1 Legal framework
1.1 Beyond general commercial and contract laws, what other specific laws and regulations govern secured finance in your jurisdiction?
Some of the key laws governing secured lending, other than commercial and contractual laws, are as follows:
- Transfer of Property Act, 1882: This law sets out the key principles and types of encumbrances used at the time of providing corporate secured finance, such as a mortgage, hypothecation, charge, exchange and transfer of actionable claims.
- Factoring Regulation Act, 2011: Factoring in India is governed by this law.
- Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002: The enforcement of assets by banks and other financial institutions is governed by this law.
- Sectoral laws: Secured lending may be subject to sectoral laws in certain industries, such as:
- aviation (regulations and notifications of the Directorate General of Civil Aviation);
- energy (Electricity Act, 2003); and
- real estate (Real Estate (Regulation and Development) Act, 2016 and state laws governing immovable property).
- IP laws: If a mortgage or security interest is created on any intellectual property (patent, trademark or copyright) or registered software, the transaction will be governed by the relevant legislation (i.e., the Patents Act, 1970, the Trademark Act, 1999, the Copyright Act, 1957 or the Designs Act, 2000).
1.2 Do any bilateral and/or multilateral treaties or trade agreements have particular relevance for secured finance in your jurisdiction?
At present, there is no specific memorandum of understanding or bilateral or multilateral agreements between India and other countries with respect to secured lending.
1.3 Beyond normal governmental institutions, are there regulatory or tax bodies that play a particular role in secured finance your jurisdiction? What powers do they have?
Reserve Bank of India (RBI) is the financial sector regulator in India and the primary governmental institution which regulates secured financing in India. RBI lays down the norms for lending in general (both secured and unsecured), prudential norms, guidelines for recovery and enforcement and so on.
If an entity enters the insolvency or bankruptcy process, the process of enforcement is subject to the jurisdiction of the National Company Law Tribunal and the National Company Law Appellate Tribunal under the Insolvency and Bankruptcy Code.
Besides RBI, Enforcement Directorate is a statutory body that monitors compliance with anti-money laundering laws and foreign exchange management laws in India. It is empowered to seize assets and criminal proceeds (located inside or outside of India) linked to borrowers that flee the Indian jurisdiction or are avoiding extradition under the Fugitive Economic Offenders Act, 2018. Any asset that is seized by the directorate cannot be enforced until it is released.
Further, if the borrower or lender is from a jurisdiction that is a participating country in a double taxation avoidance agreement, the Income Tax Authority is empowered to initiate appropriate proceedings and impose civil penalties for any violations of that agreement.
1.4 What is the government's general approach to secured finance in your jurisdiction? Are there government guarantee/support schemes available to lenders, and if so what are the qualifications to that support?
Secured financing is a standardised form of lending in India and is generally encouraged. India adopted the Basel III guidelines in 2019, which provide parameters for credit risk mitigation by way of collateralised secured financing. Thus, banks offering collateralised lending facilities are expected to follow stringent capital adequacy norms for liquidity management. As regards the Indian government's schemes for lenders, the government has recapitalised and resuscitated various public sector banks to further expand their lending operations in India. Moreover, the central and state governments release targeted secured financing schemes for specific sectors (e.g., micro, small and medium industries) or specific events (e.g., COVID-19). Recently, the Stand-Up India scheme was introduced by the government to encourage banks to facilitate collateralised bank loans for setting up greenfield projects in India.
2 Secured finance market
2.1 How mature is the secured finance market in your jurisdiction? Are the majority of the transactions purely bilateral and domestic, or is there an international syndicated market for secured financing under your domestic law?
India is a mature market for secured lending. Depending on the nature and value of financing, the lending structures vary and include domestic, bilateral and syndicated financing. Syndicated lending is a common form of lending through both domestic lenders and international lenders. All construction and infrastructure projects have national or international syndicated lending, including through foreign banks and international organisations. In view of the increasing focus of the lending institutions in India to expand the share of non-Indian corporates in credit portfolios, international syndicated finance in India has seen immense growth. See question 8.2 for further details on the procedure and relevant regulatory guidance for syndicated finance in India.
2.2 Are there any bodies in your jurisdiction/region that promote the use of standard documentation and best practices in secured finance transactions? If so, are these widely used and followed?
Indian Banks Association has issued standard facility documentation for consortium lending, which is used by the majority of Indian public sector banks. For bilateral finance agreements, lenders often adhere to their own distinct forms; however, there are certain common stipulations among banks. For syndicated transactions, private sector banks often choose to use the paperwork mandated by the Asia Pacific Loan Market Association. Most large business finance deals are negotiated and the paperwork is revised appropriately.
2.3 What significant secured finance transactions have taken place in your jurisdiction in recent times?
The Indian landscape in terms of financing transactions has evolved significantly. From time to time, financial institutions issue large volumes as loans for secured financing. Important transactions entered in recent times include the following:
- REC Limited (previously (Rural Electrification Company) secured $1.18 billion from a consortium of seven national and international banks (Axis Bank, Bank of Baroda, Bank of India, Canara Bank, DBS, MUFG and SMBC) acting as mandated lead arrangers and bookrunners, making it the single largest syndicated loan obtained by an Indian financial institution in the international bank loan market.
- Greenko raised $664 million from Power Finance Corporation (a state-owned enterprise) to build a 1200 megawatt off-river energy storage project in Andhra Pradesh, India.
- In acquisition financing, Blackstone Group raised $1.1 billion in investment from a consortium of 13 banks, making it the largest private equity transaction in India.
3 Secured finance providers
3.1 Who are the key providers of secured finance in your jurisdiction? Is there a thriving alternative credit market (beyond bank lenders)?
