Lending and taking security in India: overview
A Q&A guide to Finance in India.
The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security, negative pledge clauses, guarantees and loan agreements. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.
To compare answers across multiple jurisdictions, visit the Finance Country Q&A tool.
This Q&A is part of the global guide to finance. For a full list of contents visit www.practicallaw.com/finance-guide.
Overview of the lending market
A comprehensive bankruptcy code, the Insolvency and Bankruptcy Code 2016 (Insolvency Code), has recently been passed by the Indian parliament. The government intends to make it operational by the end of the financial year 2017. The Insolvency Code is transformational legislation as it replaces existing laws relating to insolvency and provides a single comprehensive framework for the insolvency and bankruptcy of:
Limited liability partnerships.
The Insolvency Code provides for insolvency resolution in a timely manner with the objectives of:
Maximisation of assets' value.
Revival of businesses as going concerns.
Balancing of the interests of all stakeholders.
Strategic debt restructuring scheme
As part of its continuing focus on instilling credit discipline in borrower companies and empowering banks in recovery actions, in June 2015 the Reserve Bank of India (RBI) issued the Strategic Debt Restructuring Scheme (SDR Scheme). The SDR Scheme:
Provides a regulatory framework to enable Indian banks to convert their debt into an equity stake (51% or more) in distressed companies which have not met certain critical milestones for restructured debt under a Joint Lenders' Forum (see Question 21).
Will be used in cases where change in ownership is likely to improve the economic value of the loan asset.
Requires banks to divest their stake as soon as possible to eligible shareholders.
Empowers banks to change the existing management of the borrower and appoint experts to run the borrower until its ownership is transferred to a new shareholder.
Provides for certain asset classification benefits to the banks if the ownership of the borrower is transferred within the stipulated timelines.
Issuance of Masala bonds
In September 2015, the RBI allowed Indian companies to issue INR-denominated bonds overseas (popularly known as Masala bonds) within the overarching framework of the external commercial borrowing policy. Masala bonds enhance fund raising options for Indian corporates by tapping a wider pool of investors and increase the tradability of INR as a currency on overseas markets. Eligible entities can issue these bonds with the following conditions:
The minimum maturity must be at least three years.
The maximum amount of borrowing under the automatic route (without RBI's prior approval) is INR50 billion.
The bonds must be issued in, and subscribed to by a resident of, a country that is a member of the Financial Action Task Force (FATF) or a FATF-style body.
New framework for external commercial borrowing
A foreign currency facility received from foreign lenders by an Indian borrower is known as external commercial borrowing (ECB). In January 2016, the RBI issued a revised framework for ECBs. The revised framework is based on the following principles:
Liberalising the existing laws on ECBs with fewer restrictions on end uses and higher all-in-cost ceilings for long-term foreign currency borrowings.
Liberalising the regime for INR-denominated ECBs where the currency risk is borne by the lender.
Expanding the list of overseas lenders to include long-term lenders, such as insurance companies, pension funds and sovereign wealth funds.
See Question 25.
Directions on interest rate on advances
In March 2016, the RBI issued directions on computing interest rates on advances based on the marginal cost of funds. These directions were issued to help banks in improving:
Transmission of policy rates into banks' lending rates.
Transparency in the methodology followed by banks for determining interest rates on advances.
These directions mandate that all INR loans sanctioned, and credit limits renewed, from 1 April 2016 will be priced with reference to the marginal cost of funds based lending rate (MCLR) which will be the internal benchmark for these purposes.
In April 2016, the RBI issued guidelines on priority sector lending certificates, whereby the seller bank sells priority-sector loans to a buyer bank. This enables banks to meet their priority sector lending target obligations for a financial year.
Certain provisions of the Companies Act 2013 (Companies Act) were amended last year to facilitate inter-corporate loans and corporate resolutions for borrowing.
