I Overview

Although the Indian lending market was traditionally dominated by banks (both government-owned and private), a growing recognition by the Reserve Bank of India (RBI)2 and banks of increasing non-performing assets (NPAs) and stressed assets3 has put tremendous pressure on the banking sector. This resulted in a deceleration in growth of loans and advances (especially by public sector banks (PSBs)),4 although some rebalancing came about in 2017 and 2018 following a dip in issuance of commercial papers and corporate bonds (typically picked up by non-banking financial companies (NBFCs)).5

Simultaneously, with efforts to discourage large borrowers from depending solely on the banking system for funding, the RBI and the government have attempted to open up new lending avenues for Indian corporates. New lending entities (such as foreign portfolio investors (FPIs) and alternative investment funds (AIFs)) have significantly increased their share in the market. The RBI is now focused on attracting long-term and stable funding from FPIs, through measures such as the 'voluntary redemption route', which exempts FPIs from regulatory lock-ins for individual investments if they commit to reinvesting their pool of funds in India for a specified period. Since the defaults by Infrastructure Leasing & Financial Services Limited (IL&FS) on various debt obligations in 2018, NBFCs have been facing liquidity issues, with the cost of borrowing increasing steeply for the sector, as well as rating downgrades and debt defaults. The RBI has now issued draft guidelines on liquidity risk management for NBFCs,6 to prevent any systemic crisis in the sector.

With Indian corporates looking for new (and cheaper) sources of funding, avenues such as 'masala bonds' (i.e., rupee-denominated bonds issued offshore by Indian corporates) have seen some success. The RBI has also made certain relaxations in the existing external commercial borrowing (ECB) framework,7 benefiting corporates looking to raise foreign currency loans to meet their capital needs. The Insolvency and Bankruptcy Code 2016 (the Insolvency Code) is proving to be a game-changer for corporate debt in India.

The Insolvency Code excludes corporates in the financial services sector from its scope. While the Financial Resolution and Deposit Insurance Bill 2017 (the Bill) was tabled before the Indian parliament for specified categories of financial service providers in distress, the Bill was withdrawn in the monsoon session of Parliament in 2018.

In October 2017, the government announced the recapitalisation of certain PSBs through the injection of capital by the government and directly from the markets. As at November 2018, 1,288,610 million rupees had been injected into various PSBs.8 The capitalisation was expected to provide an impetus to lending in India; however, the impact has not been immediately apparent.

Indian creditors do not usually adopt Loan Market Association (LMA) or Asia Pacific Loan Market Association (APLMA) standard documentation, and each creditor may use its own format of loan documents.9 Indian loan documentation is typically covenant-heavy on the borrower (especially in a special purpose vehicle or project financing).


i Regulation of lenders

Banks in India are heavily regulated, with RBI guidelines governing interest rates, the extent of exposure to corporate groups, information sharing and reporting requirements, and other prudential aspects. Indian regulations permit NBFCs to engage in the lending business if they register with the RBI, although NBFCs are subject to lesser scrutiny. The RBI has introduced several measures aimed at reducing regulatory arbitrage between banks and NBFCs.10 The RBI and the Securities and Exchange Board of India have introduced lightly regulated lending vehicles such as AIFs and FPIs to widen the Indian investment market. Certain changes have been introduced to the FPI regime, which are detailed in Section VII.

ii Restructuring schemes

On 7 June 2019, the RBI introduced a new 'Prudential Framework for Resolution of Stressed Assets', to replace an earlier framework that was struck down by the Supreme Court. The circular mandates lenders to enter into an intercreditor agreement and agree on a plan for debt restructuring or resolution immediately on the occasion of a payment default, and gives benefits to lenders who refer borrowers under the Insolvency Code. Decisions are made by a specified majority of lenders, and bind all lenders.

iii Insolvency Code

With the objective of effecting a complete overhaul of the earlier insolvency regime and instituting a creditor controlled process for the revival of defaulting companies (aligned with the approach in administration in the United Kingdom), the efficacy and the nuances of the Insolvency Code are currently being tested before various courts and tribunals, with over 1,484 companies currently undergoing a resolution process under the Code. The RBI has also been given the power to issue directions to banks to initiate insolvency resolution in respect of borrowers.11

Several important positions have already been taken by courts since the commencement of the Insolvency Code, including recent judgments clarifying that apportionment of payments to financial creditors and operational creditors under a resolution plan are to be done on an equal and proportionate basis.12

Several important amendments have also been made to the Insolvency Code to address the various issues that have cropped up during its implementation. One significant change was the inclusion of Section 29A,13 which introduced stringent eligibility criteria in respect of prospective resolution applicants to a distressed company (i.e., those seeking to submit resolution plans in respect of the insolvent entity), which prohibited promoters and companies with an unclean record or bad history in the credit market (on a worldwide basis), from bidding for the insolvent company.14 The disqualification criteria under Section 29A are also triggered where a disqualified entity or person is a 'connected person'15 of the resolution applicant. Other significant amendments include a provision that permits withdrawal from the insolvency process, with the approval of 90 per cent of the committee of creditors,16 and doing away with the separate classification for 'dissenting financial creditors', who were earlier eligible to receive the liquidation value of their debt in priority to financial creditors that voted in favour of the resolution plan.17