Large corporate financing transactions are primarily funded by the bigger Indian banks and international banks.
However, India has a multi-pronged and diverse supply side to secured financing.
|Corporate secured finance|
|Regulated financial institutions||
|Government-backed/state-owned/public sector undertakings||
|Retail secured finance|
|Regulated financial institutions||
The next leap in secured finance in India is the rapid expansion of the alternative credit market. Supply chain finance and factoring of bills – especially for micro, small and medium enterprises (MSMEs) – is on the rise. Since supply chain finance is not regulated, many business-to-business e-commerce websites, mobile application-based aggregators and so on are also providing transaction data driven supply chain finance.
Where continued financing is contemplated for international transactions with payments structured in foreign currency or assets located abroad, the regulated financial institution should advisably be established in the International Financial Services Centres Authority of India.
3.2 What requirements and restrictions apply to secured finance providers in your jurisdiction? Do these vary depending on (a) the type of entity; (b) whether the lender is domestic or foreign?
In order to undertake secured financing activities in India on a full-time basis, the relevant entity must obtain a certificate of registration from Reserve Bank of India (RBI). The eligibility criteria for obtaining such a licence differ based on the type of secured finance. For example, NBFCs may undertake only equipment, vehicle or machinery finance. NBFCs (factor) can undertake the business of factoring. Syndicated lending is generally undertaken by scheduled commercial banks and NBFCs (upper layer). Each such entity is subject to different capital adequacy requirements (called 'net owned fund' in India) and other governance requirements.
The applicable regulations also differ depending on the type of borrower. For example, relaxations are available for loans to MSMEs. The requirements and restrictions also differ based on the type of collateral. For example, separate norms apply to gold loans and housing projects for low-income groups.
Foreign lenders need not register in India to lend to Indian entities or projects. However, the disbursement and collection of loans are subject to the exchange control laws of India (i.e., the Foreign Exchange Management Act, 1999). The main regulations in this regard are the Foreign Exchange Management (Borrowing and Lending) Regulations 2018 and the rules and regulations framed thereunder. RBI has recently liberalised the external commercial borrowings framework whereby most foreign lending does not require government approval. To facilitate the enforcement of the security interest, it is advisable to structure this under Indian law. However, awards arising from international commercial arbitrations are enforceable under the New York Convention and the Geneva Convention.
Although factoring is regulated in India, activities that are excluded from the definition of 'factoring' are considered supply chain finance and do not require regulatory registration.
4 Secured finance structures
4.1 What secured finance structures are most commonly used in your jurisdiction?
Loans: One of the primary secured finance structures offered in India is through loans. These loans may be backed by:
- collateral-based guarantee; or
- personal guarantee.
The assets backing such loans vary and include:
- plant and machinery;
- stock in trade;
- fixed deposits;
- gold and bullion;
- mutual funds; and
- other securities.
Project finance: This is another secured finance structure. It involves financing for the construction of energy, infrastructure or industrial projects (e.g., power plants, renewable power projects, pipelines, railroads and airports). In such cases, it is common for the project assets to be held by a Special Purpose Vehicle (SPV) which primarily executes the project and receives all payments for building, operating and in many cases transferring the project to the government. The SPV is the creditor in such transactions.
Bonds and debentures: Secured bonds and debentures are very common in India. Funding through bonds and debentures saw a surge between 2020 and 2022 owing to the COVID-19 situation and the uncertainty of the market.
Financial leases: Financial leases and hire purchases are common in the aviation and energy sectors for the purchase of aircraft, turbines and spares.
Supply chain finance and factoring: These are becoming the most common modes of finance for MSMEs for working capital requirements.
4.2 What are the advantages and disadvantages of these different types of structures?
Syndicated lending and project finance are mainly undertaken through regulated financial institutions. Such financial institutions need prior registration with Reserve Bank of India (RBI) to operate in India. Their operations and governance are subject to the detailed guidelines of RBI. The interest rate in India for corporate secured finance is not regulated and is commercially negotiated along with all other terms and conditions.
Project finance is a popular mode of finance in India which has increasing infrastructure needs and expansion plans. Since the concessionaire in these projects is the government, this type of finance finds many willing backers, as exchequer payment is considered a sovereign guarantee. However, if the project is delayed or halted, the most common mode of recovery is to commence insolvency proceedings against the corporate creditor, which takes a timeline of 365 to 500 days, with a recovery rate of 45% to 50%.
Financial leases are not regulated in India. Most compliance is on the borrower's end. For example, the export of aircraft on a wet lease or dry lease basis requires the prior approval of the director general of civil aviation. Due to the liberalisation of the external commercial borrowings' framework by RBI in 2018, no prior approval is required for foreign lender-based financial lease transactions, as long as the terms and conditions – such as all-in-cost ceilings – are met.
Secured bonds and debentures are also preferred structures because in such cases:
- the lender has payment preference over other secured lenders, and
- the enforcement asset will be held in trust from the commencement of the transaction.
4.3 What other factors should parties bear in mind when deciding on a secured finance structure?
The structuring and priority of debt are commercially negotiable in India and are not subject to any legally prescribed hierarchy unless the corporate creditor goes into insolvency. It is important to contractually negotiate the priority of debt among lenders in syndicated lending.
Further, in mezzanine finance, it is common internationally for a lender to lend to a holding company instead of a subsidiary. However, lending to a holding company is subordinate to lending directly to the subsidiary, so it is advisable to lend directly to the subsidiary with the creditor or its holding company providing adequate collateral.
Despite obtaining other securities, obtaining a personal guarantee from the promoters is a common business practice in India.