Foreign portfolio investors are now allowed to invest in defaulted bonds where the revised maturity period is three years or more (earlier foreign portfolio investors were allowed to invest in bonds with a minimum residual maturity of three years).
Forms of security over assets
Real estate generally includes:
Land (freehold or leased).
Any buildings or structures standing on land.
Anything permanently attached or fastened to the land.
Any rights attached with the land (such as easement rights).
Common forms of security
Security over real estate is created by way of mortgage. Creation of mortgages is primarily governed by the Transfer of Property Act 1882.
The common forms of mortgage in India are:
An English mortgage (or a registered mortgage) whereby the mortgaged property is transferred absolutely to the mortgagee with a condition that the mortgaged property will be reconveyed to the mortgagor on discharge of the debt.
An equitable mortgage, created by depositing the title deeds with the mortgagee with an intention to create security for repayment of debt.
Under the Transfer of Property Act, a mortgage (other than an equitable mortgage) for repayment of more than INR100 must be by way of a registered instrument (indenture of mortgage). The indenture of mortgage must be:
Signed by the mortgagor.
Attested by two witnesses.
Registered with the relevant land registry where the mortgaged immovable property is situated.
In an equitable mortgage, the mortgagor records the creation of equitable mortgage by providing a declaration at the time of deposit of title deeds. That deposit is also recorded by the mortgagee by way of a memorandum of entry.
The other formalities include:
Stamp duty. The applicable stamp duty on the documents (including mortgage documents) must be paid in accordance with applicable stamp laws. The payable stamp duty varies across states.
Registration under the Indian Registration Act 1908. Any mortgage of immovable property, other than an equitable mortgage, must be registered within four months of the execution of the mortgage deed, failing which the mortgage is rendered invalid. In certain states, registration or intimation of creation of an equitable mortgage to the relevant land authorities has been made compulsory.
Filing with the Registrar of Companies (ROC). The security provider must:
file with the relevant ROC a form recording creation of the security interest (including mortgage); and
obtain a certificate of charge.
Registration with Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI). Certain security interests (including mortgages) must be registered with CERSAI. This registration must be done by the person in whose favour the security interest has been created.
Further required approvals may include:
Prior permission of the income-tax authorities for creating a charge on immovable properties.
If the immovable property is leased from government or regulatory bodies, the consent of the lessor for creation of a mortgage.
Tangible movable property
Tangible movable property
Tangible movable property includes:
Plant and machinery.
Trading stock (inventory).
Cars and other vehicles.
Furniture and other movable assets.
Ships and other vessels.
Common forms of security
The common forms of security on tangible movable property in India are:
Mortgage. Sometimes an English mortgage is created on both immovable properties and tangible movable properties. A security over ships and other vessels is created by way of a statutory mortgage.
Hypothecation. Under Indian law, hypothecation generally means a charge (fixed or floating) on any tangible moveable property, existing or future, created by a security provider in favour of a lender without the delivery of possession of the tangible moveable property to that lender.
For general mortgage formalities, see Question 2.
A mortgage on ships and other vessels must be:
Created in a statutorily prescribed form.
Attested by at least two witnesses.
Approved by and registered with the Mercantile Marine Department (MMD).
In hypothecation, a deed of hypothecation is executed by the security provider in favour of the lender. The charge created under the deed of hypothecation is governed by the terms of the document, which provides in detail the powers and provisions safeguarding the interest of the lender.
For hypothecation over aircraft, the security provider must register the hypothecation with the Director General of Civil Aviation (DGCA). The DGCA makes a note on the certificate of registration of the hypothecation in favour of the lender. The security provider may also make filings under:
The Convention on International Interests in Mobile Equipment, opened for signature on 16 November 2001.
The Protocol to the Convention on Matters Specific to Aircraft Equipment, opened for signature on 16 November 2001 (Cape Town Convention).
Hypothecation over a motor vehicle must be noted on the registration certificate of the motor vehicle.
The other formalities for hypothecation include:
Financial instruments include:
Debentures and bonds.
