By Hemant Sahai on 04 Dec 2019
Authors by Hemant Sahai | Founding Partner, Harsh Arora | Partner, Amit Ronald Charan | Partner
Yes, the concept of issuing comfort letters does exist under the laws of India. Comfort letters are also known as letters of support/undertaking in India.
Comfort letters are generally issued by the promoters of a borrower, or by parent companies in relation to a financial transaction entered into by their subsidiaries. In some cases, they are also issued by affiliates/associate companies which have substantial control over or a shareholding in the subject company, or by banks in favour of other banks.
Though “letter of comfort” is not defined under Indian law, a definition can be found in case law. The Honourable High Court of Karnataka, while relying on the definition of “letter of comfort” found in P. Ramanatha Aiyar’s Advanced Law Lexicon, remarked that “a letter of comfort is a document that indicates one party’s intention to try to ensure that another party complies with the terms of a financial transaction without guaranteeing performance in the event of default.” (United Breweries v Karnataka State Industrial Investment and Development Corporation Limited).
Yes, comfort letters can be issued in binding as well as non-binding form. Comfort letters are not defined under Indian law (see Question 1), and their enforceability largely depends on the language used in the letter, which indicates the underlying intent of the parties. The language of the comfort letter, together with surrounding circumstances, will play a key role in determining whether the intent was to create a legal relationship between the issuer and the receiver and to bind the issuer.
From our experience in the banking and finance sector, letters of comfort are granted by the promoter or an affiliate (which has substantial financial base) to the lenders of a borrower, with the intention of providing financial support to the borrower during the term of the loan. Lenders often accept guarantees in the form of a letter of comfort. In such cases, the letter of comfort/support will be worded so that it imposes financial obligations on and has a binding effect on the issuer.
Letters of comfort or letters of undertaking were at one time issued by domestic Authorized Dealer Category I Banks to overseas suppliers, banks or financial institution, on behalf of Indian importers, in respect of trade credits for imports into India. Both these types of letter created financial obligations on the issuer and were binding in nature. However, the Reserve Bank of India has instructed the Authorized Dealer Category -I Banks to discontinue issuing and recognizing letters of comfort and letters of undertaking for trade credits in import transactions (Reserve Bank of India circular dated March 13, 2018).
As letters of comfort are not specifically discussed or described under any Indian statute (see Question 1), there are no specific requirements set out by law for a binding or non-binding letter of comfort. A guarantee will often take the form of a letter of comfort, and vice versa.
In these cases, the letters generally have specific language stating that they do or do not constitute a guarantee under section 126 of the Indian Contract Act 1872 (ICA), as appropriate. Anything done, or any promise made, for the benefit of the principal debtor may be sufficient consideration for the giving of the guarantee (section 126, ICA).
In order to make a binding letter of comfort enforceable in a court of law, the letter of comfort should be a valid contract, duly executed between the relevant parties with proper authorizations (such as a board resolution and so on) and must be adequately stamped as per the provisions of the applicable stamp laws (so as to make it admissible as evidence in a court of law).
We also suggest including the following wording in Standard document, Comfort letter (binding): Cross-border, in the interests of clarity:
”If the Borrower fails to repay the loan or meet its obligations, we shall take all necessary steps to ensure that the Borrower can fulfil its obligations under the loan agreement, including funding the Borrower through unsecured loans or a capital increase.”
A non-binding letter of comfort, executed by the relevant authorized person of the parties, may clearly mention that the parties to the letter of comfort intend to execute the letter as a non-legally binding document. In the absence of this express stipulation regarding the non-binding nature in the document, the letter of comfort may be presumed to be a binding contract between the parties depending on the facts of each case.
We suggest adding the following wording to Standard document, Comfort letter (non-binding): Cross-border, to establish the non-binding nature of the letter and to clarify that there are no financial obligations being imposed on the issuer:
”The parties to this letter of comfort intend to execute this letter as legally non-binding and this letter does not constitute a guarantee under section 126 of the Indian Contract Act, 1872.”