In international asset finance, especially financial leases, sale and leaseback is the most common structure. Apart from transaction structuring, international tax structuring on the basis of favourable provisions of direct tax avoidance agreements is advisable.
5.1 What types of security interests are available in your jurisdiction? Which are most commonly used and which are recommended (if different)?
Loans in India may be secured via the following security interests on tangible assets:
- pledges; and
The most common security interests in India are mortgages and hypothecation.
Mortgage: A mortgage is created by transferring an interest in immovable property in favour of the creditor for the purpose of securing a loan. The most common mortgage used in India is an equitable mortgage – that is, a mortgage by deposit of title deed; this is frequently used by banks for house loans.
Hypothecation: Hypothecation involves creating a charge on movable property in favour of the creditor, without physical delivery of the property. The property may be present or future.
While a mortgage is used for immovable property – such as land or plant and machinery – hypothecation is used for movable property such as cars and stocks.
5.2 What are the formal, documentary and procedural requirements for perfecting these different types of security interests (ensuring that they are enforceable against debtors and third parties)?
Security interests must be documented by the parties in order to ensure their enforceability in the courts of law. Agreements in the form of a deed of hypothecation, mortgage deed, pledge deed and so on are executed between the borrower and the lender.
In order to ensure and ease the enforceability of security instruments in the courts of law, the same must be stamped as per the Stamp Act, 1899.
Additionally, notary and/or registration requirements may apply. The notary officer should be appointed under the Notaries Act, 1952 and registration should be undertaken as per the Registration Act, 1908.
The creation of security interests may also require publication by the holder and/or registration with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India and/or an information utility.
Certain security interests, such as a pledge of shares, may require actual delivery – physical or by instruction – of the title documents with the creditor to effectuate it; while others may require registration with a specific authority, such as the regional transport office for hypothecation over a motor vehicle.
Failure to register with some of the aforementioned authorities may not affect the contractual obligation of repayment, but it will not secure the collateral from competing claims and may even subject the entity to a penalty for non-registration.
5.3 What are the main types of collateral used as security in your jurisdiction and what specific points should be borne in mind regarding each?
Both movable property (e.g., vessels, raw materials, inventory of shares, intellectual property, licences, contractual rights and know-how) and immovable property (e.g., land, buildings, plant and machinery) may be used as collateral to establish a security interest in favour of the lender.
For immovable property, the lender must ensure that the party extending the security has actual ownership of the property (in possession of the title deed), as the creation of certain security interests on immovable property that is yet to be acquired is generally not allowed.
For movable property, the lender will be put in possession of the property physically or symbolically (e.g., storing goods in a warehouse with the keys to the warehouse in the possession of the lender).
A proper valuation of all types of property should be undertaken prior to, and periodically during the subsistence of, the loan. This is especially true for intangible property, the value and/or fluctuation of which is not always obvious. Moreover, clarification should be sought as to whether a certain intangible property can be used as collateral.
5.4 Can security be taken over property, plant and equipment in your jurisdiction? If so, how?
Yes, security can be taken over property, plant and equipment in India.
Land is considered immovable property. So are plant and equipment too when rooted or embedded in the earth, or attached to something that is so embedded, for the purpose of providing permanent beneficial enjoyment of the embedded thing; otherwise, the plant and equipment are regarded as movable property.
A security interest over land is primarily created under a mortgage. Plant and equipment may also be included in the mortgage, irrespective of whether they are movable or immovable.
A security interest on plant and equipment only (which are movable in nature) is more commonly created by:
- executing a hypothecation deed, which creates a charge on the property in favour of the creditor; or
- pledging the plant and equipment in favour of the creditor.
However, the movable plant and equipment may also be mortgaged, by virtue of the common law principles of equity and natural justice; this is sometimes done because mortgages (depending on the type) often provide better rights to creditors, such as the right to title and/or beneficial interest.
5.5 Can security be taken over cash (including bank accounts generally) and receivables in your jurisdiction? If so, how?
Yes, security can be taken over cash (including bank accounts generally) and receivables in India.
A security interest over cash deposits and receivables can be created by way of an English mortgage (executable by a registered deed) or hypothecation; and receivables can also be assigned in favour of the creditor.
When assigning receivables, it should be ensured that:
- the underlying contract allows for the creation of a security interest over receivables; and
- the assignment itself is evidenced by way of an instrument in writing.
For other financial instruments, a security interest is usually created by way of a pledge, which is primarily governed by the Indian Contract Act, 1872 and is also proved by a written agreement. All instruments creating security should be duly notarised, stamped and registered.
5.6 Can security be taken over company shares in your jurisdiction? If so, how?
Yes, security can be taken over company shares in India.
Company shares can be held either in physical form (as evidenced by a physical share certificate) or in dematerialised form (held in a dematerialised account with a depository); both types can be used as collateral for securing a loan, usually by way of a pledge. For shares in physical form, the share certificate may be specifically delivered to the creditor; and for shares held in dematerialised form, the pledge in favour of the creditor should be recorded with the depository, which will mark the charge in its records, proving constructive delivery. If shares are pledged before they have been issued, they must be delivered to or in favour of the creditor after they are issued.
Pledges are governed primarily by the Indian Contract Act, 1872; but there are other laws that must be adhered to where the collateral being pledged comprises company shares.
A security interest over the shares of listed companies should be created in compliance with the applicable regulations of the Securities and Exchange Board of India. Additionally, depositories may have their own bylaws, with conditions and procedures that must be abided by when pledging dematerialised shares.
Furthermore, the shares of Indian companies can be pledged in favour of overseas banks only as prescribed under the Foreign Exchange Management Act, 1999 and the rules made thereunder.