Mutual fund certificates.
Common forms of security
The most common form of security on financial instruments is the pledge. Section 172 of the Contract Act 1872 provides for a pledge over tangible movable assets as a bailment of goods as security for payment of any outstanding debt.
A pledge agreement is entered into between the pledgor and the pledgee to create and record the pledge. A power of attorney is also usually issued by the pledgor in favour of the pledgee to deal with the financial instruments on occurrence of a default. One of the essential components of a pledge is the delivery (actual or constructive) of the relevant financial instruments to the pledgee.
The other formalities include:
Stamp duty. See Question 2.
Filing with the ROC. See Question 2.
Filing with the depository. Where the financial instruments are in dematerialised form, certain forms must be filed with the depository to mark a pledge on the relevant financial instruments.
Disclosures in the case of listed company shares. If the shares of a listed company are to be pledged by its promoters, certain disclosures (if the prescribed thresholds are met) must be made to the relevant stock exchanges and to the company.
Claims and receivables
Claims and receivables
Claims and receivables include:
Rights under a contract.
Common forms of security
The common forms of security over the claims and receivables are:
Assignment of receivables can be either:
Assignment by way of security. This is an equitable assignment and is generally done under a deed of hypothecation.
Absolute assignment of receivables. Other than under factoring, this is not prevalent in India due to high stamp duty on assignment of receivables (in the range of 2% to 5%).
Intellectual property includes:
Common forms of security
Security over intellectual property rights can be created by way of either:
Under the Indian Patents Act 1970, a mortgage or other security interest created on a patent must be in writing.
Under the Trademark Act 1999, a trade mark can be assigned by the owner by executing an assignment agreement in writing between the owner and the assignee. Security on the trade mark can also be created by executing a deed of hypothecation.
Under the Copyright Act 1957, the owner of a copyright can assign the copyright by executing an assignment agreement in writing between the owner and the assignee. The assignment can be for the whole term or part of the term of the copyright and can be for the entirety or part of the copyright.
Under the Designs Act 2000, a mortgage or any other interest in a registered design can be created by executing an agreement between the parties. That agreement must be filed with the Controller General of Designs in the prescribed form within the stipulated timeline.
The other formalities in relation to creation of security over the intellectual property rights are:
Stamp duty. See Question 2.
Filing with the ROC. See Question 2.
Filing with the CERSAI. As required under a mortgage, a charge over intellectual property rights is also required to be filed with the CERSAI. See Question 2.
Filing with the IPR office. The relevant forms of security creation must be filed with the concerned intellectual property rights office. Registration of assignment or security creation over patents, trade marks and designs is mandatory (but is not mandatory for copyright).
Security can be created over future movable assets. Security over future immovable property cannot be created as it requires the security provider to have a right in the immovable property at the time of the security's creation.
Security by way of a floating charge can be granted over fungible assets, which crystallise into a fixed charge on occurrence of a default.
Creation of a security interest over certain infrastructure assets acquired under a concession granted by the government would be subject to the terms of that concession. For example, either:
They are excluded from creation of security interest (such as for roads).
Substitution rights can only be granted under a tripartite agreement with the lender and the governmental authority (such as for telecom licences).
In relation to land, for certain infrastructure projects (such as hydro and wind), if the land falls in a forest area then a mortgage cannot be created on that land.
Release of security over assets
All security interests recorded with the ROC and CERSAI must be released by filing relevant charge satisfaction forms.
Other formalities required for release of certain assets include the following:
Immovable property. In an English mortgage, a deed of re-conveyance or deed of release is executed between the mortgagor and mortgagee. It must be registered with the relevant sub-registrar of assurances.
In an equitable mortgage, the tile deeds that were delivered to the lender are returned to the security provider. If the equitable mortgage is registered, then a deed of release is executed between the mortgagor and the mortgagee and is registered with the relevant land revenue authority.
