INDIA Law and Practice Contributed by: Utsav Johri, Sucheta Bhattacharya and Nishal Makharia, JSA Advocates & Solicitors
2. Regulatory Environment 2.1 Licensing and Regulatory Approval Domestic private credit funds are primarily structured as AIFs and are regulated by SEBI. Foreign investors that want to participate in the private credit market in India can do so either by registering as an FPI with SEBI, or by lending through their off - shore entity under the ECBs route. 2.2 Regulators of Private Credit Funds Please see 1.8 Impending Regulation and Reform and 2.1 Licensing and Regulatory Approval . 2.3 Restrictions on Foreign Investments Any investment by a foreign investor in units of an AIF is regulated by the FEMA and the rules and regula - tions framed thereunder. A person resident outside India (other than a citizen of Pakistan or Bangladesh) or an entity incorporated outside India (other than an entity incorporated in Pakistan or Bangladesh) is per - mitted to invest in units of an AIF. Any sale, transfer or redemption of units in an AIF acquired or purchased by a non-resident is regulated by SEBI and/or the RBI. If either the sponsor, manager or investment manager of an AIF is not Indian “owned and controlled”, then any downstream investment by such AIF is regarded as foreign investment and is required to comply with the relevant provisions of the FEMA. This is not appli - cable to investment by AIFs in NCDs. It should also be noted that AIFs cannot lend in the form of loans. 2.4 Compliance and Reporting Requirements In India, private credit providers must comply with var - ious regulations prescribed by the RBI and SEBI. For example, a private credit provider registered as an FPI or an AIF has to comply with regulations and guide - lines, including the regulation of terms of registration, continuous disclosure requirements (including regard - ing ownership structure), investment conditions, the reporting of investments and inspection provisions. Please also see 2.1 Licensing and Regulatory Approval .
2.5 Club Lending and Antitrust Not all lending arrangements are subject to antitrust regulation but, while lending, one needs to be mindful of the antitrust laws in the context of debt enforce - ment and for merger and acquisition transactions. In acquisitions, the Competition Act, 2002 restricts merging parties from undertaking actions that would effectively implement the transaction or integrate the businesses prior to receiving approval from the Com - petition Commission of India (CCI). Providing a guar - antee on behalf of the target by the acquirer for secur - ing loans by the target may be seen as gun jumping in certain circumstances. The CCI also plays a role in the context of enforcement. Any credit arrangement where the lender acquires control in a company pursuant to enforcement may require the consent of the CCI if such acquisition results in a breach of certain thresholds prescribed pursuant to the Competition Act, 2002. 3. Structuring and Documentation 3.1 Common Structures In India, private credit lenders predominantly lend by investing in NCDs. NCDs are debt securities, and NCD holders are treated as financial creditors of the issuer. With the relaxed ECB regime, it will now have to be seen if offshore private credit lenders will lend by way of loans under the ECB regime. If private credit lenders follow the ECB regime, it is likely that loans will be the common form of such lending, and loan documentation will be entered between the borrower and the lender. Until now, NCDs and other structures commonly used for private credit lending are as follows. Non-Convertible Debentures NCDs can be issued by a company to an AIF or FPI. The proceeds of NCDs issued on a private placement basis can be used for any purpose. However, where the investor is an FPI, the proceeds of an unlisted NCD cannot be used for real estate business, investment in capital markets or the purchase of land. There are
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