The treatment of convertible and structured instruments in an insolvency proceeding remains to be tested. Further, the provisions of the Insolvency Code that allow operational (trade) creditors to file proceedings against borrowers for smaller defaults have caused many creditors to strengthen cross-default clauses in loan documents, while also imposing stricter covenants on borrowers with respect to trade creditors.

iv Constitution of the NCLT

The NCLT and the National Company Law Appellate Tribunal (NCLAT) were constituted in June 2016. These are meant to be solely responsible for all company law disputes, assuming powers previously exercised by high courts, the Company Law Board and the Board of Industrial and Financial Reconstruction. The NCLT also functions as the adjudicating authority for all matters under the Insolvency Code (with the NCLAT functioning as the appellate authority).

v Basel III

Basel III implementation has commenced in a staged manner in India, with full implementation expected by 1 January 2022. Though it is generally expected that implementation of Basel III may increase lending rates, unlike LMA and APLMA jurisdictions, domestic creditors have not introduced a concept of 'increased costs' for Basel III implementation in loan documentation. Foreign creditors in India, however, adopt the LMA standard of reserving a right to claim increased costs from the borrower, subject usually to negotiated caps.

vi Sanctions and anti-corruption laws

In recent times, based on recommendations of the Financial Action Task Force and the Basel Committee, the RBI has issued various guidelines on compliance by banks with these standards18 in respect of monitoring accounts and reporting of suspicious activity.

Banks are also now subject to enhanced 'know your customer' (KYC) requirements, which are tailored to meet these guidelines. Most domestic banks require borrowers and security providers to complete a comprehensive KYC process as a condition precedent to disbursement. International banks, as well as domestic banks with a presence in the United States and the European Union, may additionally require borrowers to comply with requirements of the Office of Foreign Assets Control regime or the relevant EU regime. Typically, creditors do not look to extend compliance requirements beyond these regimes (except in transaction-specific cases).

Given the recent spate of financial frauds,19 the government introduced the Fugitive Economic Offenders Act 2018, which came into force on 21 April 2018. The legislation is intended to lay down measures to empower Indian authorities to attach and confiscate properties and proceeds of crime (in or outside India) associated with economic offenders who have left India or are refusing to return to India to avoid prosecution. The efficacy of these measures is currently being tested.

vii Marginal cost of funds-based lending rate

While RBI guidelines permit banks and NBFCs to determine interest rates linked to market-determined external benchmarks (such as the London Interbank Offered Rate), most domestic lenders adopt the 'marginal cost of funds-based lending rate' (MCLR). In April 2016, the RBI replaced the existing interest rate system with the MCLR. Under the MCLR, the lending rate is also pegged against changes in rates and costs of borrowing by banks, including the repo rate. The the final lending rate offered to individual borrowers includes a 'spread' over and above the MCLR.


i Withholding tax

An Indian borrower is required to withhold tax payable by a non-resident creditor on interest. Interest payable on a foreign currency-denominated loan is subject to a withholding tax of 20 per cent (plus applicable surcharge and cess),20 whereas interest on a rupee-denominated loan is subject to withholding tax of 40 per cent (plus applicable surcharge and cess). A lower withholding tax rate of 5 per cent (plus applicable surcharge and cess) may be available where an Indian company avails itself of a long-term foreign currency loan, or issues long-term foreign currency- or rupee-denominated bonds, subject to fulfilment of certain prescribed conditions linked to the Indian exchange control regulations.21 Interest on loans to Indian borrowers outside India for their offshore businesses is not subject to withholding tax in India, whereas loans taken out in India are subject to withholding tax.

Indian tax laws also offer lower withholding tax rates to certain foreign investors who qualify as FPIs. Generally, FPIs suffer a withholding tax of 20 per cent (plus applicable surcharge and cess) in the case of interest from any securities. However, a lower withholding tax rate of 5 per cent (plus applicable surcharge and cess) applies in the case of payment of interest on rupee-denominated bonds of an Indian company.22

Non-resident creditors and FPIs may also be eligible to avail themselves of beneficial tax rates available under India's vast array of double tax avoidance agreements (DTAAs). Certain DTAAs exempt interest income from tax, should the interest be paid to certain specified creditors (such as the government, specified governmental agencies, financial institutions, and statutory or local authorities). The rate of withholding tax on interest varies from 7.5 per cent to 40 per cent as per the DTAAs executed by India.

