: under Indian law, enforcement of mortgages cannot be submitted to arbitration, but must be decided by the civil court having ordinary original jurisdiction. With an English mortgage, the mortgagor can attempt to sell the mortgaged property without court intervention. This is required to be contractually provided under the mortgage deed.
• Hypothecation: with hypothecation, both ownership and possession remain with the debtor. The creditor has an equitable charge over the property, and is given the right to take possession and sell the hypothecated property to recover the related dues. SARFAESI allows secured lenders to enforce without court intervention. However, in practice, this may be difficult, given that possession of the hypothecated property remains with the security provider.
• Pledge: under the Indian Contract Act, the pledgee may enforce the pledge by selling the pledged shares after giving “reasonable notice”, although what constitutes this would depend on the facts of each case. While there are instances of pledge enforcement being challenged based on the sale price, one way to mitigate this risk is to obtain a valuation report from a reputable valuer.
• Guarantee: under Indian law, the liability of the principal debtor and the guarantor is co-extensive. This allows the creditors to initiate enforcement directly against the guarantor without any recourse to the principal debtor. Guarantee can be enforced by way of a suit in the court having jurisdiction or where the instrument provides for arbitration, by instituting arbitration proceedings.

Choice of Foreign Law as a Governing Law

A choice of foreign law to govern a contract between an Indian and a non-Indian party is permitted provided the rationale behind the selection is not to circumvent the provisions of Indian law. In any case, the transaction would still be subject to certain statutory provisions of Indian law, such as foreign-exchange control regulations, and the Companies Act, etc.

Submission to Foreign Jurisdiction

The parties may submit to a foreign jurisdiction, in which case the foreign court’s judgement may be enforced in India, unless:

• it was not issued by the court of a competent jurisdiction;
• it was not issued on the merits of the case;
• it appears to have been founded on an incorrect view of international law or a refusal to recognise the laws of India in cases where the latter is applicable;
• the processes whereby it was obtained are opposed to natural justice;
• the judgement was obtained by fraudulent means; or
• it upholds a claim founded on a breach of any Indian law.

If any of the above apply, the Indian courts will decline enforcement of the foreign judgment.

Waiver of Immunity

Immunity on the grounds of sovereignty or other similar grounds such as suit, jurisdiction of any court, relief by way of injunction or order for specific performance or recovery of property, attachment of assets, etc. is often contractually waived. Such waivers are enforceable only if the relevant statute permits contractual waivers.

Enforcement of a Judgement by a Foreign Court

Enforcement of a foreign judgment in India, without retrial of merits of the case, is possible where the foreign judgment has been rendered by a superior court in a territory recognised as a “reciprocating territory” by the Central Government. Such foreign judgments may be enforced in India as if rendered by a relevant domestic court. A foreign decree for anything other than payment of money (not being a penalty or fine) is not enforceable as a decree, and parties will need to file a fresh suit in India where the foreign decree will be considered as factual evidence.

To enforce a judgment pronounced by the courts of territories which have not been notified as reciprocating territories, a suit can be filed in Indian Courts based on the foreign decree (not corresponding to any of the scenarios described in 6.2 Foreign Law and Jurisdiction) or on the original underlying cause of action. It is unlikely that the courts in India would award damages on the same basis as a foreign court if an action were brought in India or if it viewed the damages awarded by the foreign court as excessive.

The suit must be brought in India within the period of limitation in the same manner as any other suit filed to enforce a civil liability in the country.

Enforcement of an Arbitral Award

The grounds for refusal of enforcement of a foreign award in India are relatively narrow, including:

• incapacity of parties to the agreement;
• agreement not being in accordance with the law to which the parties have subjected it, or the law of the country where the award was made;
• the award is ultra vires the agreement or submission to arbitration;
• the award involves decisions on matters beyond the scope of submission to arbitration; and
• the award (specifically a foreign award) has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, it was made.