Ships. The borrower must file a release application with the MMD enclosing the:
no-objection certificate from the existing charge holders;
original statutory mortgage form filed with the MMD (filled with the release information);
the necessary board resolutions of the borrower; and
the authority letters of the lenders to release the mortgage over the vessel.
Aircraft. The borrower must file a release application with the DGCA requesting the DGCA to release the charge created to secure the debt, enclosing the:
no-objection certificate from the lenders;
aircraft's original registration certificate; and
necessary resolutions of the borrower.
Intellectual property rights. Release deeds must be executed and filed with relevant offices to terminate the security interest created over the intellectual property rights.
Shares. Where the shares are in physical form, the share certificates must be returned to the pledgor. If the shares are in dematerialised form, the necessary forms must be filed with the depository participant for release. The power of attorney issued under the pledge agreement must also be returned or cancelled.
Special purpose vehicles (SPVs) in secured lending
Sale and leaseback
Sale and leaseback is a preferred arrangement for asset financing. In this arrangement, one party sells a property to a buyer and the buyer leases the property back to the seller. The transaction is a means for the lessor to provide finance to the lessee, with the asset as security. Some of the risks associated with sale and leasebacks include:
Over-valuation of assets.
Assets becoming an inseparable part of another property.
Factoring is an arrangement where the seller makes a sale, delivers the product and generates an invoice. The payment under the invoice has a credit period. The factor buys the right under that invoice for an amount equivalent to the invoice's face value less a discount. Factoring transactions are governed by the Factoring Regulation Act 2011.
Financing in the form of hire-purchase is mostly used for financing assets (equipment, vehicles, and so on). Under this arrangement, the possession of the asset is transferred to the hirer, for which the hirer pays a monthly instalment to the financing company. At the end of tenure, the hirer has an option to purchase the product. The main risks under this arrangement are:
Risks attached to the asset.
Claims of a third party against the owner.
That the assets will not be in control of the financing company.
Retention of title
Retention of title means the seller retaining the title to the goods, even after possession of the goods has been transferred to the buyer, usually until the time full payment towards the goods has been made. This arrangement is not common in India.
Other common forms of quasi-security include non-disposal undertakings, under which the security provider agrees and undertakes not to dispose of the specified assets.
Letters of comfort are also used in many financing transactions instead of guarantees.
In addition to a statutory lien, parties may also enter into contractual arrangements to establish a lien and grant set-off rights to the lenders. The contractual right of set-off can be exercised only if there is mutual demand. The relevant form must be filed with the ROC and a certificate of registration obtained for perfecting the lien.
Risk areas for lenders
Under the Companies Act, a public company 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 includes, but is not limited to, assistance in the form of loans, guarantees, and security.
A public company must obtain a special resolution from its shareholders if the loan (including the existing loans) exceeds the aggregate of its paid-up share capital and free reserves. This is not applicable to temporary loans.
A company can provide a loan, issue guarantee or provide security to any person (including its subsidiaries), if it does not exceed the higher of either:
60% of its paid-up share capital, free reserves and securities premium account.
100% of its free reserves and securities premium account.
A special resolution of the shareholders is required if these limits are exceeded.
Loans to directors
The Companies Act regulates the giving of loans, guarantees or security by companies to their directors (whether directly or indirectly). It prohibits a company from making any loan, issuing any guarantee and providing any security for the loan to a director or to any other person to whom the director has an interested relationship. Certain exemptions are provided under the Companies Act, including:
For certain private companies.
Where the loan is given to a wholly owned subsidiary for its principal business.
Where the security or guarantee is provided in relation to a loan taken by a subsidiary from a bank or financial institution.
Banks. The RBI has issued directions on computing interest rates on advances based on the marginal cost of funds. No banks can lend to any person at a rate below the MCLR or the base rate (as applicable before 1 April 2016).