The introduction of the Goods and Services Tax in India may impact the cost of lending, since increased service tax will be leviable on banking services.

ii Documentary and transfer taxes

Documentary (or stamp) tax is payable on every document signed in India or signed outside India but brought into India (including, in some states, in electronic form). Therefore, if creditors anticipate a document being brought into India (i.e., for enforcement), stamp duty is usually paid at the time of signing. Rates of stamp duty on most documents are determined by the respective state governments for where the document is to be executed or for the location of the immovable property concerned. The rate of stamp duty payable on various types of security interests also varies significantly and is a consideration for creditors while choosing their security package. Following a 2015 judgment of the Supreme Court,23 although collateral is created in favour of a single agent or trustee in consortium lending, security documents are required to be stamped as though executed separately in favour of each creditor.

Loan trading transactions attract stamp duty. Though novation of commitment may attract a nominal stamp duty (since stamp duty is already paid on the loan agreement), stamp duty on an agreement for assignment of a loan and receivables (being treated as a conveyance of movables) attracts stamp duty ranging from 3 per cent to 14 per cent of the loan amount being assigned. To boost the securitisation market, however, the legislature has exempted securitisation transactions involving the transfer of rights or interest of banks or financial institutions in financial assets from stamp duty incidence.

Typically, the adequacy of stamp duty on instruments is tested when: (1) they are sought to be registered or otherwise presented to a public authority that has the authority to impound such documents under the stamp laws; or (2) they are sought to be enforced or relied on as evidence (in court proceedings or private dispute resolution proceedings such as arbitration).

Documentation is structured in a manner that minimises stamp duty incidence (such as by executing in states that have a lower stamp duty rate and agreeing to the jurisdiction clauses of such state).

iii FATCA and the CRS

In 2015, the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) became applicable in India, under the intergovernmental agreements executed by the Indian government. These arrangements have been implemented by requiring financial institutions to share relevant data with the Central Board of Direct Taxes, which will then transmit this information to the relevant offshore authorities. The RBI has also modified its KYC and reporting guidelines applicable to lending institutions to incorporate the FATCA and CRS requirements. Creditors typically address FATCA compliance by requiring the borrower and other creditors to confirm their FATCA status, and each party bears its own FATCA deductions, with no gross-up (similar to the LMA arrangements on FATCA).


i Security

Types of security interests

Creditors can choose from a variety of security options to safeguard their exposure to borrowers and minimise risks associated with lending in India. Typically, high-value transactions involve the creation of multilayered security packages. Though creditors may have preference for the type of security that is to be created, industry and company-specific diligence plays a key role in charting out the strategy for assets to be secured as well as the type of security interest to be created, to ensure the highest degree of protection.


A mortgage is a transfer of interest in immovable property to secure an existing or future debt or the performance of an engagement that may give rise to a pecuniary liability. Although there are different types of mortgages that may be created in India (such as usufructuary mortgage, mortgage by conditional sale), in secured lending transactions involving immovable property as security, typically a mortgage in the English form or by deposit of title deeds is created. Many traditional lending institutions in India still require a borrower to mortgage some immovable property for any lending, since this is seen to provide a greater assurance than security over movable or financial assets. Working capital is typically secured by receivables and the stock-in-trade of the borrower.

A mortgage in the English form is the preferred form of security, since it involves a complete transfer of property to the creditor subject to the right of redemption of the mortgagee. It is typically associated with ease of enforcement, since a creditor has private remedies available (such as appointment of a receiver for the property) under law and does not have to rely on a court process for protection or enforcement of security. There is ambiguity regarding whether these remedies are available to foreign creditors, however. Legal structuring of a mortgage in the English form allows borrowers to charge or assign movables, contracts and other assets along with the immovable property, affording the benefit of private remedies and ease of mortgage enforcement to all such assets. A mortgage in the English form can, thus, effectively secure all assets of the borrower.

A mortgage by deposit of title deeds requires the deposit of title deeds of the property with the creditor with an intention to create security over the property (usually demonstrated by a declaration issued by the borrower at the time of deposit of the title deeds). The mortgage can be created only over immovable property and, therefore, does not afford the convenience of stapled security, unlike a mortgage in the English form.

Pledges and liens

A pledge is a special form of 'bailment' under law and, therefore, requires actual or constructive delivery of possession of the assets being pledged. Since transfer of possession restricts the ability of the borrower to use the secured assets, a pledge is usually created over shares and financial assets, which are not required for day-to-day operations. The pledge is created by handover of the share or security certificates to the creditor, or if the securities are in electronic form, by the marking of a pledge over the securities in the records of the depository,24 which 'locks' the securities and does not permit any transaction without the consent of the creditor. Pledges are usually accompanied by a power of attorney in favour of the creditor (or the trustee) for exercise of rights in respect of the securities on the occurrence of a default.

Pledges are taken as security in all kinds of financing, including project financing and mezzanine or structured financing, since they allow borrowers to leverage financial securities held by them and provide ease of enforcement. Upon a default by the pledgor, a sale of the pledged assets can be effected without court intervention, and the proceeds can be used by the pledgee to discharge the pledgor or borrower of its obligations.

Indian law also recognises retention of title clauses and provides for security in the form of a lien to unpaid sellers.