There is no specified format for a binding or non-binding letter of comfort (see Question 3). A letter of comfort does not create a liability on, or assign or otherwise transfer a liability to, the issuer unless this is expressly agreed by the issuer in the letter of comfort. A binding comfort letter may take the form of a primary or secondary liability guarantee, depending on how it is worded.
Under the ICA, a primary liability guarantee, that is, a contract by which one party promises to save the others from loss incurred due to the conduct of any other persons, is called a “contract of indemnity”. By contrast, the liability of a surety (the guarantor) is a secondary obligation which is enforceable contingently on the principal debtor failing to perform the obligations which have been guaranteed (ICA).
Under the ICA, the key differences between a contract of indemnity and a contract of guarantee are as follows:
No there is no general prohibition under Indian law on an Indian company entering into an inter-corporate lending transaction with another company or other legal entity. However, the lending company generally needs to comply with the provisions of:
A lender can charge interest on the loan amount, provided that the interest is not less than the prevailing yield of one-year, three-year, five-year or ten-year Indian government security closest to the tenor (that is, term) of the loan (section 186(7), Companies Act). The lending company is entitled to accelerate repayment of the loan on occurrence of certain events as may be contemplated under the lending agreement.
Restrictions under the Companies Act
A lending company may lend money to another company (or other legal entity), or to a related party or associate of the lending company, in accordance with the provisions of sections 185 and 186 of the Companies Act.
A lending company may not advance a loan to:
(Section 185(1), Companies Act.)
A lending company may advance a loan to any person in whom any of the directors of the lending company is interested (see below), provided that both:
(Section 185(2), Companies Act.)
In this context, “any person in which any of the directors of the lending company is interested” means:
The following transactions are exempted from the restrictions under section 185(1) and (2):
In addition to the above, a lending company must comply with the provisions of section 186 of the Companies Act, which generally deals with:
Contract Act
A loan agreement must also satisfy the following requirements of a valid contract under section 10 of the Contract Act:
Requirements for non-resident lender
If the lender is not resident in India, then the parties to the lending transaction must also comply with the requirements in:
FEMA is the master Act which generally governs borrowing and lending and all other activities in relation to foreign exchange. It is a mechanism which gives the Reserve Bank of India (RBI) the authority to issue regulations, guidelines and circulars for all matters pertaining to foreign exchange, in line with India’s prevailing foreign trade policy.
The Foreign Exchange Borrowing Regulations specifically lay down the conditions which need to be satisfied under various scenarios of borrowing and lending in foreign exchange. These conditions are covered under the ECB Master Directions. In particular, the ECB Master Directions prescribe a maximum all-in-cost ceiling, which is currently the benchmark rate (set by the RBI under the Master Directions) plus 450 bps per annum under the automatic route (that is, where prescribed conditions are met and no approval is therefore required to be obtained from the RBI). (see Question 7).
Other laws
If a resident lender in its ordinary course of business provides loans to a borrower in India, then the resident lender must also comply with (as applicable):
Foreign law-governed agreements
The courts in India recognize agreements governed by a foreign law.
To determine whether a foreign law has a substantial connection to the contract, the courts generally examine:
(Section 20, Civil Procedure Code (CPC).)
However, if the cause of action of the dispute arises in India, or if the subject-matter has no real bearing on the foreign jurisdiction and both parties are Indian entities which have chosen the foreign jurisdiction with the intention of circumventing Indian law, then the Indian courts would have jurisdiction over the contract or transaction, and the choice of law may not be upheld by the courts. The Honourable High Court of New Delhi has, in Pantaloon Retail (India) Limited v Amer Sports Malaysia Sdn Bhd & Anr, laid down that, while interpreting the choice of forum by the parties to a contract, courts must keep in mind that, where the parties have not specified a governing law in the contract, the forum must not be against public policy or totally unrelated to the place of occurrence of the dispute (I.A. Nos.820/2012 & 3347/2012 in CS(OS) No.115/2012).