5.7 Can security be taken over inventory/moveables in your jurisdiction? If so, how?
Inventory financing involves using the inventory of unsold stock as collateral for a loan. The lender usually conducts an independent valuation of the stock to be used as security and then approves or rejects an application for a loan on the basis of such valuation and the credibility of the stock.
Such a loan is usually short term in duration and requires the submission of periodic stock details to the lender, on the basis of which the lender may vary the borrowing limit.
Please also see questions 5.2 and 5.3.
5.8 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a security interest? Do these vary depending on the type of assets used as collateral?
As mentioned in question 5.2, to execute documents in India, a notary, stamp duty and/or registration requirements may apply. The notary officer should be appointed under the Notaries Act, 1952, who is entitled to a fee for his or her services. Stamp duty must be paid as per the Stamp Act, 1899 or the concerned state enactment. The rates of stamp duty vary with each state; the rates may be fixed for different values or maybe ad valorem to the value of the transaction. Registration requirements and fees can be found in the Registration Act, 1908, and should be undertaken as per its provisions.
Additionally, fees may apply to register with various authorities, which is required in some cases when creating a security interest. Examples include registration with the Registrar of Companies when creating a charge on a company's assets; the fees for this will vary depending on the share capital of the company or other factors for companies without share capital. Other registrations include those with:
- the regional transport offices for motor vehicles;
- the controller of patents for patents;
- the Central Registry of Securitisation Asset Reconstruction and Security Interest; and
- information utilities.
The fees generally differ based on:
- the type of asset being used as collateral;
- the value of the asset; and
- the loan amount itself.
5.9 What are the respective obligations and liabilities of the parties under the security documents?
Borrowers must repay the loan to the creditor as per the timeline detailed in the loan agreement. In the event of a borrower's default in repayment, the right to obtain repayment via alternative means accrues to the creditor. Subject to the security documents in its favour, the creditor may dispose of the collateral by means of which the loan was secured by the borrower in lieu of direct repayment.
Additionally, if the loan was guaranteed by any sureties, the creditor may approach such sureties for repayment of the loan to the extent of a surety's liability.
Often, the creditor will ensure that it has the right under the loan agreement to transfer all or any part of the creditor's rights and obligations under the loan agreement, security and/or other documents to another party, which may recover repayment instead of the creditor.
5.10 What other considerations should be borne in mind by all counterparties when perfecting a security interest in your jurisdiction?
The following considerations should also be borne in mind by all counterparties when perfecting a security interest in India:
- Prior to creating a security interest on any type of property, the creditor should inquire as to whether the party giving the security has title over the property in the first place. In particular, the creation of a mortgage on a property that will exist or be owned by the mortgagee in the future is not allowed.
- The creditor should also inquire as to whether any prior charge exists over the property meant to be used as collateral.
- In addition to creating a security interest over the property of the borrower, a creditor should enter into contracts of guarantees with the borrower's sureties to further secure the loan if the borrower is unable to discharge the loan amount by itself.
6.1 What types of guarantees are available in your jurisdiction? Which are most commonly used and which are recommended (if different)?
As per the Indian Contracts Act, 1872, a 'guarantee' is a contract among the parties to perform the promise or discharge the liability of a third party in case of default by it.
The primary concept of a guarantee or surety is an undertaking to indemnify creditors if the principal debtor fails to fulfil its promise.
The Indian Contract Act, 1872 provides for two types of guarantees:
- a specific guarantee, which is a guarantee for a specific transaction; and
- a continuing guarantee, which is for a series of transactions.
However, different types of guarantees exist in general, such as:
- counter guarantees;
- fidelity guarantees;
- performance guarantees; and
- bank guarantees.
In general, creditors in India require promoters to provide personal guarantees as a safeguard against instances of default by a company. Further, creditors also require personal guarantees from promoters as a condition of restructuring loans, based on the principle that shareholders should bear the first loss.
6.2 What are the formal, documentary and procedural requirements to perfect a guarantee?
There is no formal requirement for the creation of guarantees as per the Indian Contract Act, 1872, as both written and oral agreements are enforceable in the Indian courts. However, in order to ease the enforcement of a guarantee agreement or the liability against the surety, the industry practice is to execute the agreement in writing.
Further, a valid contract of guarantee should have the following characteristics:
- There should be a consideration;
- It should be satisfactorily proved; and
- It may be in writing or oral.
Section 127 of the Indian Contract Act provides that the consideration need not flow from the creditor and be received by the surety. Consideration between the creditor and the principal debtor is a valid and good consideration for the guarantee given by the surety.
Further, in order to perfect the guarantee, the parties to the guarantee agreement should execute the agreement on non-judicial stamp paper of a prescribed amount as per the Indian Stamp Act, 1899 or the Stamp Act of the concerned state of execution of the agreement.
In order to conduct guarantee business, banks must also follow the Reserve Bank of India's (RBI) Master Circular – Guarantees and Co-acceptances. This circular governs banks that provide guarantees on behalf of their customers for a variety of purposes.
6.3 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a guarantee?
There is no fee or income tax associated with the guarantee deed. However, the guarantee deed must be stamped and stamp duty will be levied on it.
As stamp duty falls under the jurisdiction of the Indian states, the rate and applicability of stamp duty vary from state to state.
Further, where the parties to the guarantee agreement are residents outside India, the agreement may be required to be stamped in India as per the applicable legislation to ensure its validity and enforcement.
6.4 What are the respective obligations and liabilities of the parties under the guarantee?
In general, in the case of an agreement of guarantee, three parties are involved:
- Surety: The party that gives the guarantee;
- Principal debtor: The person in respect of whose default the guarantee is given; and
- Creditor: The person to which the guarantee is given on behalf of the principal debtor.