Charges and hypothecations

Although movable assets are frequently 'stapled' with immovable property in an English mortgage (see the 'Mortgages' section), where immovable property is not available or is being secured by a mortgage by deposit of title deeds, creditors require the borrower to charge its movable assets (physical, financial and non-physical assets) under a hypothecation document. Though a stand-alone mortgage over movable properties has also been recognised, this is not the usual route adopted by creditors in India. A hypothecation is recognised in Indian law as a charge on existing or future movable property without delivery of possession. It is a contractual creation of a special property in assets, entitling the creditor to take possession of those assets in a default and sell them for realisation of outstanding debt. Both fixed and floating charges are recognised in India.

Substitution rights

In most public–private partnership projects (e.g., roads and airports), the government continues to own the project asset, with a concession being granted to the borrower to develop and operate the asset. Similarly, several assets such as telecom assets, spectrum and mining rights are owned by the government and licensed to private parties. These assets cannot be charged directly to creditors. Therefore, government authorities enter into tripartite arrangements with creditors, under which they allow the creditors a right to substitute the borrower with an eligible third party (subject to certain conditions). However, the sanctity of these arrangements is unclear.

Common methods of taking security

The most common types of security interests associated with certain types of assets are:

  1. real estate: by way of a mortgage over immovable property, which may also encompass all other assets of the borrower under a stapled security structure;
  2. tangible movable property: by way of a mortgage (if stapled with land) or a hypothecation;
  3. financial securities: usually by way of a pledge, delivering possession to the creditors; and
  4. contractual rights, receivables, intellectual property, etc.: by way of a mortgage (if stapled with land) or a hypothecation. Additional perfection rights may be required depending on the nature of the asset (e.g., creation of charge over aircraft is required to be endorsed on the certificate of registration with the Directorate General of Civil Aviation). With respect to intellectual property, creation of any security interest is required to be notified to the relevant registration authorities.

Foreign creditors also require a no-objection certificate from the relevant authorised dealer25 prior to the creation of security over any Indian assets in their favour.

Common methods of enforcement

Enforcement of a security interest may be done either privately or through court intervention. A typical private enforcement process would take about two to four years, whereas a court process may extend to about 10 to 12 years. A mortgagee has the right to file a suit for foreclosure or sale on default in repayment; however, these rights have not been extended to foreign creditors under the Indian transfer of property regime. Thus, although foreclosure is not an option for mortgages in the English form or foreign creditors, creditors holding a mortgage in the English form are permitted to effect a private sale of the property or appoint a private receiver without approaching a court. The enforcement of a charge over movable assets requires the intervention of courts unless the terms of the underlying contract expressly provide for it. For a pledge, a creditor may simply sell the pledged assets in accordance with the terms of the underlying contract and after giving reasonable notice to the pledgor. Creditors have a duty to maximise recovery from secured assets.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (the SARFAESI Act) provides creditors private remedies to enforce any security interest (except a pledge on movable assets or a lien). Where a substantial part of the business is held as collateral by the creditors (such as in a project financing), they are also permitted to take over the management of the borrower. In the case of consortium lending, approval of 60 per cent of the creditors in value is required for the exercise of powers under the SARFAESI Act, and the approval is binding on all creditors (including dissenting creditors). Remedies under the SARFAESI Act are also available to the listed bond market in India and to notified non-banking financial companies.

Debt recovery tribunals (DRTs) were established in India under the Recovery of Debts Due to Banks and Financial Institutions Act 1993. Creditors (including secured creditors who have not received full repayment from enforcement of security) may apply to the DRTs for recovery of debt. Recovery officers of the DRT are empowered to, inter alia, attach property of the borrower (even property that is not offered as collateral) and require third-party debtors of the borrower to repay debt amounts to the officer. The efficacy of approaching the DRTs to seek recovery of debt is severely hampered by an immense backlog of cases. It is estimated that there are over 100,000 cases pending before the various DRTs.26

Under extant foreign exchange regulations, foreign creditors require authorised dealer approval for enforcement of security and repatriation of proceeds. Further, enforcement would also need to comply with generally applicable foreign exchange restrictions, including that the sale of immovable property can only be to a resident and any invocation of pledge is to be in accordance with the foreign investment policies.

Formalities and registration

Board approval

Any creation of security over a company's assets needs the approval of the board of directors of the company by way of a physical meeting. Creation of security over assets exceeding specified valuation thresholds or of third-party security for a loan to a group company also requires approval of three-quarters of the shareholders of a company. In the case of third-party security, additionally, the loan for which security is provided is required to be used for the principal business activities of the borrower.


All charges (including mortgages, pledges and liens) created over the property and assets of a company are to be registered with the Registrar of Companies within 300 days of the date of creation of the charge for the security interest to be enforceable as regards the company's creditors and its liquidator, for a fee ranging between US$3 and US$9.

Mortgages over immovable property (other than by way of deposit of title deeds) are also required to be registered with the sub-registrar of assurances in whose jurisdiction the property is situated. The registration fee varies across various states and may either be a capped amount (US$461 in Maharashtra) or ad valorem in respect of the amount secured. Mortgages by deposit of title deeds are required to be noted in the land registry in certain states.

