INDIA Law and Practice Contributed by: Anish Mashruwala, Utsav Johri, Megha Upadhyaya and Sahil Unadkat, JSA
Shares and Other Securities Security over shares and other securities is typically created through a pledge. A pledge agreement or deed is entered into between the pledgor and pledgee to create and record the pledge. The pledgor also issues a separate power of attorney in favour of the pledgee that allows the pledgee to deal with the pledged shares/securities in an event of default and to take other actions on behalf of the pledgor. Movable Property Movable property – such as receivables, plant and machinery, accounts and stock – is usually secured by way of hypothecation. Under Indian law, hypothecation generally means a charge over any movable property. The charge created by hypothecation may be a fixed charge over identifiable assets or fixed assets, and is usu- ally a floating charge over current assets and stock-in-trade. The security provider executes a deed of hypothecation in favour of the lender or security trustee. India is an exchange-controlled economy, and the creation of security on the assets of an Indian company in favour of persons outside India, or assets of a non-resident Indian in India, is ruled by the Foreign Exchange Management Act, 1999 (FEMA), and the rules and regulations framed thereunder. Any cross-border security or guar- antee is governed by the FEMA. The security that can be created for the various acquisition finance structures is discussed below. Inbound Acquisition Finance: Offshore Acquirer Any acquisition financing availed by an offshore acquirer for the purpose of acquiring the shares of an Indian company cannot be secured by a pledge on the shares acquired by the offshore acquirer without the prior approval of the RBI.
Further, no security can be created on the Indian assets of the target or any other person resi- dent in India for securing any such acquisition finance. Outbound Acquisition Finance Any security provided by an Indian entity for finance availed by an Offshore SPV will be gov- erned by the framework in relation to overseas investment issued by the RBI (the “OI Guide - lines” ). The revised OI Guidelines were intro- duced in August 2022 with the intent of liberal- ising and simplifying the regulatory framework governing overseas investments, and with a view to promoting ease of doing business. In order to provide a financial commitment (which includes security or guarantee) for any borrowing by an overseas entity, an Indian entity must satisfy the following conditions: • the Indian entity should be eligible to make overseas direct investment (ODI); • the Indian entity should have made ODI in the foreign entity; and • the Indian entity has acquired control in such foreign entity at the time of making such financial commitment. It is also important to note that an Indian entity will not be able to provide any financial commit- ment (including any guarantee or security) for any borrowing by an overseas entity if there is any delay in filing or reporting by the Indian entity in relation to such offshore entity, unless such delay is regularised. Further, an Indian entity can make an investment/financial commitment after it has obtained a no-objection certificate from the lender bank/regulatory body/investigative agency if:
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