Indian courts may refuse enforcement of the foreign award if the subject matter of the dispute cannot be arbitrated under Indian law, or if the enforcement would be contrary to the public policy of India.

Regardless of foreign law governing a contract, the procedural aspects of a transaction remain subject statutory provisions under Indian law. Given that foreign exchange matters in India are governed by FEMA, any loan from/guarantee to/provision of security in favour of a foreign lender must be in compliance with FEMA.

Upon commencement of the Corporate Insolvency Resolution Process (CIRP) of a corporate debtor, a moratorium is imposed under IBC by which proceedings involving the corporate debtor and/or its properties are stayed in order to ensure that the debt of the corporate debtor can be “resolved” under IBC. During this moratorium, the lender loses the ability to enforce its own security outside of the CIRP under IBC and must, by law, be a part of the CIRP. The rights of secured creditors are restored only in the event of failure of the CIRP at the stage of liquidation. Further, the distribution of the assets of the corporate debtor at the time of liquidation is undertaken on the basis of the liquidation waterfall set out under the IBC (see 7.2 Waterfall of Payments).

As far as guarantees are concerned, there is some uncertainty around whether the beneficiary of a guarantee can submit its claim as a “financial creditor” if the guarantee is not invoked at the time of admission of an application to admit the guarantor to a CIRP. Various courts have held differing views on the matter, with some of the opinion that it is the intent of the IBC is to provide a clean slate for the successful resolution applicant and, therefore, that all debt (including contingent liabilities) should be wiped out before handing over the company to the successful resolution applicant, whereas other courts have held that, since the uninvoked guarantee only constitutes a contingent liability, it must first be invoked for the debt to crystallise before the guarantee beneficiary can submit a claim as a “financial creditor” under the IBC.

Lenders who have the benefit of third-party security (in the absence of receiving a guarantee from the third-party security provider) may not be admitted as financial creditors in a CIRP of the third-party security provider. The courts have held that, while operational creditors or dissenting financial creditors under the resolution plan are protected and paid the amount equivalent to that which they would have been entitled to, in the event of liquidation of the corporate debtor under the IBC, a secured creditor who is not a financial creditor or an operational creditor, but who has merely been provided with security by a corporate debtor, has no such protection.

There are two possibilities under the IBC for distribution of the assets of the corporate debtor: (i) under the CIRP; and (ii) applying a liquidation process under the IBC. In (i), the priority of claims is left to the COC’s commercial wisdom and in (ii) a pre-defined waterfall dictates the distribution of the corporate debtor’s assets.

The courts have held, on numerous occasions, that the commercial wisdom of the COC in accepting a particular resolution plan under the IBC cannot be subject to judicial scrutiny. Therefore, once the COC has approved a particular resolution plan, the distribution of assets of the corporate debtor will proceed in the manner set out in the resolution plan itself.

In (ii), the priority of claims is as follows:

• payment of insolvency resolution process costs and liquidation costs in full;
• workmen’s dues for the period of 24 months preceding the liquidation commencement date, alongside debts owed to secured creditors who have relinquished their security interests;
• wages and unpaid dues owed to employees, other than workmen, for the period of 12 months preceding the liquidation commencement date;
• financial debts owed to unsecured creditors;
• any amount due to the central government and state government, along with debts owed to secured creditors for any shortfall following the enforcement of their security interest;
• any remaining debts and dues;
• claims of preference shareholders; and
• claims of equity shareholders or partners.

The IBC provides that the CIRP of a corporate debtor must be completed within 180 days from the date of admission of the application to initiate CIRP, which can be extended by up to 90 days. The resolution professional is required to file an application for seeking the extension and the adjudicating authority may extend the timeline if it is satisfied that the subject matter of the case is such that the CIRP cannot be completed within the original 180-day deadline.

In any event, the CIRP must be mandatorily completed within 330 days from the insolvency commencement date (ie, the date of admission of the application to initiate CIRP), including any extension of the period of CIRP and the time taken in legal proceedings in relation to the CIRP of the corporate debtor.