Creditors are required to file details of mortgages created in their favour with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) under the SARFAESI Act. Additionally, specific assets may also require additional registration (i.e., the assignment or transmission of rights in relation to patents is required to be filed in the register of patents).

Particular challenges

Some of the specific challenges faced by creditors in the creation and enforcement of security are as follows:

  1. requirement of government consent for creation and enforcement of security. Consent of local authorities may be required in some states for mortgaging land, particularly if the creditor is not a recognised or notified creditor. Certain assets (such as production-sharing contracts or mining leases) require government approval for creation and enforcement of any security, and enforcement is also possible against a limited number of entities. Similarly, forest land cannot be mortgaged, as it belongs to the government and approval is required even for the removal of immovable plant and machinery located on it (which may itself be charged to the creditor). Securing government approvals may require approval of the relevant authority, and any transfer on enforcement may only be in favour of a similarly qualified entity;
  2. transaction costs remain high because of stamp and registration duties;
  3. private enforcement is limited to only certain types of creditors, and enforcement proceedings through the court process are highly protracted, resulting in a diminution in the value of the assets over time; and
  4. under Indian transfer of property laws, there may be dual ownership over fixed assets and the land on which such assets are located. This creates complications for the purposes of enforcement of security by creditors.

ii Guarantees and other forms of credit support

Corporate guarantees are usually sought by creditors from the parent or from associated companies of the borrower entity. Although guarantees are executed as deeds (and, therefore, do not require consideration to pass to the guarantor), most creditors require the guarantor to demonstrate consideration in the form of a corporate benefit accruing to it.

Given India's traditionally promoter-driven corporate market, creditors have historically required individual promoters to provide personal guarantees for corporate loans. Creditors also require promoters to provide personal guarantees as a condition of restructuring loans, on the principle that shareholders should bear the first loss. In view of the burgeoning NPA problem (see Section I), the RBI in 2014 allowed banks to classify guarantors who refuse to honour guarantees as 'wilful defaulters', restricting access to capital and debt markets. With the increasing focus on guarantors by both banks and regulators, many corporate groups resist guarantees by individual promoters. Creditors as beneficiaries of guarantees are also able to take the guarantor (following invocation) to a corporate insolvency resolution proceeding under the Insolvency Code.27

Group company guarantees require a host of corporate compliance criteria to be met, including approval of the shareholders of the guarantor and a condition that the loan should be used by the borrower company for its principal business activities only.

iii Priorities and subordination

Secured creditors continue to have better protection and preferential access to borrower assets than unsecured creditors.28 Certain encumbrances created under law also have priority over secured creditor rights (such as banker's lien and an unpaid vendor's lien). Since these rely on a preferential status because of possession, priority rules gain significance in the context of non-possessory securities (such as charges and mortgage).

In the absence of contractual provisions to the contrary, the following rules of priority are applicable under Indian law:

  1. between two registered charges, the charge registered prior in time will have priority;
  2. an equitable mortgage takes effect against any mortgage deed subsequently executed and registered in relation to the same property;
  3. a mortgage of movables with possession has priority over a prior mortgage without possession;
  4. a mortgagee of movable property without possession that comes to court first will have priority over subsequent such mortgagees that approach the court;
  5. a fixed charge has priority over a floating charge;
  6. between two floating charges, the one created earlier in time will have priority; and
  7. the registration and fulfilment of perfection requirements of a charge give it priority over a non-registered and non-perfected charge, notwithstanding when the charge was created.

Contractual priorities in security are usually set out in an intercreditor or subordination agreement between the creditors. Intercreditor arrangements are fairly standard and are afforded sanctity by courts as well as participating lending institutions. It remains to be tested whether turnover subordination provisions will be binding on a liquidator appointed under the Insolvency Code or the Companies Act 2013.

Typical LMA and APLMA provisions requiring majority creditor consent for enforcement or other action against a borrower or obligor are viewed as unenforceable under Indian law, since the Indian Contract Act 1872 holds contracts restraining legal proceedings to be void. Therefore, enforcement priority in India is maintained by imposing wait periods (up to a year) on subordinated creditors for enforcement.

An intercreditor arrangement may become problematic where different types of creditors are party to it, since all creditors do not have equal access to special enforcement mechanisms. For instance, remedies under the SARFAESI Act are not available to foreign creditors who are not registered in India and to certain NBFCs. The imposition of wait periods for access to remedies under the SARFAESI Act also entitles some creditors to invoke remedies under the SARFAESI Act before others. Though an intercreditor arrangement may address these issues by requiring creditors who have the benefit of these regimes to share recoveries with other creditors, this results in an unsatisfactory situation where the notified creditors can not then recover their dues as they have (notionally) already received full payment from the borrower.


i Limitations on the validity and enforceability of guarantees and securities

Although India broadly adopts a pro-creditor approach in ensuring the least possible hindrance in the enforcement of security interests and guarantees, there are certain limitations to enforceability that find their origin in law and apply in a universal fashion. These include the necessity of demonstrating a corporate benefit, aspects pertaining to financial assistance and the existence of clawback risks in the context of insolvency. These issues have been elaborated upon in more detail below.

ii Corporate benefit

A corporate benefit is required to be demonstrated in different ways, depending on the type of transaction being entered into, and the person or entity to whom loans are being advanced or on behalf of whom security interests are being created (e.g., in favour of lenders). There applies a blanket prohibition on loans being advanced or securities being created by a company in favour of its own directors or persons in whom the directors are interested. Exceptions to this rule include the provision of loans or securities as part of the service ordinarily extended by the company to its employees or pursuant to a scheme expressly approved by the members of the company.