Further, as per Section 128 of the Indian Contract Act, 1872, the liability of the surety is co-extensive with that of the principal debtor, unless the contrary is determined by the parties to the agreement.
The rights and obligations of the parties to an agreement of guarantee are as follows:
- Principal debtor:
- To timely pay the dues to the creditor; and
- In case of failure to pay the dues to the creditor and triggering of the guarantee obligation of surety, to reimburse the surety for the payment made on behalf of the principal debtor.
- To pay the due amount to the creditor in case of default by the principal debtor to pay the due amount in a timely manner; and
- To obtain the underlying security provided as collateral by the principal debtor to the creditor at the time of payment of the dues to the creditor.
- To receive timely payment of outstanding dues from the principal debtor or surety, as the case may be; and
- To provide the collateral to the surety upon receipt of due payment from the surety.
6.5 What other considerations should be borne in mind by all counterparties when taking the benefit of a guarantee in your jurisdiction?
First, the surety should know that it will be still responsible even if the creditor has used up all of its options against the main debtor. If there is no special equity, the surety has no right to stop a creditor from taking action against it because the main debtor is solvent or because the creditor may be able to obtain relief against the main debtor in another proceeding.
Since the surety's liability is the same as that of the main debtor, it is joint and several with that of the main debtor. Thus, unless it is clear that the creditor wants to pursue the surety instead of the main debtor, it is up to the creditor to decide whether to pursue the surety or the main debtor. A guarantor can, of course, be held responsible for the debt.
Furthermore, banks conducting guarantee business must follow the RBI Circular on Guarantees. Paragraph 2.1 of the circular sets out the general guidelines which banks must consider before acting as a surety.
7 Financial assistance
7.1 What requirements and restrictions apply with regard to the provision of financial assistance in your jurisdiction? What specific implications do these have for secured finance transactions?
In this context, 'financial assistance' is understood to mean loans, grants and guarantees.
In light of the above, and pertaining to the issue of loans by the company, Section 185(2) of the Companies Act, 2013 provides that no company may directly or indirectly:
- advance any loan to its director or to any other person in whom the director is interested; or
- give any guarantee or provide security in connection with the loan taken by the director or any such other person.
However, the above can be done if the company:
- obtains the consent of the shareholders by special resolution; and
- ensure that the loans are utilised for its principal business activities.
Further, Section 186 of the Companies Act, 2013 provides that no company may make a loan or provide a guarantee to another person or body corporate for an amount exceeding the greater of:
- 60% of its paid-up share capital, free reserves and share premium; or
- 100% of its free reserves and securities premium.
If the company intends to advance any such loan in excess of its limits, prior approval through a special resolution passed at a general meeting is required. A company can also give a loan to a wholly owned subsidiary or a joint venture exceeding the threshold without a special resolution. Further, if the acquisition is made by a holding company of the securities of its wholly owned subsidiary, it can be bought, subscribed to or acquired exceeding the threshold without a special resolution.
8 Syndicated lending
8.1 Is the concept of an agent or trustee recognised in your jurisdiction? If not, how is security taken for multiple lenders?
Yes, the concept of an agent or trustee is recognised and is generally a part of the Indian lending system. An agent is a party that acts as a link between the borrower and the lender of the syndicated loan. The agent owes contractual obligations to both the borrower and the lender and provides them with information related to the exercise of the rights under the syndicated loan agreement.
The agent acts in an administrative capacity and not in a fiduciary manner. Indian law does not restrict an agent to acting on behalf of the syndicate members; therefore, Indian banks usually act in the dual capacity of facility agent and lender.
A trustee, on the other hand, handles the security of the assets of the borrower. The duties entrusted upon the security trustee are set out separately in a security trust deed or in the facility agreement and are governed by the Trust Act, 1882.
In India, trustee services are undertaken by both banks and other non-bank entities. However, if banks are acting as a trustee, there should be a clear division between the lending function and the trustee role. In order to regulate the role of the trustee in loan syndication, a committee on the secondary market for corporate loans has recommended that Reserve Bank of India (RBI) conduct a supervisory review from the perspective of conflict of interest against all entities performing the role of trustees in syndicated lending.
8.2 What requirements and restrictions apply with regard to syndicated lending in your jurisdiction?
At present, there is no statutory enactment specifically related to syndicated lending in India, so this is governed by the regulatory norms of RBI.
When resorting to syndicated lending, banks follow the RBI credit exposure norms. As per these exposure norms, the maximum exposure limit for banks is 15% of the capital funds for a single borrower. However, if the funds provided to the borrower are intended for the purpose of an infrastructure project, the maximum limit of exposure can be extended to 20%.
Subject to the RBI regulatory norms, the parties are free to structure the syndicated lending as per their requirements.
8.3 What other considerations should be borne in mind by all counterparties when engaging in syndicated lending in your jurisdiction?
In addition to existing regulatory norms, RBI has directed all banks engaged in consortium or multiple banking arrangements (including syndicated lending) to regularly share the credit information of respective borrowers with one another to ensure transparency and reduce fraud among lenders.
Further, as regulated entities, banks must also submit the details of borrowers to credit information companies to ensure the pooling of information with respect to borrowers in one place, for better disbursement and usage of information.
9 Taxes, charges and fees
9.1 What taxes and similar charges are levied in the secured finance context in your jurisdiction? Do these vary depending on whether the lender is a domestic or foreign entity?
Generally, corporate tax and goods and service tax (GST) are paid by the parties in a secured lending transaction.
Corporate tax is charged on the interest income of the interest recipient. If the lender is engaged in the business of lending money, the income derived from that business is taxed as income from a business. However, if the lender is not engaged in the lending business, interest income is taxed under the residuary head 'income from other sources.'