Generally, the courts in India, subject to exceptions laid down in section 13 of the CPC and to the fulfilment of conditions laid down in section 44A of the CPC, will recognize and enforce a judgment obtained from a competent court in relation to enforcement of a contract that has a foreign governing law (section 44A, CPC). The exceptions apply where:
(Section 13, CPC.)
Where a foreign judgment has been rendered by a
superior court in a territory which the Indian government has (by notification in the official gazette) recognized to be a “reciprocating territory”, it may be enforced in India by proceedings in execution, as if the judgment had been rendered by a relevant court in India (section 44A, CPC). The UK has been declared to be a reciprocating territory, and a judgment by a high court or any superior court in the United Kingdom is enforceable in Indian district courts, provided it is brought in India within the limitation period of three years from the date of the judgment (Article 101, Limitation Act, 1963).
There are no mandatory requirements relating to the layout or contents of a loan facility agreement governed by Indian law between two companies or other legal entities.
There are no specific signing, witnessing or notarisation requirements for a loan facility agreement, except if there is a clause establishing a power of attorney in the loan agreement. In this case, the authorized persons are required to sign the loan agreement in accordance with their relevant authorizations. The general practice for the execution of contracts should also be followed.
There is no legal requirement to execute a promissory note in relation to the loan facility agreement. It is, however, general practice for lenders in India to require the borrower to do so.
Generally, a loan facility agreement is legally binding on the lender on signing. However, until the borrower meets the drawdown conditions stipulated in the agreement, the lender is not obliged to disburse any amounts.
An Indian-law governed loan facility agreement generally sets out the following conditions precedent:
There is generally no restriction on the borrowing powers of a company in India, unless these are restricted or limited by the shareholders of the company in a general meeting or by the company’s memorandum of association and articles of association.
However, note that under section 180(1)(c) of the Companies Act a public company (and any private company which is a subsidiary of a public company) must obtain shareholder consent where the money to be borrowed, together with the company’s existing total borrowing (apart from temporary loans obtained from the company’s bankers in the ordinary course of business), exceeds the aggregate of its paid-up share capital, free reserves and securities premium.
In the case of immovable property, all charges must be registered with the registrar of companies or sub-registrar of assurances (for immovable property) in whose jurisdiction the property is situated, unless expressly exempted (section 77, Companies Act, read with section 17, Registration Act 1908).
Registration of a charge under the Companies Act amounts to constructive notice of the charge and its particulars stated in the registers maintained by the public officers, and any person acquiring any interest in the property of a company is deemed to have notice of the charge from the date of registration of such charge (section 80, Companies Act).
Therefore, it is common practice (and a practical necessity) for lenders to review the public records of the borrower, in order to find out whether there are any charges created on its movable and immovable property and the consents, if any, required for the transaction (if these are publicly available).
Against the above background, confirmations in the form of certificates and undertakings may be taken from the borrower, but the lender will still need to carry out a thorough review of public records. If a company borrows amounts in contravention of the restrictions laid down in the Companies Act, the rights of the lender may be affected, and its charge may be subordinated to other secured lenders whose charges were created earlier in time. Confirmations obtained from the borrower will protect the lender only if the borrower has deliberately hidden from the lender information which the lender has no way of obtaining publicly.
The lender’s rights will not be affected if the lender has disbursed the amounts for a lawful and permitted purpose and the borrower has used the monies for an illegal purpose. In fact, the use of funds for illegal purposes would amount to a breach of the loan facility agreement, and in these circumstances the lender would be entitled to call an event of default and accelerate the loan.
Approval from the shareholders or members of a borrower in India is generally not required. However, borrowing can only be done to the extent that it remains within the borrowing-limit (if any) approved by the shareholders or members of the borrower and as permitted under the memorandum of association and the articles of association.
In addition, under section 180(1)(c) of the Companies Act a public company (and any private company which is a subsidiary of a public company) must obtain shareholder consent where the money to be borrowed, together with the company’s existing total borrowing (apart from temporary loans obtained from the company’s bankers in the ordinary course of business), exceeds the aggregate of its paid-up share capital, free reserves and securities premium (see Question 4).