Financial assistance

The Companies Act 2013 restricts public companies from giving loans or guarantees, or providing security or any financial assistance in connection with the purchase or subscription of shares by any person (including any shares in its holding company).

Clawback risks

As the insolvency regime applicable to corporate entities is spread over the provisions of the Companies Act 2013 and the Insolvency Code, there are several clawback risks that apply depending on the framework under which the relevant antecedent transaction is being scrutinised. These have been set out in the table below.

Antecedent transaction Counterparty to the transaction Effect Look-back period Consequence Who may apply
Fraudulent preference under the Companies Act 2013 Creditor, surety or guarantor Puts person in better position in liquidation than would have been if no preference had been given The preference would involve the transfer of property or delivery of goods, payment, execution made, taken or done by or against the company Six months prior to making of winding-up application The NCLT may restore position to what it would have been if no preference had been given Suo moto
Transfers not in good faith under the Companies Act 2013 A purchaser or encumbrancer in good faith and for valuable consideration A transfer of property or delivery of goods not being a transfer or delivery made in the ordinary course of business One year before presentation of a petition for winding up by the NCLT The NCLT would deem the transfer or delivery void against the company liquidator Suo moto
Creation of a floating charge under the Companies Act 2013 Any person Creation of a floating charge on the undertaking or property of the company, unless it is proved that the company was solvent immediately after the creation of the floating charge One year before presentation of a petition for winding up by the NCLT The NCLT would deem the floating charge invalid except to the extent of any money paid in consideration for the charge together with interest on this amount Suo moto
Extortionate credit transaction under the Insolvency Code Any person other than financial service companies Requires the company to pay exorbitant payments for credit provided or is unconscionable under laws of contracts Two years from insolvency commencement date Set aside the transaction, restore the position as it existed prior to the transaction, modify the transaction or pass any other order under Section 51(1) of the Code Liquidator or resolution professional
Extortionate credit transaction under the Insolvency Code Any person other than financial service companies Requires the company to pay exorbitant payments for credit provided or is unconscionable under laws of contracts Two years from insolvency commencement date Set aside the transaction, restore the position as it existed prior to the transaction, modify the transaction or pass any other order under Section 51(1) of the Code Liquidator or resolution professional
Preferential transactions under the Insolvency Code Creditor, surety or guarantor Transfer of property or an interest thereof because of an antecedent financial liability, operational debt or other liability owed by corporate debtor having an effect of putting person in a better position than under waterfall mechanism under Section 53 Related party: during the two years preceding insolvency commencement date Other than related party: during the one year preceding insolvency commencement date Avoidance of preferential transactions or any other order made by the tribunal under Section 44 of the Code Liquidator or resolution professional
Undervalued transactions under the Insolvency Code If the transaction was deliberately entered into by the company to keep assets beyond the reach of creditors or adversely affect a person's claims, the transaction can be treated as a transaction defrauding creditors Any person A gift is made to a person; or a transaction is entered into that involves transfer of one or more assets or consideration that is significantly less than the value of consideration provided by corporate debtor Related party: during the two years preceding insolvency commencement date Other than related party: during the one year preceding insolvency commencement date No look-back period is applicable in respect of transactions defrauding creditors Undervalued transactions: declaration of transaction as void or reversal of effect of transaction (as provided under Section 48), and release of security created or return of benefits Transactions defrauding creditors: restoration of the position as it existed before the transaction, as if the transaction had not been entered into; and any other order to protect the interests of the persons who are victims of the transaction Liquidator, resolution professional, creditor, or member or partner of the corporate debtor

iii Legal opinions practice

The issuance of legal opinions is standard practice for the purposes of Indian lending. Opinions usually contain statements regarding the capacity of the counterparty to execute the necessary documentation and to enter into the transaction. For the purposes of secured lending, these opinions also explicitly comment on the validity of the security interest being created. It is the creditors' counsel who usually delivers the opinions. However, in some cases, opinions are sought from the borrower's counsel along with a supporting confirmation from the creditors' counsel.

iv Choice of law

Decrees passed by courts of a 'reciprocating territory' may be executed in India as Indian decrees, except in certain limited circumstances (e.g., where the judgment has not been pronounced by a court of competent jurisdiction, where it has not been given on the merits of the case or where it appears on its face to be founded on an incorrect view of international law). The government notifies jurisdictions that qualify as reciprocating territories by way of notification in the Official Gazette. So far, only 12 jurisdictions have been notified as reciprocating territories, and this list does not include several key jurisdictions, including the United States. Judgments or decrees of courts in non-reciprocating territories can be enforced only by filing a lawsuit in an Indian court for a judgment based on the foreign judgment.