However, in practice, it has generally been observed that the CIRP takes much longer than the 330-day period, and one can reasonably expect it to complete within one to two years.

In addition to the CIRP under IBC, a financially stressed borrower/company may undertake a scheme of arrangement under the Companies Act or a restructuring under the RBI’s directions and circulars, specifically the Prudential Framework for Resolution of Stressed Assets (Stressed Assets Framework).

The Companies Act

The Companies Act governs voluntary schemes of arrangement and compromise between a company and its creditors or members. A reorganisation or restructuring can be carried out through a contractual arrangement between the company, its shareholders, and its creditors. The scheme must be approved by three quarters of the creditors and shareholders, following which it can be sanctioned by the NCLT.

Stressed Assets Framework

The Stressed Assets Framework applies to financial restructuring of distressed debtors. Under this framework, lenders (entities regulated by the RBI) are required to identify stressed accounts and formulate resolution plans to address defaults.

The framework envisages a 30-day period for review (Review Period) of the account by lenders, as well as the determination of a resolution strategy and the nature and implementation of a resolution plan (Plan) to be implemented within 180 days of the end of the Review Period. The plan:

• may involve sale of exposure, change in ownership, or restructuring;
• may provide for treatment of lenders with differential security interest; and
• must provide for a liquidation value to be paid to dissenting creditors.

During the Review Period, lenders and asset reconstruction companies with exposure to the borrower are to enter into an inter-creditor agreement (ICA) for finalising and implementing the Plan. The ICA should provide that decisions by lenders representing 75% of outstanding facilities and 60% by number will bind all lenders.

Restrictions During Moratorium

See 7.1 Impact of Insolvency Processes.

Risks of Substantial Haircuts

A significant concern arises in the event of the liquidation of the corporate debtor, where lenders could face substantial financial losses. The extent of these losses, or “haircuts”, can sometimes reach as much as 90% of outstanding loan amounts.

India’s project finance landscape is supported by various financial instruments, including sovereign green bonds, masala bonds and infrastructure debt funds. Domestic banks have dominated this space for decades and continue to do so, but there is now a growing trend towards leveraging other domestic lenders and overseas borrowings. NBFCs, specifically infrastructure debt funds (NBFC-IDFs) and infrastructure finance companies (NBFC-ICCs) are involved to a large extent in the refinancing of big-ticket project finance taken from banks. In addition, there are several local and international state-sponsored institutions, developmental finance institutions and multilateral development institutions – such as the National Investment and Infrastructure Fund (NIIF), the India Infrastructure Finance Company Limited (IIFCL), International Finance Corporation (IFC), Asian Development Bank (ADB) and the Asian Infrastructure Investment Bank (AIIB) – which have not only emerged as alternatives but are at the forefront of supporting the development of long-term project financing in India. AIFs set up as pooled project finance vehicles are also emerging.

India is witnessing a growing number of Public-Private Partnerships (PPPs) owing to various benefits, including access to private finance, greater accountability and well-defined risk allocation.

PPPs may take a wide range of forms, depending on degree of purpose, involvement of the private entity, legal structure and risk sharing:

• DBFOT/BOT: the private sector operator designs, builds, finances, owns and constructs the facility and operates it commercially for the concession period, after which the facility is transferred to the authority;
• Service Contracts; and
• Lease, Develop, Operate and Maintain: assets are leased out to the private sector under specific terms to operate and maintain the asset for the term of the concession period.

The Department of Economic Affairs (DEA) of the Ministry of Finance has primarily overseen the development of the central public infrastructure through the PPP model across the country. The Central Government has offered incentives to PPPs in the form of a “Viability Gap Funding Scheme” for financial support, whereby up to 40% of the project cost can be accessed in the form of a capital grant. In addition to this, the DEA has issued standardised bidding documents, including PPP concession agreements (adaptable to individual projects).