In addition to corporate tax, Indian companies are liable to pay a surcharge of:
- 7% of the tax amount if the taxable income exceeds INR 10 million; or
- 12% of the tax amount if the taxable income exceeds INR 100 million.
Additionally, a cess at a 4% on the aggregate amount of tax and surcharge is also levied.
Further, any processing charges, management charges and guarantee charges undertaken during secured lending are subject to GST. The standard rate of GST on these services is 18%.
9.2 Are any exemptions or incentives available?
The interest on a loan can be deducted by the borrower in the year it is accrued. A borrowing cost incurred wholly and exclusively for the purposes of the business of the company is deductible as allowable business expenditure incurred by the company, provided that it is not a personal or capital expense.
9.3 What other significant costs will be incurred by the counterparties in entering into a secured finance transaction? Do these vary depending on whether the lender is a domestic or foreign entity?
The other significant costs can broadly be classified into three categories:
- documentary taxes;
- registration fees; and
- notarial fees.
In India, borrowers must withhold tax (i.e., deduct tax at source) payable by a non-resident creditor on interest. Interest payable on a foreign currency-denominated loan is subject to a withholding tax of 20%, along with the applicable surcharge and a cess of 4%.
Interest on a rupee-denominated loan is subject to a withholding tax of 40%, plus applicable surcharge and 4% cess. The applicable surcharge can be 0%, 2% or 5%, depending on the income thresholds.
A registration fee is levied on registration of a mortgage with the relevant registrar of sub-assurances, depending on the state in which the property is located. Some states in India have a fixed registration fee while others have a percentage-based fee.
Documents such as declarations (in an equitable mortgage) and power of attorney (in pledge agreements and deeds of hypothecation) must be notarised. Notarisation fees are nominal.
Further, a court fee must also be paid if any proceedings relating to the security are initiated before a court.
9.4 What strategies might the counterparties consider to mitigate their tax and other liabilities in the secured finance context?
The taxes and fees outlined in question 9 are mandatory and cannot be mitigated by the counterparties when entering into secured lending agreements However, certain tax planning measures may be undertaken.
10 Judicial enforcement
10.1 In the event of default, what options are available to enforce a security interest or guarantee? Is self-help available in your jurisdiction in connection with the enforcement of security (if so, in what circumstances) or must enforcement action be pursued through the courts?
In India, security interests for secured loans are governed by the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI).
A loan is classified as sub-standard, doubtful and non-performing upon a delay in repayment for a period of 30 days, 60 days and 90 days, respectively, from the due date.
In order to enforce a security interest under SARFAESI, the secured creditor must classify the assets in question as non-performing assets in its books of account and as per Reserve Bank of India (RBI) regulations. The value of each such loan classified as non-performing must exceed INR 100,000. Under SARFAESI, a secured lender can proceed to enforce a security interest against the borrower even without the court's intervention after providing due notice of 60 days for repayment. If the defaulting party fails to make the payment or contest the notice, the secured creditor is endowed with all rights to take possession or take over the management of the secured assets to realise its pending dues. This is a regulated method of self-help available to secured creditors enabling them to liquidate the assets in case of failed payment of outstanding dues.
If the secured creditor cannot enforce the security interest through these mechanisms, it may:
- approach the debt recovery tribunals (DRTs) established under the Recovery of Debts and Bankruptcy Act, 1993, to adjudicate and recover debts due to financial institutions; or
- initiate action per the alternative dispute resolution mechanisms specified in the financing documents.
10.2 How long does the enforcement process generally take and what steps does this typically involve? Do these vary depending on any applicable requirements or restrictions (eg, requirement for public auction or regulatory consents)? Do these vary depending on whether the lender is a domestic or foreign entity?
Under Section 17(5) of SARFAESI, the DRT must deal with applications for measures to recover secured debts and dispose of them within 60 days. From time to time, this period may be extended to a maximum of four months and the DRT must record the reason for this in writing. However, if the DRT does not dispose of the application within four months, the secured creditor may apply to the Appellate Tribunal (Debt Recovery Appellate Tribunal) to direct the DRT on the expeditious disposal of the pending application.
A secured creditor can also proceed with a public auction in accordance with the regulatory consent under the Security Interest [Enforcement] Rules 2002 through an authorised officer, who will take possession of the assets, conduct a valuation of secured assets and issue a certificate of sale.
The enforcement process for secured creditors does not vary for foreign lenders; Indian laws govern all security documents if the assets over which the security interest is created are within India's territorial limits.
10.3 What other considerations should be borne in mind when enforcing a security interest or guarantee in your jurisdiction?
In enforcing a security interest or a guarantee, a secured creditor should conduct prior due diligence to determine the benefits or the ease of liquidating the assets depending upon the nature of the assets (e.g., perishable or immovable).
A secured creditor can also commence insolvency proceedings in the event of default. However, upon the commencement of insolvency proceedings, the asset will be transferred to the liquidator and become an entity in the pool of assets available for liquidation and payment of the dues. In such a case, the secured creditor should weigh the benefits of adding the collateral to the pool of assets against liquidating the collateral individually.
In recent years, RBI has directed recognised banking institutions to initiate insolvency proceedings against a select few debtors. It has also changed its stressed asset resolution regulations by instructing banking entities to commence a resolution process on the occurrence of a payment default.
Moreover, in the case of security interests created through hypothecation or pledge as per the Indian Contract Act, 1872, there may be difficulties in practical execution, as the secured creditors do not have possession of the secured assets.
10.4 Are direct agreements with contractual counterparties well understood in your jurisdiction?
Yes. Such agreements are common and well-understood.