Non-banking financial company. The RBI does not regulate the interest rate to be charged by non-banking financial companies. It only prescribes that the board of directors of each non-banking financial company must adopt an interest rate model taking into account relevant factors such as cost of funds, margins and risk premiums, in determining the interest rate.
External commercial borrowing (ECB). The RBI prescribes all-in-cost ceiling above which a borrower is not allowed use ECB. The all-in-cost includes rate of interest, other fees, expenses, charges, guarantee fees whether paid in foreign currency or INR, but does not include commitment fees, pre-payment fees or charges, or withholding tax payable in INR.
The validity of a loan or guarantee of security depends on the:
Relevant corporate authorisations under the Companies Act.
Payment of stamp duty.
Registration of documents (in the case of immovable properties).
A lender cannot be held liable for the actions of a borrower, security provider or a guarantor unless he has taken over the management control of the relevant company. Generally, suitable representations, covenants and indemnities are provided in the finance documents to ensure that the borrower complies with environmental laws at all times.
Structuring the priority of debts
Contractual subordination, where creditors contractually agree among each other on whose debts would be paid in priority over others, is common in the Indian loan market. Contractual subordination can take place either through a subordination deed or through inter-creditor agreements.
A lender to a holding company is usually structurally subordinated to the senior lenders of the operating subsidiaries, as the senior lenders of the operating subsidiaries will be paid before the lenders of the holding company. These structures are used in mezzanine financing, but are rarely seen as lenders are conservative and prefer to lend against security over assets of operating subsidiaries.
Inter-creditor arrangements are also common in the Indian loan market. Usually the lenders sharing common security are party to inter-creditor agreements. Inter-creditor arrangements typically cover:
Ranking and sharing of proceeds.
Ranking in relation to security.
Decision-making provisions amongst the lenders.
Debt trading and transfer mechanisms
Trading of debt
Debt can be traded in the form of securitised debt instruments, pass through certificates or security receipts. Securitised debt instruments are issued by the issuer and listed on the stock exchanges for trading.
Other debt instruments that are prevalent in India and not listed on stock exchanges include pass-through certificates and security receipts.
Debts are generally transferred by way of novation or assignment. Assignment is more common for securitisation transactions.
Benefits of security and guarantee
In the majority of transactions, the security and guarantee is created and perfected in favour of a security trustee and not in favour of the lenders. Therefore, in event of any transfer, novation or assignment of the debt, the new lender accedes to the security trustee agreement by executing a deed of accession. In securitisation transactions, the benefit of the security interest is transferred to the assignee.
Agent and trust concepts
Enforcement of security interests and borrower insolvency
A lender can enforce a guarantee or security interest on the occurrence of an event of default as set out in the relevant financing document. Usually, the loan agreements provide for the lender's entitlements on occurrence of default, including:
Acceleration of the facility.
Enforcement of the security interest.
Exercising other legal rights and remedies.
Methods of enforcement
Enforcement of security is governed by the terms and conditions of the security documents.
In an English mortgage (see Question 2), the mortgagee can sell the mortgaged property without the intervention of the court, subject to certain notification requirements. In an equitable mortgage, the mortgagor must apply to the court for a decree to sell the mortgaged property for recovery of the debt. A mortgage can also be enforced directly by the lender (by banks in India and certain recognised financial institutions) under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act) without the court's intervention. The enforcing party must comply with the procedure provided under the SARFAESI Act.
The rights and remedies of a hypothecatee are entirely regulated by the terms of the deed of hypothecation (see Question 3). A deed of hypothecation can be enforced by either compelling the delivery of the moveable property or selling or obtaining a decree for sale of the moveable property, as stipulated in the deed. Under a deed of hypothecation, a lender usually appoints a receiver to take possession of and sell the hypothecated assets. A hypothecation can also be enforced by the lender (by banks in India and certain recognised financial institutions only) under the SARFAESI Act without the courts' intervention.