The Central Government has established the Public Private Partnership Appraisal Committee and issued detailed guidelines to streamline the formulation, appraisal and approval mechanism for central sector PPP projects.

While there is no specific central legislation governing procurement of all government contracts in India, procurement by the Central Government (and by state governments) is governed by comprehensive rules and government orders, directives and guidelines that lay out, in sufficient detail, instructions related to inter alia expenditure and controls (both operational and financial). In addition, there are several sector-specific laws, policies and guidelines in place for public procurement.

The fundamental principle at the core of these laws, orders and guidelines is that every government (or authority) entrusted with the power to procure various goods has the absolute responsibility to ensure accountability, transparency, economy and efficiency in procurement and in maintaining a level playing field for all stakeholders.

See 6.2 Foreign Law and Jurisdiction for views on governing laws.

It is commonly observed that when parties to project agreements are Indian residents, the agreements are governed by Indian law. However, if one or more counterparties are foreign residents, it is common to have a foreign law as the governing law of the agreement.

Indian courts have largely relied on the principle of party autonomy and upheld the rights of the parties to the contract to decide the governing law of the contract.

See Section 6.3 Foreign Court Judgments on jurisdiction of foreign courts and foreign arbitral awards.

Foreign ownership and investment in India are covered by FEMA and the rules, regulations and directions thereunder. The FEM (Non-Debt Instruments) Rules (NDI Rules) contain instructions on acquisition of immovable property in India. These rules inter alia provide that a person resident outside India who has established a branch, office or other place of business there to carry out any activity (excluding a liaison office) may acquire any immovable property in India that is necessary for or incidental to carrying on that activity subject to compliance with applicable laws, rules and regulations in force and subject to filing with the RBI a declaration in the prescribed format and within the required timeline.

However, a person belonging to certain specified countries cannot acquire immovable property, other than on a lease not exceeding five years, without the prior approval of the RBI.

Foreign ownership in India is further regulated by the Consolidated Foreign Direct Investment Policy (FDI Policy), which, together with the NDI Rules sets out:

• 1. lists of sectors where foreign ownership is prohibited, such as real estate business and atomic energy;
  2. entry routes for foreign investment in various permitted sectors (ie, automatic and approval route);
  3. categories of foreign investors and attendant investment conditions;
  4. valuation restrictions for acquisition or disposal of ownership by non-residents; and
  5. reporting requirements and downstream investment processes for project companies under foreign ownership.

The main issues that need to be considered are related to land acquisition, project construction and completion, environmental compliance, revenue generation, operational factors, supply-chain management and force majeure events. Given these complexities, project finance lenders strive to allocate risks effectively to safeguard their interests and those of project-implementing entities.

Most financings are structured as “limited recourse” financings, often necessitating sponsor support to cover cost overruns, in addition to corporate or personal guarantees for additional comfort.

Choosing the appropriate legal structure for project implementing entities is crucial. Limited Liability Companies (LLCs) with Holding Companies (HoldCos) and Joint Ventures (JVs) are most commonly seen. LLCs provide limited liability protection to shareholders, while JVs facilitate the sharing of resources, expertise and risks among stakeholders.

Other effective risk-mitigation strategies include obtaining upfront approvals for security creation, implementing substitution rights in the event of default and obtaining adequate insurance coverage. Project cash flow monitoring through trust and retention accounts, requiring detailed project progress reports and the linking of loan disbursements to project milestones are essential. Conducting thorough due diligence, including verifying encumbrances through searches with the CERSAI and ROC, is also essential for mitigating risks associated with conflicting claims over project assets.

Foreign investments in Indian project companies also entail specific tax considerations apart from the exchange control considerations set out in 8.4 Foreign Ownership.

The RBI plays a pivotal role in regulating project financing through regulations and circulars issued from time to time. It has recently introduced a set of draft regulations which aim to enhance oversight of project finance and are applicable to all commercial banks, NBFCs and certain other financial institutions. They include stricter provisioning norms, continuous monitoring of project progress, and the establishment of resolution mechanisms for stressed assets.