Loans from a foreign lender to an Indian borrower are generally referred to as external commercial borrowings (ECBs) in India and are governed by FEMA, the Foreign Exchange Borrowing Regulations and the ECB Master Directions. The ECB Master Directions lay down ceilings for interest, fees, repayment and prepayment methods, the ECBs amount and end-use restrictions.
FEMA lays down certain restrictions on the remittance outside India of enforcement proceeds of assets obtained in India, although the ECB Master Directions allow for remittance of principal, interest and other charges to foreign lenders.
There are no significant costs (other than hedging costs) which a foreign lender may incur as compared with domestic lenders.
The ECB Master Directions do not dictate a different approach according to where the foreign lender is incorporated, provided that the foreign lender is a “recognised lender” under direction 2.23.3 of the ECB Master Directions, that is:
The ECB Master Directions further provide for the borrowers that are eligible to raise finance through foreign currency by way of ECB, which are (i) all those entities which are eligible to receive FDI, (ii) Port Trusts and (iii) Units in SEZ, SIDBI and EXIM Bank.
If there are two or more lenders, it is standard practice to appoint an agent to act on behalf of the lenders, and to create security in favour of the agent to enable it to enforce the security and loan documentation on behalf of the lenders.
The agent must be given adequate powers under the agent appointment agreement to do the following:
The concept of agency is governed by section 182 of the Contract Act.
The trustee must be given adequate powers under the security trustee appointment agreement to do the following:
The concept of trust is governed by the Trusts Act 1882.
There is no general restriction on a foreign lender lending to a borrower resident in India. However, the loan must comply with FEMA and the ECB Master Directions. The ECB Master Directions generally provide:
If a foreign lender lends to a borrower resident in India in contravention of FEMA, the FEMA Foreign Exchange Borrowing Regulations and the ECB Master Directions, then the borrower will be subject to penalties or other proceedings by the RBI. Repatriation of the loan amounts and other payments under the loan facility agreement from India to the foreign lender may be restricted.
See Question 1. As with any other agreement, loan agreements are subject to the Contract Act. In addition, the provisions of the Companies Act 2013, Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act 2002 and the Transfer of Property Act 1882 are also applicable and may affect loans and security granted.
There are no legal restrictions relating to repayment of a loan by instalments or relating to voluntary early repayment of a loan. Loan agreements in India generally set out the conditions for repayment and early repayment. However, in the case of foreign lenders providing ECBs (see Question 7), the restrictions on prepayment (or early repayment) under the ECB Master Directions must be complied with. The ECB Master Directions provide for minimum average maturity periods such as one, five, seven, or ten years, depending on the category of ECB loan availed by the borrower.
No, there are no legal restrictions on the accrual or payment of interest, or on fees payable by the borrower to the lender. An agreement for the accrual of interest on the basis of a year of 360 days is enforceable.
Accrual of interest at a LIBOR-linked rate is permitted, provided this complies with the all-in-cost ceiling stipulated under the ECB Master Directions.
What provisions are permissible in order to cover the eventuality that the wholesale financial markets are disrupted and that as a result, in particular, the method agreed by the lender and the borrower for calculating the interest rate does not work (or produces an inappropriate result)?
A loan agreement provides the method to be used to re-set the interest rate in an unforeseen situation, if such a term has been agreed between the borrower and the lender. It is general market practice to provide a benchmark rate (usually based on the bank’s cost of lending funds) to re-set the interest rate in such an eventuality. This rate is based on the prevailing market conditions and will be affected by any disruption in wholesale financial markets. Sometimes lenders will argue that a general clause should be added giving them the authority to change the interest rate for any reason whatsoever. However, such clauses, being one-sided, are usually strongly resisted by the borrower and are not very often accepted.
Yes, warranties are provided alongside representations under loan agreements governed by Indian law.
The Indian Accounting Standard, as prescribed under the Companies (Indian Accounting Standards) Rules 2015.
No, generally there are no such restrictions.
Yes, it can be enforced against third parties. However, the enforcement of such an undertaking may be limited if the third party had no constructive notice (see Question 4).