Pursuant to certain changes to the framework governing domestic and international arbitration, the scope for challenging a foreign award on the basis of violation of public policy has been narrowed, and awards have been prohibited from being set aside merely on the ground of an erroneous application of the law or by way of re-appreciation of evidence.


Loan trading is common, with most documentation structures providing for loan trading without borrower consent by way of novation (usually of undisbursed commitment) and assignment (of a disbursed facility). Large loans involve agent and security trustee structures, allowing new creditors the benefit of existing collateral without requiring action on the part of the borrower. In the event of trading of bilateral loans, however, a release and recreation of security with the cooperation of the borrower is inevitable, which also has its own stamp tax and registration cost implications. See Section III.

Sub-participation and risk participation without a change to the creditor on record have seen an increase in Indian markets in light of the NPA issue, with the market having seen a lifetime high of transactions between April and December of 2018.29 This has encouraged banks to trade stressed assets. Securitisation (i.e., assignment of loans and receivables to asset reconstruction companies (ARCs) that issue security receipts to holders) is governed by the SARFAESI Act, which contemplates transfer of stressed assets to ARCs, which would then undertake recovery measures against the borrower. There has been a big push to promote these entities by the RBI and the Indian government recently, including by liberalising foreign investment in such companies.30 Foreign investment by eligible FPIs is also now permitted in securitised debt instruments issued by ARCs.

In September 2016, the RBI permitted banks to sell their stressed assets to other creditors, NBFCs and financial institutions. As per these guidelines, 'scheduled commercial banks' are required to identify assets for sale on an annual basis and periodically review the classification of their financial assets. Banks are also required to invite public bids for the same, to attract more buyers and improve the price discovery mechanism. Banks have also now been permitted to buy back financial assets that have been successfully restructured by ARCs (other than those that were sold by the banks themselves).

The Insolvency Code and its time-bound mechanism for acquisition of distressed assets has seen great interest from global distressed assets funds. Many funds with an India focus have raised a significant amount of capital recently to acquire debt positions from stressed banks looking to offload non-performing and stressed assets.31

Since a resolution process under the Insolvency Code requires 66 per cent positive votes from creditors, loan trading has assumed greater significance for companies that are in the middle of a corporate insolvency resolution process. The Indian Banks Association has therefore requested its member banks not to sell stressed assets of companies undergoing insolvency resolution proceedings without informing other lenders in the consortium.32


The 'concentration limits' applicable to FPIs, stipulated that related FPIs' exposure to a corporate group could not exceed 20 per cent of their portfolio; however, this was repealed by a circular issued by the RBI.33 The limit with respect to 50 per cent of a single issuance continues to be applicable as it has not been expressly altered. The earlier 'lock-in', which permitted FPIs to invest in unlisted corporate debt securities only subject to a minimum residual maturity of three years, has been reduced to one year, although the end-use restrictions continue to be applicable.

The changes to the external commercial borrowing regime (discussed in Section I), while aiming to liberalise the regime, have also restricted the access of investment companies and infrastructure investment trusts (among others) to cheap offshore debt.

Besides this, there also apply several restrictions on remittances outside India. Any remittance of proceeds from the enforcement of security by a secured creditor may also require RBI approval.

Another development that creditors may need to be mindful of is the notification of the Real Estate (Regulation and Development) Act 2016, which provides for greater regulation of borrowers in the real estate sector and, inter alia, stringent timelines for the completion of projects, and restrictions on the usage of money received from buyers for purposes other than for the development of the project. The empowered authority under the Act is authorised to revoke the registration of promoters for contravention of provisions of the Act. Lenders to borrowers in the real estate sector may be required to enforce stricter compliance and escrow mechanisms.


The Indian lending market is currently in a state of transition, and the RBI's proposed new measures for debt restructuring will play an important role in shaping India's debt market for the next two to three years.

The Insolvency Code continues to find favour with lenders looking to recover non-performing debt, and the government's continued support could mean an upswing in insolvency cases. Regulators continue to try and attract offshore debt funding through liberalisation in the ECB and FPI regulations, with a focus on attracting stable and long-term investors. It remains to be seen whether these measures will overhaul the corporate debt market in India.


1 L Viswanathan and Dhananjay Kumar are partners at Cyril Amarchand Mangaldas. The authors acknowledge the help received from Surya Sreenivasan and Gautam Sundaresh.

2 The RBI is the central bank constituted under the Reserve Bank of India Act 1934, which is accorded the statutory mandate to govern the functioning of the banking sector in India.