The most common structures for project-implementing entities in India are LLCs with HoldCos and JVs. SPVs with HoldCos remain the preferred structure for implementing projects across various sectors, ensuring compliance with foreign-exchange regulations and specific sectoral requirements by both domestic and international sponsors.

As mentioned in 8.1 Recent Project Finance Activity, banks have traditionally served as the principal sources of infrastructure finance in India, but NBFCs, and specifically NBFC-IDFs and NBFC-ICCs, are emerging as reliable modes for the refinancing of project finance taken from banks in addition to state-sponsored institutions, developmental finance institutions and multilateral development institutions, such as NIIF, IIFCL, IFC, ADB and the AIIB.

Export Credit Agency (ECA) financing is another crucial funding mechanism, particularly for projects with substantial international components. ECAs provide loans, guarantees and insurance to mitigate risks associated with cross-border investments and trade, thereby facilitating the influx of capital into large-scale infrastructure projects.

Foreign entities lending in foreign currencies are regulated under the ECB Guidelines, as are Indian companies issuing bonds overseas. Foreign lenders, including private credit funds, frequently invest through FPIs by subscribing to INR-denominated NCDs.

Within PPP, the Indian private sector remains a primary sponsor of infrastructure projects. Emerging sponsors include international sovereign funds, pension funds, and private equity funds.

Natural resources projects in India, whether these involve conventional resources (coal, lignite, natural gas, oil, hydro and nuclear power) or viable non-conventional sources (wind, solar, and agricultural and domestic waste) must comply with the relevant activity-specific legislations framed by the Central Government and state governments and directions of concerned regulatory authorities.

The Central Government retains ownership of various natural resources (along with attendant rights) and private parties can use them only after obtaining licences or leases from the Central Government. The use of such resources is also subject to strict conditions, violations of which could lead to immediate revocation of licences or termination of leases. Royalties are payable for extraction, processing and export of natural resources, which varies depending on the concession and stipulations set out under applicable law. As an exchange-controlled economy, exports from India are also regulated by the RBI and the Central Government through circulars and directives issued from time to time.

The Central Government has enacted several statutes, rules and regulations that seek to safeguard the environment, including the following.

• The Environment (Protection) Act of 1986 and the Environment (Protection) Rules (EP Rules) form the principal legislations concerned with the safeguarding the environment and prescribe the powers of central government activities and set out the penalties for any violations.
• The Water (Prevention and Control of Pollution) Act and Air (Prevention and Control of Pollution) Act together deal with contamination of water bodies and the atmosphere, and provide for establishment of “pollution control boards”.
• The Hazardous and Other Wastes (Management & Transboundary Movement) Rules and the Plastic Waste Management Rules inter alia regulate the manner of disposal of plastic or hazardous/industrial wastes.
• The Environmental Impact Assessment Notification dated 14 September 2006 issued under the EP Rules, deals with granting environmental clearance for a new or existing project.
• The Coastal Regulation Zone Notification dated 6 January 2011 sets out permissible and prohibited activities within the coastal regulation zone.

Infrastructure projects typically require environmental clearance depending upon location of the project and the activity being undertaken. Other statutory licences under industrial and labour codes are also required if the project employs labour personnel.

Compliance and enforcement of legal requirements are undertaken by certain regulatory authorities, including the following.

• Ministry of Environment, Forests and Climate Change, Government of India (MoEFCC): this is the primary authority responsible for formulating and implementing policies and programmes related to environmental conservation, biodiversity, forest management, and climate change. The MoEFCC has the authority to grant forest and environmental clearances. Several environmental statutes confer certain powers on the government, which are also exercised by the MoEFCC.

• Central Pollution Control Board and State Pollution Control Board: this authority advises the central and state governments on matters relating to pollution and notify the standards/guidelines on the emission of pollutants.
• Central and State Coastal Zone Management Authority: this authority issues clearances for permissible activities within the coastal regulation zone.