A pledge can be enforced by the pledgee by giving a reasonable notice to the pledgor. The pledgee does not need to obtain a court order to sell the pledged assets. As the pledged assets are in possession of the pledgee, it can directly dispose of the pledged assets and apply the proceeds against the loan.
A claim under a guarantee can be made by providing a demand notice in accordance with the deed of guarantee. If the guarantor fails to make the payment, the guaranteed party can file a suit to enforce the guarantee. The guaranteed party can also approach the court under a summary procedure and file a summary suit for the enforcement of the guarantee.
Rescue, reorganisation and insolvency
Under the Sick Industrial Companies Act 1985, when proceedings with the Board for Industrial and Financial Reconstruction (BIFR) commences, or a scheme sanctioned by it is being implemented, no legal proceedings (with certain exemptions) can proceed except with the consent of the BIFR. A reference to the BIFR can be made by the board of directors of the company when it has become a sick industrial company.
Special state legislation can also provide protection to debtor companies from claims by creditors, on the relevant state government's express notification of the debtor company as a relief undertaking. Some of these legislations are:
Bombay Relief Undertakings Act 1958 (applicable to Maharashtra and Gujarat).
Rajasthan Relief Undertakings Act 1961.
Karnataka Relief Undertakings Act 1977.
Joint Lenders' Forum
The RBI has issued guidelines in relation to formation of a Joint Lenders' Forum (JLF) for companies facing distress. A JLF is a body of all the existing lenders and is formed by execution of a JLF agreement. After formation, the JLF decides on a corrective action plan for revival of the borrower or recovery of the loans granted to the borrower. A corrective action plan (with the consent of minimum 75% of creditors by value and 50% of creditors in number) is drawn up to achieve either:
Rectification. Without any sacrifice by the lenders, the JLF may consider obtaining a specific commitment from a promoter, or equity or strategic investor, to provide need-based additional finance to the borrower.
Restructuring. The lenders may enter into an inter-creditor agreement and require the borrower to execute a debtor-creditor agreement (with a standstill clause). The restructuring process may be initiated by referring the account to corporate debt restructuring or by the JLF itself.
Recovery. If these actions are not feasible, the JLF may consider a debt recovery process.
A secured creditor can either stay outside the winding up and enforce its security and prove for any balance debt, or surrender its security and prove its debt in the winding up. If a secured creditor stands outside the winding up and proves for balance debt, then it will be on par with other unsecured creditors.
Any creditor (secured or unsecured) can initiate winding up proceedings if, after serving a demand notice requiring the payment of the sum due, the debtor neglects to pay the sum.
Under Indian insolvency laws, a fraudulent preference can be alleged against a company where it is unable to pay its debts and is adjudged insolvent on a petition presented no later than six months later and it, with the view of giving a creditor preference over other creditors:
Transfers property (including by creation of security interest).
Incurs an obligation or initiates judicial proceedings in relation to a creditor.
A fraudulent preference renders that transfer, payment and/or obligation invalid.
In addition, any transfer of property, movable or immovable, or any delivery of goods made by the company within one year before the presentation of a petition for winding up or passing of a resolution for the winding up of the company is void against the liquidator, unless it is either:
A transfer made in the ordinary course of its business.
In favour of a purchaser or security holder in good faith and for valuable consideration.
A floating charge created within the 12 months immediately preceding the commencement of the winding up of a company is invalid unless it is proved that the company was solvent immediately after the creation of the floating charge.
The order in which creditors of a company are paid in an insolvency is broadly:
Workmen's dues and secured creditors (on a pari passu basis).
Cost, charges and expenses of winding up.
Preferential payments such as government and statutory dues, insurance fund amounts, pensions, gratuities and other such welfare fund dues.
Cross-border issues on loans
Any loans or credit facilities by a foreign lender to an Indian borrower are governed by the Foreign Exchange Management Act 1999 (FEMA) and its rules and regulations. Under the FEMA, the RBI has recently revamped the framework governing external commercial borrowings (ECBs) and has issued the revised framework on ECBs with the Master Direction on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers dated 1 January 2016 (ECB Guidelines).
