Debt commitment letters and acquisition agreements
Types of documentation
What documentation is typically used in your jurisdiction for acquisition financing? Are short-form or long-form debt commitment letters used and when is full documentation required?
In relation to ECBs and acquisition financing, where the acquirer is an SPV located outside India and the funding is obtained from foreign lenders, the credit agreements and inter-creditor agreements will generally be based on the latest Asia Pacific Loan Market Association (APLMA) or Loan Market Association (LMA) forms.
In relation to domestic financings, the nature of documentation varies with every transaction. The documents for an acquisition financing usually include the debenture trust deeds and facility agreements. Some banks and NBFCs may have their own format of facility agreement. Further, the Companies Act 2013, and its related rules, prescribe some prerequisites of the debenture trust deed. Further, the debenture trust deeds are governed by regulations from the SEBI if the debentures are listed on a stock exchange. In addition, the information memorandum or the offering memorandum for NCDs must be in a format as prescribed by the Companies Act 2013 and the various regulations issued by the SEBI.
There is no standard form of documentation for security documents in relation to assets located in India.
Typically, commitment letters are not executed for domestic acquisition financing and sanction letters are issued by lenders in India. However, commitment letters may be issued sometimes upon the request of the borrower, and APLMA or LMA forms are adapted for Indian transactions. The full finance documents are simultaneously executed with the acquisition documentation.
Level of commitment
What levels of commitment are given by parties in debt commitment letters and acquisition agreements in your jurisdiction? Fully underwritten, best efforts or other types of commitments?
Commitment letters, when executed, usually provide for underwritten debt or for a club of lenders to provide financing. Execution of commitment letters is not common unless the borrower is located outside India. Generally, the sanction letters govern the rights and obligations of the borrower and the lenders, and the financing is subject to final documentation.
Conditions precedent for funding
What are the typical conditions precedent to funding contained in the commitment letter in your jurisdiction?
The typical conditions precedent to funding in the sanction and commitment letters in relation to acquisition financing provided to Indian entities include:
- corporate authorisations;
- constitutional documents;
- acquisition documentation;
- funds-flow statements;
- due diligence of the target;
- security documents;
- reliance letters for due-diligence reports;
- government approvals and third-party consents;
- know-your-customer requirements; and
- lenders’ counsel legal opinions.
Are flex provisions used in commitment letters in your jurisdiction? Which provisions are usually subject to such flex?
In our experience, flex provisions are not common in term sheets executed in relation to acquisition financing provided to Indian entities, except in cases where the acquisition financing is to be committed at a bidding stage. However, the term sheets and commitment letters are often kept open-ended (especially in relation to provisions on representations and warranties, covenants and events of default) and are subject to execution of final documentation to the satisfaction of the lenders. Flex provisions regarding financial terms are heavily negotiated and are especially influenced by any due-diligence findings that the lenders may have to consider from a financing perspective.
Are securities demands a key feature in acquisition financing in your jurisdiction? Give details of the notable features of securities demands in your jurisdiction.
These are not a key feature in acquisition financing in India.
Key terms for lenders
What are the key elements in the acquisition agreement that are relevant to the lenders in your jurisdiction? What liability protections are typically afforded to lenders in the acquisition agreement?
Lenders usually look for the following key elements in an acquisition agreement:
- valuation of the target shares and any provisions regarding adjustments to purchase price;
- issues arising out of any due diligence that are disclosures to representations and warranties;
- timelines for completion of the acquisition and dependency on any court, government or regulatory approvals or filings;
- indemnities available to the acquirer from the sellers;
- ability of the acquirer to pledge or encumber the shares in the target;
- transfer restrictions on the sale of shares of the target;
- corporate governance matters, including board representation and veto rights;
- anti-dilution protection in case of new issuances;
- exit provisions, where the acquirer is a sponsor;
- governing law and dispute resolution mechanisms;
- confidentiality provisions and carve-outs for sharing information with lenders; and
- acquirer ability to assign (including by way of security) any rights under the acquisition documents.
Acquisition agreements typically do not deal with the rights or liabilities of lenders, and those will usually be part of the credit documentation between the lenders and borrower. However, conditions precedent will be carefully provided for in those documents so that lenders are aware of what needs to be completed before they are required to fund the acquisition or part of it.
Public filing of commitment papers
Are commitment letters and acquisition agreements publicly filed in your jurisdiction? At what point in the process are the commitment papers made public?
Commitment letters, sanction letters and term sheets for acquisition financing and acquisition agreements are not publicly filed in India. However, security documents for loans and NCDs are publicly filed with the ROC within 30 days of execution of such documents. Further, the information memorandum and debenture trust deeds in relation to listed NCDs are filed as soon as possible with the stock exchanges in the case of listed NCDs.