INDIA Law and Practice Contributed by: Divyanshu Pandey, Utsav Johri, Sucheta Bhattacharya and Nishal Makharia, JSA Advocates & Solicitors
of privately placed NCDs and NCDs issued by way of a public issuance. 3.7 Junior and Hybrid Capital Junior/hybrid finance is generally raised in the form of compulsorily convertible preference shares (CCPS), optionally or partially convertible preference shares, CCD or OCD. If such finance is provided by an offshore entity, optionally or partially convertible preference shares or deben - tures are treated as ECBs and must comply with the ECB guidelines. If the junior/hybrid capital is structured as CCPS, optionally or partially convertible preference shares, CCDs or OCDs or partially convertible debentures, then the key documents are the securities subscription agreement and the inves - tor rights/shareholder agreement. Deals involving funding to holding companies (HoldCo) are typically secured without recourse to the assets of the operating companies (OpCo). The security package may comprise shares of the HoldCo and the OpCo, security on the assets of the HoldCo and (in non-sponsor deals) a guarantee from the promoter. 3.8 Payment in Kind/Amortisation Payment in kind (PIK) structures as a mode of repayment are not uncommon in India. Some of the largest private credit deals have featured full PIK structures. However, lenders prefer an amortised structure or a part PIK/part payments structure where a portion of the return on invest - ment is paid on an amortised basis. 3.9 Call Protection The following call protection measures are typi - cally seen in private credit transactions.
• Lock-in periods: no prepayment of the loan/ NCDs is permitted during the lock-in period. Any payment during the lock-in period may require the borrower to pay certain make- whole amounts. • Make-whole provisions: if there is any repay - ment of the loan/NCDs by the borrower prior to a specified period, the borrower is required to pay an amount equal to the interest the lender would have received had the NCDs/ loans been repaid after the specified period. • Prepayment premiums: imposing a percent - age-based fee on the principal amount for prepayments within a specified period. Interest payments to foreign private credit lend - ers are subject to withholding tax. Such lend - ers can claim the credit of the tax withheld on interest to meet their tax liabilities in India and in the country of residence. Such withholding tax is mitigated by the addition of relevant tax gross-up provisions in the relevant documents. Where a foreign credit player has invested in an AIF in India and the AIF has in turn made the credit available to the borrower, then the income is not taxed in the hands of the AIF (if incorporated as a Category II AIF). A Category II AIF that is incorporated as a trust will enjoy pass-through status, but the unit holders may be taxed depending on their jurisdiction of incor - poration and any double taxation treaty available with the country of incorporation of the creditor. 4.2 Other Taxes, Duties, Charges or Tax Considerations Apart from direct tax, there are implications from an indirect tax perspective. While the principal 4. Tax Considerations 4.1 Withholding Tax
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