INDIA Law and Practice Contributed by: Utsav Johri, Sucheta Bhattacharya and Nishal Makharia, JSA Advocates & Solicitors
• security documents, such as deed of hypotheca - tion, indenture of mortgage/memorandum of entry, and share/securities pledge agreement, in the event of a secured loan; and • necessary filing requirements as per extant exchange control regulations. In debt transactions, if an entity has multiple lend - ers, it is likely that the lenders would like to enter into intercreditor agreements. Any intercreditor agree - ments executed between the creditors are negotiated between them. For listed debt and loans, regulators also mandate a standard form of intercreditor agree - ment to be signed between various creditors to gov - ern the enforcement of the security of a company in default. India has not seen a rise in first-out, last-out transac - tions, which are relatively rare. 3.3 Restrictions on Foreign Direct Lenders Foreign lenders can lend by way of either ECBs or investment in NCDs. Funding by private credit provid - ers in the form of ECBs was not prevalent because India’s earlier ECB framework restricted all-in cost pertaining to the ECB, end use and other prescribed matters. However, given the recent liberalisation, it will be interesting to see how the market develops to adopt funding by private credit lenders. ECBs can be secured by the borrower’s domestic movable assets (including current assets), immov - able assets, intangible assets, financial assets and a pledge of shares held by the promoters in the borrow - ing company, and in the borrower’s domestic associ - ate companies, subject to the satisfaction of certain customary conditions. The ECB Amendment Regulations provide for signifi - cant changes to the present ECB Guidelines by: • increasing ECB limits to USD1 billion or 300% of the net worth, whichever is higher, for eligible bor - rowers; • dispensing with the requirement of a different minimum average maturity period (MAMP) basis for the end use of the ECB, by making the MAMP three years, irrespective of the end use – the only
exception to this rule is for borrowers engaged in the manufacturing sector looking to raise ECBs with an MAMP of between one and three years, if the outstanding amount of such ECBs does not exceed USD150 million; and • disposing with the all-in cost requirements that were previously applicable to ECBs and introduc - ing cost of borrowing in line with prevailing market conditions for ECBs with an MAMP of three years. NCDs can be secured by domestic assets. However, security on the shares of an Indian entity that are held by an offshore entity requires prior approval from the RBI. In an acquisition finance transaction, the target (if it is a public company) will be restricted from providing any kind of security or support for its acquisition. 3.4 Use of Proceeds and Acquisition Financings As mentioned in 3.1 Common Structures , the pro - ceeds 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 acquisition financing. There are no end use restrictions for an NCD that is listed on a recognised stock exchange in India. Generally, ECBs cannot be used for equity invest - ments in India, except for transactions undertaken by an Indian entity for corporate actions such as a merg - er, demerger, amalgamation, arrangement or acquisi - tion of control for strategic purposes only. ECBs can also be used for the acquisition of assets through a slump sale. However, until now, private credit lenders did not use the ECB route to fund companies in India. Notification of the new ECB framework, as mentioned in 3.3 Restrictions on Foreign Direct Lenders , will open up the route for international private credit funds, which could then lend on market rates to Indian com - panies in foreign currency. 3.5 Debt Buyback Call or put options can be provided pursuant to the terms of the NCDs. Such options will enable the issuer or NCD holder to redeem/buy back the NCDs subject to certain terms. Call or put options for listed NCDs,
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