10.5 What other avenues are available to a lender to safeguard its position in connection with security or guarantees?
SARFAESI empowers a secured creditor to take possession or control of the assets with the assistance of the Chief Metropolitan Magistrate or District Magistrate within whose jurisdiction the secured asset is located.
Further, if the secured creditor is not satisfied with the proceeds of the sale of the collateral, it can file an application before the DRT that is competent to recover the balance amount from the borrower.
In addition to these judicial remedies, a secured creditor in whose favour a secured interest (including mortgage or hypothecation) has been created may relinquish its security interest under Section 52 of the Insolvency and Bankruptcy Code 2016 by submitting its claim to the liquidator within 30 days of the date of liquidation and claiming the total value of the assets.
Finally, the secured creditor can avail of an institutional alternative, such as the sale of non-performing assets to asset reconstruction companies, which are regulated and supervised by RBI, to accelerate the process of resolution and the recovery of secured assets by enforcing the security interest.
11.1 How (if at all) do bankruptcy proceedings impact on the enforcement of security by a creditor?
Bankruptcy proceedings in India are governed by the Insolvency and Bankruptcy Code, 2016, which enables both financial lenders and operational lenders to initiate insolvency proceedings against defaulting debtors. At present, the code applies only to corporate debtors (i.e., limited companies and limited liability partnerships) as defined under Section 2 of the code.
Furthermore, Part III of the code provides that insolvency and bankruptcy processes for unincorporated entities and natural person debtors are supervised by the debt recovery tribunal under the Recovery of Debts and Bankruptcy Act, 1993.
It is settled law in India that secured creditors are not barred from initiating parallel proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) and the Insolvency and Bankruptcy Code 2016 through the pronouncement of the National Company Law Appellate Tribunal in Punjab National Bank v Vindhya Cereals Pvt Ltd Company Appeal (AT) (Insolvency) 854/2019.
Bankruptcy proceedings have an impact on the enforcement of security by a secured creditor because once an application is admitted by the adjudicating authority under the Insolvency and Bankruptcy Code for the initiation of the corporate insolvency resolution process, a moratorium will commence and any proceedings initiated under the SARFAESI in furtherance of enforcing the secured interest will cease.
Moreover, a secured creditor that has taken physical possession of a secured interest before the commencement of insolvency and bankruptcy proceedings must hand over the same to the resolution professional upon commencement of the moratorium. Any action to foreclose, recover or enforce any security interest created by the corporate debtor stands suspended under Section 238 of the code.
11.2 In what circumstances can antecedent transactions be unwound for preference? What other similar measures apply in this regard?
As per the Insolvency and Bankruptcy Code, there are four types of excluded transactions:
- preferential transactions;
- undervalued transactions;
- transactions that defraud creditors; and
- extortionate transactions.
Avoidable transactions should have been entered into within the prescribed relevant time or look-back period (i.e., the timeframe within which a resolution professional can go back to scrutinise an expected avoidable transaction).
- Preferential transactions: A resolution professional can apply for the recovery of transactions due to preferential treatment under Section 43 of the Insolvency and Bankruptcy Code if the transaction entered into by the corporate debtor favoured a creditor, surety or guarantor on account of old financial debts owed by the corporate debtor. Such transactions entered into by the corporate debtor within two years of the initiation of insolvency can be overturned by the resolution professional. The aim, in principle, is to put the creditor, surety or guarantor into a more beneficial position than it would have been in under the old transaction.
- Undervalued transaction: The resolution professional can approach the adjudicating bodies to obtain a declaration of the undervalued transaction as void. This can be done if the transaction made by the corporate debtor by way of gift or payment of consideration is significantly less than the consideration paid by the corporate debtor for the asset or acquired asset, under Section 45 of the code. The look-back period is two years from the date of initiation of the insolvency process.
- Defrauding creditors: Section 49 of the code applies where the corporate debtor sold off the property with the aim of disentitling claimants or creditors. The essence of this provision is to safeguard the interests of such persons in relation to the claim.
- Extortionate credit transaction: An extortionate transaction is one in which the debtor had to make an exorbitant payment to the creditor and whose terms are unconscionable under the Contract Act.
11.3 Are any types of entities excluded from the bankruptcy regime in your jurisdiction? If so, what alternative regimes apply?
Since its inception, the Insolvency and Bankruptcy Code 2016 has excluded financial services providers such as banks, non-banking finance companies (NBFCs) and insurance companies. The reason behind this exclusion was the involvement of public money. However, the government had extended the scope of the rules on the applicability of the code to various financial services providers from time to time. As a result, adjudicating forums such as the National Company Law Tribunal and the National Company Law Appellate Tribunal have held that there is no blanket exclusion of NBFCs and the exemption is limited to entities with an asset size of INR 5 billion.
12 Governing law and jurisdiction
12.1 What law typically governs secured finance agreements in your jurisdiction? Do any specific requirements apply in this regard?
Secured finance agreements in India are governed by the Indian Contracts Act, 1872, the principal contract law of the country. All of the roles and responsibilities of the parties to contracts are decided as per the mutual discussion of the parties, unless these would otherwise be contrary to the provisions of other applicable laws or inherently illegal, which would make the contract void or voidable, depending on the nature of the breach.
There are no specific provisions governing secured finance agreements in India. However, Reserve Bank of India issues regulations on the authorised borrowing of Indian corporations from foreign entities on an as-needed basis.
12.2 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application? Are submission to jurisdiction provisions that operate in favour of one party only enforceable?
