INDIA Law and Practice Contributed by: Vivek Chandy, Archana Tewary, Kumarmanglam Vijay and Brijita Prakash, JSA
3.2 Typical Security Created by Commercial Investors
ing financial companies (NBFCs)) to evergreen loans, by restricting the ability of AIFs to invest in securities (other than equity shares) of debtor entities of such regulated entities, if such regu - lated entities are also partners in the AIFs. Debt Financing The most common means of fundraising for real estate developers is by issuance of non-convert - ible debentures (NCDs) to lenders. Debt invest - ments by banks are subject to certain pruden - tial norms relating, inter alia, to bank exposure to such investments, as stipulated by the RBI. While previously a preferred means of raising funds, market conditions have affected invest - ments by NBFCs lately. Real estate developers are required to obtain all the permissions required from the relevant government authorities for the project prior to funding by such NBFCs for the development of the project – this has restricted access to funds by real estate developers in the early stages of the project development from banks and NBFCs. Private credit funds invest in debt or hybrid securities issued by real estate developers for funding requirements. ECBs The RBI has eased the definition of beneficiaries eligible for ECBs to include all entities that can receive FDI. Funds borrowed under ECBs can - not generally be used, inter alia, for real estate activities, except for: • construction/development of industrial parks/ integrated townships/SEZs; • purchase/long-term leasing of industrial land as part of a new project/modernisation of expansion of existing units; and “infrastruc - ture sector” activity. All eligible borrowers are now permitted to raise up to USD750 million or equivalent per financial year under the automatic route.
The types of security typically created or entered into by a commercial real estate investor that is borrowing funds to acquire or develop real estate include: • mortgages; • hypothecation/escrow of project receiva - bles, cash flows (subject to compliance with RERA); • pledge of the developer company’s shares, its parent and/or associate entities; and • provision of corporate/personal guarantees, typically created in favour of a security/ debenture trustee acting for the lenders’ benefit. To create mortgages, a mortgage deed must be registered with the SRA. Where an equita - ble mortgage is created by the deposit of title deeds, recording of the deposit of deeds may need to be registered in certain states. The secu - rity interest created on such assets (tangible/ intangible) must be registered with the Regis - trar of Companies and the Central Registry of Securitisation Asset Reconstruction and Secu - rity Interest of India (CERSAI), a central database for all security interests established to check for fraudulent activity in secured loans. 3.3 Restrictions on Granting Security Over Real Estate to Foreign Lenders FDI in Indian companies cannot be secured and, accordingly, FDI investors are not permitted to have assured returns at the time of exit. However, investments in NCDs can be secured, including where issued to permitted foreign investors. Security in such cases is typically created in favour of a trustee. In ECBs, pledge over shares of an Indian company in favour of
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