General structuring of financing
Choice of law
What territory’s law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?
Finance documentation for acquisition finance raised by an Indian borrower from Indian banks and financial institutions is governed by Indian law. Documents in relation to the issue of non-convertible debentures (NCDs) by an Indian company are governed by Indian law. Agreements for acquisition finance raised by a borrower located outside India are typically governed by English law. Security and guarantee documents are generally governed by the law of the jurisdiction where the assets or the guarantors are located.
Indian courts generally uphold the choice of the parties to have an agreement governed by foreign law unless the Indian courts believe that the choice of foreign law is not bona fide or if the application of foreign law is opposed to the public policy of India. Foreign law would have to be proved as a matter of fact in an Indian court by leading expert evidence of foreign legal counsel.
Under the provisions of the Code of Civil Procedure, 1908 (CPC), a foreign judgment is conclusive as to any matter directly adjudicated upon in such a decree, barring certain exceptions. If a foreign judgment is in the nature of a money decree and is passed by a ‘superior court’ of a ‘reciprocating territory’, then such a decree can be filed with an Indian court and would be enforceable as a decree of an Indian court. Certain territories (such as the United Kingdom) have been designated ‘reciprocating territories’ and certain courts in those territories have been designated as ‘superior courts’ by the Indian government (such as the House of Lords, the Court of Appeal and the High Court in England).
Where the judgment is not a money decree (such as an injunction or an order for specific performance), a fresh suit will have to be filed in a competent Indian court where the foreign judgment will be admitted only as evidence.
Restrictions on cross-border acquisitions and lending
Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?
India is an exchange-controlled regime and investment by offshore entities in India is regulated by the Foreign Exchange Management Act 1999 (FEMA), framing the rules and regulations, together with the government’s foreign direct investment (FDI) policy.
Any FDI in an Indian company will need to comply with the sectoral investment caps, pricing guidelines and specific conditions, if any, related to the sector in which FDI is proposed to be made. If such requirements are not met, then the approval of the relevant government department may be required.
Any loans or credit facilities by a foreign lender to an Indian borrower are governed by the FEMA. A foreign lender can provide debt to an Indian company via the following routes:
- provide term loans or subscribe to bonds known as external commercial borrowings (ECBs), which are governed by the guidelines (ECB Guidelines) and directions issued by the Reserve Bank of India (RBI); or
- subscribe to rupee-denominated NCDs issued to foreign portfolio investors (FPI) registered with the Securities and Exchange Board of India (SEBI) under the SEBI (Foreign Portfolio Investors) Regulations 2014 (FPI Regulations).
The ECB Guidelines stipulate provisions on various matters that need to be considered by a foreign lender when lending to an Indian borrower under the relevant options. Among other things, the ECB Guidelines regulate:
- the sources from where Indian entities can raise ECBs;
- the type of Indian entities that can borrow;
- the average maturity and quantum of the ECB;
- the purpose for which an ECB can be used;
- the maximum interest and fees payable in relation to an ECB; and
- the type of security and procedure for security creation.
NCDs may be listed on the wholesale debt market segments of stock exchanges or may be unlisted. Such NCDs are required to have minimum maturity or duration of one year at the time of investment by the FPI. Any investment by an FPI in NCDs will need to comply with the concentration limits and single or group investor-wise limit prescribed by RBI. It should be noted that investment by any FPI, including investments by related FPIs, shall not exceed 50 per cent of any issue of NCDs. In the case that an FPI, including related FPIs, has invested in more than 50 per cent of any single issue, it is not permitted to make further investments in that issue until this requirement is met. Further, FPIs cannot invest in partly-paid NCDs.
Types of debt
What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?
Acquisition financing typically includes senior debt from the lenders and subordinate debt and equity infusion in the acquirer by the sponsors.
Are there rules requiring certainty of financing for acquisitions of public companies? Have ‘certain funds’ provisions become market practice in other transactions where not required?
If an acquisition of shares, voting rights or control of an Indian listed company triggers a requirement of making a mandatory open offer by the acquirer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Regulations), then the acquirer is required to fund an escrow account with the requisite funds in accordance with the Takeover Regulations. Such requirement can be funded in the form of cash deposited in the escrow account, a bank guarantee issued in favour of the manager to the offer by any scheduled commercial bank or the deposit of frequently traded and freely transferable securities with appropriate margin. If the escrow account is to be funded by financing obtained by the acquirer, then the manager to the offer must be satisfied that the financing is available.
In some cases, Indian sellers expect bidders to demonstrate binding funding commitments before choosing a winning bidder and entering into definitive documentation. Further, in case of acquisition of a corporate debtor undergoing a corporate insolvency resolution process under the Insolvency and Bankruptcy Code 2016 (IBC), the committee of creditors expects the acquirer to demonstrate that funding arrangements are tied up before approving its resolution plan. Very recently, it has been prescribed that upon approval of a resolution plan by the committee of creditors, resolution applicants must provide a performance security within the time specified in the request for the resolution plan, and such performance security will be forfeited if the resolution applicant of such plan, after its approval by the National Company Law Tribunal, fails to implement or contributes to the failure of implementation of that plan in accordance with the terms of the plan and its implementation schedule. The nature, value, duration and source of such performance security will be prescribed by the committee of creditors in light of the nature of the resolution plan and business of the corporate debtor.
Restrictions on use of proceeds
Are there any restrictions on the borrower’s use of proceeds from loans or debt securities?
The proceeds of an ECB cannot be used for financing the acquisition of shares of an Indian company
The proceeds of NCDs issued on a private placement basis can be used for equity investments. The proceeds of unlisted NCDs cannot be used for capital market investments. Further, the proceeds of a public issue of listed NCDs cannot be used for the acquisition of shares of any person who is part of the same group or who is under the same management.
RBI guidelines restrict an Indian bank’s ability to finance the acquisition of equity shares. In general, a promoter’s contribution towards equity cannot be funded by a bank and banks cannot finance the acquisition of equity shares, save for exceptional cases.
The restrictions on acquisition finance have led to the establishment of offshore lending mechanisms in which special-purpose vehicles (SPVs) are set up outside India to raise funds offshore for making acquisitions in India.
What kind of indemnities would customarily be provided by the borrower to lenders in connection with a financing?
The borrower will usually provide indemnities to lenders on matters such as tax, stamp duty, loss to finance parties pursuant to events of default, costs and expenses in relation to the transaction, amendments to the documentation and enforcement and preservation of security. Transaction specific indemnities may also be included based on the due-diligence findings. Specific tax indemnities have also become the norm under financing documentation, especially when any security is provided to secure the credit.