For a foreign lender, India represents a vast opportunity amidst a complex maze of regulatory regime and market peculiarities that differentiate it from other lending markets such as the European and the Asia Pacific market. The lending environment the world over has deteriorated and Indian Infrastructure sector is in need of massive amount of funds to sustain a booming economy. The draft 12th five year plan (the 12th Plan) has set a target of 8.2% GDP growth and even in the alternative scenario of 'policy logjam' it is pegged at a minimum of 5%. The total investment in infrastructure sectors in the 12th Plan is estimated to be around one trillion dollars at prevailing exchange rates out of which 48% has to flow from private sector, obviously most of it will be in the form of debt.
The lending margins in India are attractive. However, it comes at a cost which make it difficult to measure and compare risk such as lack of a fully evolved market (e.g. secondary trading of debt is very limited, securitization and derivative market are also nascent) and lack of standard documentation and practices. This article examines some of the market and documentary issues faced in a cross-border syndicated secured lending into India.
In an external commercial borrowing (ECB) i.e. lending by a foreign party to an Indian resident, it is important to obtain legal advice on the structuring upfront since the commercial bargain has to walk the tight rope of regulations. Some of the important legal considerations that have a bearing on the structure are noted below:
- The ECB guidelines: These guidelines issued by the Reserve Bank of India (the RBI), regulate not only the returns (prescribed all-in-cost ceilings pegged to 6 month LIBOR cover fees, interest fees etc. except pre-payment fee, commitment fee and fees payable in Indian Rupees) but also the tenure and amount of the loan, the sectors and purposes for which loan can be availed, the type of security and so on. Sometimes approval of the authorized dealers (AD, most banks in India) and in some cases that of the RBI may be required. For example, mortgage over immovable property in favour of a foreign lender requires an NOC from AD while using ECB to repay rupee obligations requires RBI approval.
- Transaction costs: Stamp duty (and sometimes registration duty) plays a significant part in the choice of security (English Mortgage or mortgage by deposit of title deeds), properties (immovable or movable and location of immovable property) and place of execution. It differs across states in India and can be very significant particularly in case of assignment (assignment of rights under the project documents is a very typical security for lenders) and mortgage.
- Enforcement remedies: If domestic lenders are also involved, as part of lending syndicate or as independent lenders to the borrower, the lending is further complicated by the considerations of inequality of bargaining powers. Unlike foreign lenders, most domestic secured lenders can avail of the non-judicial remedies under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and can also approach the Debt Recovery Tribunal under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. Given the overstretched judicial system in India where recovery proceedings are typically time consuming, this represents a significant advantage. Some have tried to work around this through inter- creditor arrangements.
- Additional issues in Projects: The project documents typically regulate security in terms of form as well as prior approval requirements. Thus, there is no security over project assets in case of National Highways and security over participating interest in an oilfield requires prior government approval. In certain cases, such as mining lease, security in favour of a foreign lender may require prior government approval.
The Indian loan documents have certain distinguishing characteristic which set them apart from typical cross border LMA/APLMA compliant loan document. It is important for a foreign lender to appreciate these differences otherwise one may end up with a different legal/commercial bargain than the domestic lender vis-a-vis the borrower. It is very difficult to fix these issues through mere tweaks to cross-border facility documents.
- Institutional Issues: There is a significant difference between the role of administrative parties abroad and those in domestic financing in India. Unlike a cross border loan document, the arranger is typically not a party to the Financing Documents in a domestic facility and therefore has no right/obligations. The Facility Agent in India is more of an administrative/documentary agent- collecting and notifying issues in relation to CPS and some technical matters with very limited say. The disbursements are typically not routed through the agent. On the other hand the role of the Security Agent/Trustee does not differ much between rupee and ECB loan document. On the borrower side, the concept of allowing borrower switch/addition/release of borrowers and guarantors within the framework of the document is not prevalent in India.
- Documentary differences: Unlike the European standard loan documents, the Indian rupee financing documents tend to be more lender friendly. It is more of a legacy issue. Covenant –lites could never have made their way into Indian lending scene. This is not to say that borrowers get a raw bargain but rather that the final drafts are more contingent on negotiation (and as we shall see later it has its advantages from a borrower perspective too) since one does not have the benefit of a base draft which represents market standard and allows a good starting point for a bargain between the parties. This issue is most evident in revolvers/working capital facility documents where the wording is too broad and standard format (which are not so standard) bilateral documents are used. The Indian Banking Association has been working on standardization of financing documents but so far the banks and financial institutions have preferred their own standard drafts. Large syndicated lending documents generally have a better fate and are more akin to international drafts. It is worthwhile though to note some key conceptual differences.
- Conceptual Issues: The Indian mandate letters generally do not have clauses such as front running and market flex. In a cross border transaction the latter may also be an issue. As far as interest and margin protection (or yield protection) clauses are concerned, lending in India is based on base rates hence detailed margin protection clauses are not required (since base rates can be adjusted to reflect the cost) but are often retained. Margin reset at regular intervals (either a fixed period or after commercial operation) is a very unique feature of Indian loan documents. 'Yank the bank' and 'snooze you loose' are rare but may be encountered in large syndicated deals with some banks participating with minimum 'take and hold'. Prepayment invariably attracts prepayment premia (as opposed to break costs) and banks are reluctant to allow prepayment except on an interest reset date where margins are being reset. In large deals they may allow substitution of rupee commitment by foreign currency commitment. Borrower is generally not a party the inter-creditor arrangement (ICA) and acknowledges that it is aware of the same but has no rights thereunder. Unlike the foreign drafts, the clauses relating to majority and unanimous consent items are dealt with in the ICA rather than the facility agreement. In foreign financing documents borrower may also be a party to the ICA. This has a bearing on the rights of the borrower to enforce the terms of the ICA.
One may wonder as to why an Indian borrower will not prefer a foreign lending over domestic loans. A look at any lending document or negotiating with most Indian borrowers will cure one of such notions. From a borrower perspective, the above issues may be daunting but then some good negotiation can also result in benefits for him. Indian lending documents sometime permit deviations from financial covenants within an acceptable range. Typically banks stick to three -four standard financial covenants and breach of a financial covenant may not result in an immediate event of default. It may instead attract higher interest whereas internationally it is more likely to result in an immediate event of default and one does come across a wide range of financial covenants in foreign documents. Also sometimes Indian lenders are happy to provide longer cure periods for events of default than international documents which can even apply to events of default such as non- payment!
It is quite apparent that a foreign lender/counsel has to appreciate the differences between the lending markets and practices as well as the peculiarities of the legal regime in India, so as to be able to negotiate a well balanced deal and to identify the potential risks and rewards. At any rate the regime and practices are sufficiently complex to merit a buffered time schedule and procuring legal advice from local counsel.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.