INDIA Law and Practice Contributed by: Divyanshu Pandey, Utsav Johri, Sucheta Bhattacharya and Nishal Makharia, JSA Advocates & Solicitors
• Regulatory approvals: creating a charge over certain types of assets (land, buildings, machinery, plant, shares, securities and fixed deposits in banks), to the extent to which those assets do not form part of the stock- in-trade of the taxpayer’s business, may also need permission from the income tax authori - ties. Permissions may also be required under the Central Goods and Services Tax Act, 2017 (CGST Act) and under the GST act for the relevant state. Other formalities include the following. • Immovable property: typically, title searches and searches on the portal of the registrar of companies are conducted in relation to immovable property to ensure that the mortgagor is the legal owner and entitled to mortgage the property, and to check whether any prior charge or mortgage exists over the property. • Movable property such as bank accounts and contracts: where bank accounts or contracts are hypothecated, notices should be issued to the banks or the counterparties to the con - tracts, informing them of the charge created. • Shares or other securities: where the shares are in dematerialised form, certain forms have to be filed with the depository participant to mark a pledge over these shares in the share - holder’s beneficial account. 5.2 Floating Charges and/or Similar Security Interests Under Indian law, a floating charge can be cre - ated on movable properties. A floating charge cannot be created on all the assets of the bor - rower – eg, immovable properties. Security over different assets is created through separate instruments, as discussed in 5.1 Assets and Other Forms of Security .
Lenders generally favour fixed charges over floating charges because fixed charges provide greater control and priority in case of default, restricting the borrower’s ability to freely use or dispose of the charged assets. 5.3 Downstream, Upstream and Cross- Stream Guarantees It is possible to provide downstream, upstream and cross-stream guarantees for private credit transactions in India. However, such guaran - tees need to comply with certain conditions and approval requirements, as follows. • Companies Act requirements: any guarantee will need to comply with Sections 185 and 186 of the Companies Act, 2013. Section 185 regulates guarantees issued on behalf of any person in whom the directors of the company issuing guarantee are interested. Section 186 requires special approval from the sharehold - ers of the company if the aggregate of the loans given, security provided and the invest - ment made by the company exceeds the threshold provided thereunder. • Compliance with SEBI regulations: any guar - antee given by a listed company or high-value debt listed company for the benefit of its wholly owned subsidiary should be in accord - ance with the applicable laws for related party transactions in accordance with the SEBI (Listing Obligations and Disclosure Require - ments) Regulations, 2015. • Guarantee for NCDs: if the guarantee is issued by a non-resident entity for NCDs, that guarantee will need to comply with the follow - ing key conditions: (a) such guarantees can be issued by multi - lateral financial institutions, regional finan - cial institutions and government-owned (either wholly or partially) financial institu - tions and direct or indirect equity holders;
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