The ECB Guidelines provide for three tracks under which ECBs can be made available:
A medium-term foreign currency denominated ECB with a minimum average maturity of three to five years, obtained under Track I.
A long-term foreign currency denominated ECB with a minimum average maturity of ten years, obtained under Track II.
Track III is for INR-denominated ECBs with a minimum average maturity of three to five years.
The ECB Guidelines prescribe the sources from where Indian entities can obtain ECBs. An eligible foreign lender providing an ECB to an Indian borrower does not need to obtain any consent or licence in India to lend to the Indian borrower or to enforce its rights under any loan agreement. ECBs, up to a certain amount, can be obtained by eligible Indian borrowers under the automatic route (without the RBI's prior approval) or in excess of stipulated amounts under the approval route (with the RBI's prior approval). The Indian borrower must obtain a loan registration number before it can draw down an ECB.
The type of security and procedure for security creation for securing ECBs is also provided under the ECB Guidelines. Generally, consent from the authorised dealer bank is required for creating any security interest or for providing any guarantee.
India is an exchange controlled economy and there are restrictions on inflow and outflow of foreign exchange under the FEMA. The ECB Guidelines contain restrictions on the:
Amount of external commercial borrowings (ECBs) that can be raised.
Amount of interest and fees that can be paid on ECBs.
Prepayment of ECBs.
Assets that can be provided as security for an ECB.
In addition, any prepayment of ECBs that does not comply with the stipulated minimum average maturity and any indemnity payments by an Indian borrower to a person resident outside India require the RBI's prior approval.
See Question 25.
Taxes and fees on loans, guarantees and security interests
Stamp duty must be paid on loan agreements, guarantee deeds and security documents. The stamp duty payable on the documents varies from state to state. Normally, the obligation to pay the stamp duty is on the borrower, guarantor or security provider (as the case may be).
Registration fees for registering mortgages with the relevant registrar of sub-assurances depends on the state in which the property is located. Some states have a fixed registration fee while some states have a percentage based fee.
Registration fees for registering relevant security documents with the ROC are nominal.
Registration fees for filing relevant forms with the CERSAI are nominal.
Documents such as declarations (in an equitable mortgage) and powers of attorney (in pledge agreements and deeds of hypothecation) must be notarised. Notarisation fees are nominal.
Court fees must be paid if any proceedings are initiated before a court.
Security enforcement legislation
To facilitate the prompt disposal of loan recovery applications, the government has decided to amend the SARFAESI Act and the Recovery of Debts due to Banks and Financial Institutions Act 1993. There will also be consequential changes in the Indian Stamp Act 1899 and the Depositories Act 1996. These amendments have been placed before the lower house and may be enacted as a law in this financial year.
Peer-to-peer (P2P) lending
The RBI recently proposed the registration of P2P lending platforms as non-banking finance companies (NBFCs) so that they can be brought under the regulatory purview of the RBI.
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Dina Wadia, Joint Managing Partner
J Sagar Associates
Professional qualifications. B Com (Hons); LL.B; LL.M; Solicitor, The Bombay Incorporated Law Society
Areas of practice. Banking and finance (including investment funds), debt capital markets, mergers and acquisitions, and private equity.
Professional associations/memberships. Bar Council of Maharashtra and Goa; The Bombay Incorporated Law Society; Bombay Bar Association; International Bar Association.
Divyanshu Pandey, Partner
J Sagar Associates
Professional qualifications. BA (Hons); LL.B; BCL
Areas of practice. Banking and finance, and corporate commercial
Professional associations/memberships. Bar Council of Delhi; The Law Society, England & Wales
Pratish Kumar, Senior Associate
J. Sagar Associates
Professional qualifications. BA; LL.B (Hons)
Areas of practice. Banking and finance
Professional associations/memberships. Bar Council of Maharashtra and Goa