3 Gross NPAs in September 2018 were reported to be 10.8 per cent of gross advances of scheduled commercial banks in India, compared with 11.5 per cent in March 2018, https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/­0FSRDECEMBER2018DAFEDD89C01C432786925639A4864F96.PDF.

4 RBI, Report on Trend and Progress of Banking in India 2015-16.

5 RBI, Report on Trend and Progress of Banking in India 2017-18.

7 RBI Master Direction on External Commercial Borrowings, Trade Credits and Structured Obligations (RBI/FED/2018-19/67) published on 26 March 2019.

8 See press release issued by the Ministry of Finance, 'Recapitalisation of Public Sector Banks (PSBs)' on 14 December 2018, available at http://pib.nic.in/PressReleaseIframePage.aspx?PRID=1556008.

9 The Indian Banks Association has notified some standard formats, the broad terms of which are adopted by lenders.

10 RBI, Report on Trend and Progress of Banking in India 2015-16.

11 Although these powers were first exercised by the RBI in June 2017 to refer 12 companies to insolvency proceedings under an ordinance (i.e., an executive order), an amendment to the Banking Regulation Act 1949 was formally notified on 25 August 2017.

12 Padmanabhan Venkatesh v. Shri V Venkatachalan & Ors, Company Appeal (AT) (Insolvency) No. 128 of 2019 & I.A. No. 675 of 2019 (decision of the National Company Law Appellate Tribunal); and Binani Industries Limited v. Bank of Baroda & Anr, Company Appeal (AT) (Insolvency) No. 82 of 2018 (decision of the National Company Law Appellate Tribunal).

13 By way of the Insolvency and Bankruptcy Code (Amendment) Ordinance 2017, which was subsequently replaced by the Insolvency and Bankruptcy Code (Amendment) Act 2017.

14 The disqualification criteria set out under Section 29A include, inter alia: (1) being an undischarged insolvent or wilful defaulter; (2) having an account, or being the promoter of a company that has an account that has been declared to be a non-performing asset under the guidelines of the Reserve Bank of India, with a period of one year having elapsed from the date of such classification; (3) being convicted for an offence punishable with imprisonment of two years or more; (4) being prohibited by the Securities and Exchange Board of India from trading or accessing the securities market; and (5) having executed an enforceable guarantee in respect of a corporate debtor against whom proceedings have been initiated under the Insolvency Code.

15 A 'connected person' has been defined under the Explanation to Section 29A of the Insolvency Code as: (1) any person who is the promoter or in the management or control of the resolution applicant; (2) any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or (3) the holding company, subsidiary company, associate company or related party of the persons mentioned in points (1) and (2). The definition of a 'related party' is very wide in respect of both individuals and companies.

16 Section 12A of the Insolvency Code. This was inserted by Act No. 26 of 2018, with effect from 6 June 2018.

17 This was earlier provided for under Regulation 38(1)(c) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016. This amendment came about by way of notification No. IBBI/2018-19/GN/REG032, dated 5 October 2018.

18 Consolidated in the RBI Master Direction – Know Your Customer (KYC) Direction, dated 25 February 2016, as amended from time to time.

19 Such as the US$2 billion fraud involving diamantaire Mr Nirav Modi and Punjab National Bank.

20 Surcharge may be zero per cent, 2 per cent or 5 per cent depending on the income thresholds. Rate of cess will be 4 per cent.

21 This reduced rate of withholding tax is applicable where the specified loans and bonds are issued before 30 June 2020.

22 Subject to fulfilment of certain conditions. Also, this reduced rate of withholding tax is applicable where the specified bonds are issued before 30 June 2020.

23 Chief Controlling Revenue Authority v. Coastal Gujarat Power Limited & Ors, Civil Appeal No. 6054 of 2015 (arising out of SLP (C) No. 32319 of 2013).

24 A depository is an entity registered with the Securities and Exchange Board of India to hold dematerialised securities in its system and maintain records for the beneficial owners of the securities.

25 Authorised dealer banks are banks that are authorised by the RBI to deal in foreign exchange in India.

27 See Vishnu Kumar Agarwal v. Piramal Enterprises Ltd, (Company (AT) (Insolvency) Nos. 346 and 347 of 2018); Rai Bahadur Shree Ram and Company Pvt Ltd v. Rural Electrification Corporation & Ors, Civil Appeal No. 001484 of 2019; Axis Bank Limited v. Edu Smart Services Limited (Company Appeal (AT) (Insolvency) No. 304 of 2017); and ICICI Bank Limited & Ors v. CA Ritu Rastogi & Ors (CA 366 (PB)/ 2017 and (IB)-102(PB)/2017).

28 Under the Insolvency Code, secured creditors have the option of enforcing their security interests without relinquishing the same to the liquidation estate. In this scenario, the unpaid debt of secured creditors ranks at par with government dues and below unsecured financial creditors under the liquidation waterfall.

30 Press Note No. 4 of 2016 issued on 6 May 2016 by the Department of Industry Policy and Promotion, Ministry of Commerce and Industry, government of India.

33 A.P. (DIR Series) Circular No. 19, dated 15 February 2019.