Guarantees and collateral for acquisition financings in India

Guarantees and collateral

Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?

Under the Companies Act 2013, a shareholder’s approval (by way of special resolution) is required for an Indian company to provide any guarantee or security if certain prescribed thresholds (in terms of paid-up capital and free reserves) are exceeded. However, this approval is not required if the guarantee or security is being provided for a financing mechanism utilised by the company’s wholly owned subsidiary or joint venture.

Further, under the Companies Act 2013, a company (lending company) cannot give loans, provide security or extend any guarantee to or on behalf of any other company in which the directors of the lending company are interested or control a certain percentage of voting rights unless such a loan, guarantee or security falls within the exemptions prescribed under the Companies Act 2013. Certain exceptions to this rule are:

• for any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary if those loans are utilised by the wholly owned subsidiary for its principal business activities;
• for any guarantee given or security provided by a holding company in respect of loans made by any bank or financial institution to its subsidiary if those loans are utilised by the subsidiary for its principal business activities;
• if the lending company, in the ordinary course of its business, provides loans or guarantees or security for the due repayment of any loan and in respect of those loans an interest is charged at a rate not less than the bank rate declared by the RBI; or
• if the lending company obtains the approval of at least 75 per cent of its shareholders for such guarantee given or security provided and the loans availed by the borrower are utilised by it for its principal business activities.

An ECB can be guaranteed upon obtaining a no-objection from an authorised dealer. If the guarantee is issued by a non-resident entity, the guarantor is required to fulfil the qualification of a recognised lender under the ECB Guidelines.

A non-resident entity can guarantee any credit facilities availed by an Indian borrower from Indian banks and financial institutions. On invocation of that guarantee, the payment must be made to the beneficiary lender through an inward remittance and the liability of the Indian borrower towards that guarantor will be restricted to the rupee amount that was received by the Indian beneficiary lender.

A non-resident entity can also guarantee NCDs issued by Indian companies, subject to, inter alia, the following conditions:

• the non-resident entity should be an eligible lender under the ECB Guidelines;
• the issuer must be eligible to raise an ECB under the automatic route;
• the debt instrument should have a minimum average maturity of three years;
• any prepayment and call or put options are not permissible for such NCDs up to an average maturity period of three years; and
• any guarantee fee and other costs in connection with that guarantee is restricted to a maximum 2 per cent of the principal amount involved.

Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?

Under the Companies Act 2013, a public company (whether listed or not) is not permitted to provide any direct or indirect financial assistance to any person for subscription to, or for purchase of its own, shares or the shares of its holding company. The term ‘financial assistance’ is broad and includes assistance in the form of loans, guarantees and the provision of security. However, this restriction does not apply to private companies (which are not subsidiaries of public companies). There are no whitewash procedures available under Indian law in connection with this financial assistance.

What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?

In relation to financing utilised by a borrower located outside India for the purpose of acquiring shares of an Indian company, no security can be created over Indian assets and a pledge over shares of the Indian company is not permitted without regulatory approvals.

In relation to domestic financing, ECBs and NCDs issued by Indian companies, security over immovable and movable property (including shares under certain circumstances) may be created.

Security over property such as land and buildings is taken in the form of a mortgage. Security over shares and other securities is typically created by way of a pledge.

Movable property, such as cash deposits, bank accounts, receivables, plant and machinery and stock, is usually secured by way of hypothecation. Under Indian law, hypothecation generally means a charge over any movable property, existing or future, created by a borrower in favour of a creditor without the delivery of possession of the movable property to that creditor. A blanket charge over all movable assets can be granted and the charge created by way of hypothecation may be a fixed charge over identifiable assets or fixed assets, including a floating charge over current assets, stock-in-trade, future cash flows and receivables.

Security over claims and contractual rights can be created by a charge or by a legal or equitable assignment.

Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?

Perfection requirements would differ depending upon the underlying nature of the collateral.

Mortgage

Any mortgage, other than an equitable mortgage, of immovable property must be registered as per the Indian Registration Act 1908 within four months of the execution of the mortgage deed. Where the mortgage is an equitable mortgage created by way of deposit of title deeds of the property being mortgaged, no registered instrument is required (although in some states, the registration authorities require equitable mortgages to be registered or notified too). Mortgages are also registered with Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI). The mortgage also needs to be registered with the relevant registrar of companies (ROC) within 30 days of creation.

Hypothecation

Hypothecation of movable property is also registered with CERSAI and the requisite filings must be made with the ROC within 30 days.

Pledge

For shares held in dematerialised form, a form must be filed with the depository participant to create a pledge on the shares, and the requisite filings must be made with the ROC within 30 days where the pledgor is a company.

Other filings

Under Indian law, ships are usually offered as security by filing of a statutory form with the Mercantile Marine Department and the terms and conditions of creation of a mortgage on a vessel are generally agreed between the parties in a deed of covenants that is attached to that form. Aircraft are usually offered as security pursuant to a deed of hypothecation or mortgage, and security over aircraft is registered with the Director General of Civil Aviation.

Exchange control regulations

Approvals from the RBI or the authorised dealer may be required for cross-border security creation and the enforcement of that security is required to be in accordance with the exchange control regulations and the terms and conditions of those approvals.

Stamp duty

Under Indian law, stamp duty must be paid on a facility agreement and security documents at or prior to execution for them to be admissible as evidence in a court of law. Stamp duty rates are determined based on the nature of the instrument and differ from state to state. Stamp duty needs to be paid on a document depending on the state where it is executed.

No objection from tax authorities

A no objection certificate should be obtained pursuant to section 281 of the Income Tax Act 1961 for the creation of security on certain types of assets because the security interest could be void if there are any tax proceedings or tax claims by the income tax authorities against the security provider.

Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?

Once a security interest is perfected and the charge filings have been made with the ROC, no further renewal procedures are required to keep the lien valid and recorded.

Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?

Consent from works councils or trades unions is not required for the purposes of providing guarantees or security by a company in India.

Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?

Indian law recognises the concept of agency as well as trust. Security is typically created in favour of a security trustee in syndicated loan transactions and debenture trustee in case of NCDs. Since the security is created in favour of the trustee for the benefit of the creditors, the security is not required to be created in favour of each individual creditor. Assignments and transfers can be effected by lenders under a facility agreement without the need for any steps to be taken in relation to the underlying Indian law’s security documents for new lenders to benefit. However, in some cases, the documentation will provide that the lenders should accede to the security trustee agreement by way of a deed of accession to get the benefit of the security.

What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?

The security trustee generally executes a release deed or provides confirmation in relation to release of security upon the instructions of the lenders. Different procedures may be followed depending upon the nature of the property, and appropriate confirmation can be obtained from the borrower for the protection of the lenders. For example, modifications are required in the land registry for release of security over immovable property and appropriate instructions need to be issued to a depository participant for the release of pledge over shares. Further, filings are made with the registrar of companies for the release of security on the property, and sometimes government authorities may have to be notified depending upon the nature of the assets that were secured (eg, in the case of ships and aircraft).

Describe the fraudulent transfer laws in your jurisdiction.

See question 33 in relation to voidable transactions.