The stance on the choice of foreign law or jurisdiction is evolving in India. The Delhi High Court has issued progressive judgments such as that in Dholi Spintex Pvt Ltd v Louis Dreyfus Company India Pvt Ltd in 2020, emphasising the principle of non-interference of the Indian courts of law in matters of international arbitration and upholding the rights of Indian parties to choose a foreign law as the law governing the arbitration proceedings.
However, as India is not a signatory to any of the international treaties or conventions that regulate disputes arising from the international jurisdiction of courts or the recognition and enforcement of foreign judgments in transnational civil or commercial matters, the choice of law remains open to discussion.
A clause on submission to a particular jurisdiction is binding upon the parties in the spirit of the mutuality of the contract. However, if it can be shown that the essence of the contract was misrepresented, the aggrieved party may have the right to bring the matter before the court of competent jurisdiction in the country of the plaintiff.
12.3 Are waivers of immunity enforceable in your jurisdiction?
Yes, waivers of immunity are enforceable in India against state entities when involved in private or commercial undertakings. Time and again, states or state authorities have been held liable in various circumstances where their acts call for liability and thus their immunity has been waived in such situations.
12.4 Will foreign judgments or arbitral awards be enforced in your jurisdiction? If so, how?
Foreign judgments or arbitral awards can be enforced in India as long as they fulfil the conditions laid down by the laws in force.
The Code of Civil Procedure, 1908 dictates the procedure for the enforcement of foreign judgments in India. The code requires that:
- the foreign judgment or decree passed by the foreign court be conclusive in nature; and
- the case has been decided on the merits by a court of competent jurisdiction.
Section 13 of the code sets out the 'test of conclusiveness', which states that a foreign judgment will be conclusive as to any matter directly adjudicated between the same parties, or between parties through whom they or any of them claim, unless it:
- lacks merits;
- was not pronounced by a court of competent jurisdiction; or
- does not fulfil any other condition as provided.
Further, India is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 and the Geneva Convention on the Execution of Foreign Arbitral Awards, 1927.
The Arbitration and Conciliation Act of 1996 governs the enforcement of both domestic and foreign arbitral awards. This act is based on the UNCITRAL Model Law on International Commercial Arbitration 1985. Part II of the Arbitration and Conciliation Act governs the enforcement of foreign arbitral awards: Chapter I deals with New York Convention awards and Chapter II deals with Geneva Convention awards. There are also specific provisions (e.g., Sections 44 and 49) dealing with the recognition and enforcement of arbitral awards under the Arbitration Act, 1996.
13 Trends and predictions
13.1 How would you describe the current secured finance landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
One of the key issues relating to asset-based loans in India concerned title verification of land. Land falls under the jurisdiction of the states in India and land records are maintained in local and regional languages. The format of these records is also very local and varies even within a state. To resolve this issue, the government of India launched the Digital India Land Records Modernisation Programme; as of March 2022, approximately 93% of government land records in India had been digitised. The insurance regulator now also allows general insurance companies in India to offer title insurance to mitigate the risk of title disputes in secured finance.
Reserve Bank of India (RBI) has also issued a framework for the securitisation of standard assets and for the sale of loan exposure. These guidelines are aligned with the Basel framework and with working papers released by the Bank of International Settlement and are thus aligned with international best practices in other jurisdictions.
In a progressive move, the central regulatory body RBI has been planning to allow peer-to-peer platforms to enter the secured lending landscape with the intention of diversifying risks emanating from having a completely unsecured book with relatively new-to-credit customers which have been outside the reach of legacy credit vendors.
The finance sector in India is becoming more tech-inclusive every day. The digitalisation of the banking sector is ubiquitous, suggesting that future legislative reforms will most likely be based on secure lending effected through technology. RBI recently released a concept note on central bank digital currency and it will be interesting to watch whether it becomes a security backing loan in India. In the meantime, in September 2022, RBI released Guidelines on Digital Lending which aims to protect the data of borrowers using digital lending applications against misuse. These guidelines will have a significant impact on supply chain finance and factoring in India.
We foresee a boom in secured lending for infrastructure and construction as the world heads into a global recession, as India is predicted to remain largely unaffected by this trend. Additionally, overall infrastructure capital expenditure is estimated to grow at a compound annual growth rate of 11.4% from FY21 to FY26, driven by spending on water supply, transport and urban infrastructure.
India is currently the seventh largest civil aviation market in the world and is expected to become the third-largest civil aviation market within the next 10 years. Further, India has committed to a goal of 500 gigawatts (GW) of renewable energy capacity by 2030 (this currently stands at 150 GW). In light of this, we foresee increasing supplier-based international asset finance, aided by India's liberalised exchange control policies.
India is also promoting the capitalisation and restructuring of stressed assets and doubtful debt. RBI is in the process of revamping the framework for asset reconstruction companies, which are now also allowed to acquire assets during insolvency proceedings. Hence, we foresee an increase in the number of such companies and more takers for third-party funding of dispute resolution.
14 Tips and traps
14.1 What are your top tips for the smooth conclusion of a secured finance transaction in your jurisdiction and what potential sticking points would you highlight?
Our key takeaways for secured finance transactions are as follows:
- Have clarity on and commercially negotiate debt subordination.
- In the case of syndicated lending, establish dispute resolution boards and other standard operating procedures for decision making and dispute resolution both between lenders and between the lenders and the borrower. Such mechanisms should be targeted at problem solving rather than the enforcement of contractual rights.
- Ensure the clarity of contractual terms aligned with the principles on the transfer of property and relevant precedents in transactions such as mortgage, hypothecation and guarantees.
- Conduct title due diligence of immovable property with the help of local lawyers before proceeding with the transaction.
- When planning the transaction, verify the rights of the lender from its position in the insolvency framework, which would be the worst-case scenario in such transactions.
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.