No, generally it will not be liable. However, if the lender comes into possession of the assets on enforcement of the security, and the lender implements an infrastructure project having a bearing on the environment or becomes owner of the borrower pursuant to enforcement of a pledge on the borrower’s share capital, then the lender must comply with environmental laws.
However, where the lender exercises its enforcement rights in connection with the sale of the project or assets then the lender may not be required to comply with environmental laws.
Yes, such undertakings are generally enforceable in India.
Indian-law governed loan facility agreements generally provide the following definition of a “subsidiary”:
”’subsidiary’, in relation to any other company (that is to say, the holding company), means a company in which the holding company—
controls the composition of the board of directors; or
exercises or controls more than one-half of the total voting power either on its own or together with one or more of its subsidiary companies.”
The term “control” is defined in the Companies Act as follows:
”’control’, shall include the right to appoint a majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements or in any other manner.”
See Question 7.
No, there are no limits on which events can be categorised as events of default in a loan facility agreement governed by Indian law.
Yes, a provision for early repayment under certain circumstances without the need for the lender to make demand is enforceable.
No, there are no such laws.
No, generally there are no restrictions on the accrual or payment of default interest as a result of the occurrence of an event of default, provided this is agreed in the loan agreement. However, under the Fair Practice Code guidelines prescribed by RBI applicable to non-banking finance companies (NBFCs), RBI has advised NBFCs not to charge interest or default interest rates beyond a certain level which may be seen as excessive.
The following is the typical list of insolvency events and procedures which would constitute events of default:
Section 14 of the Insolvency and Bankruptcy Code 2016 deals with moratoriums and restricts, amongst other things:
The Government of India amended section 14 of the Insolvency and Bankruptcy Code 2016, by way of the Insolvency and Bankruptcy (Ordinance) 2018 issued pursuant to a notification dated 6 June 2018, to exclude a surety or guarantor from the moratorium provisions under section 14.
Yes, stamp duty and court fees are payable at the time of the execution of a loan agreement and also its enforcement.
If a security interest is created over immovable assets of the borrower or a third-party security provider, then this needs to be registered before the Registrar of Sub-Assurances in whose jurisdiction the property is situated. A registration fee is also payable.
A borrower or security provider must file a charge creation form CHG-1 with the Registrar of Companies where a security (other than a guarantee) has been created by the borrower or security provider.
The lender or security trustee must also file Form 1 with the Central Registry of Securitisation Asset Reconstruction and Security Interest.
Transfer of the lender’s outstanding rights under a facility agreement is generally permitted under Indian law. The rights of the lender under a facility agreement can be divided among more than one transferee.
The transferee generally acquires the same rights as provided to the original lender under the facility agreement. There is no special requirement which must be satisfied by the transferee for enforcement of the loan or the guarantee (other than the execution of a novation deed, accession deed or deed of assignment in relation to the loan facility agreement or security documents).
Lenders generally obtain a confirmation from the guarantor or third-party security provider when transferring the lender’s outstanding rights to a new lender.
Yes, unless otherwise agreed in a loan agreement by the borrower and the lender. There are generally no specific requirements as to how a demand for early repayment must be conveyed by the lender to the borrower and the same are based on the contractual understanding of the parties.
Yes, it is generally enforceable.
Yes, the Indian courts generally recognize the choice of forum by the parties in a commercial transaction.
Parties generally provide for dispute resolution through the courts. Arbitration as a dispute resolution procedure is not generally provided for in loan facility agreements. However, where the parties have chosen arbitration as a dispute resolution procedure under the loan facility agreement, the courts will recognize and enforce it.
The law relating to domestic and international arbitration and all related matters is set out in the Arbitration and Conciliation Act 1996 (Arbitration Act).
The enforcement of domestic arbitral awards is governed by sections 34 to 36 of the Arbitration Act, while foreign arbitral awards are subject to conditions set out under sections 44 to 60 of the Arbitration Act.
An arbitral award given against the company will be enforced by the courts in accordance with the provisions of the CPC, without going into the merits of the award. Subject to any challenge to the arbitral award, it will be enforceable as a decree, and in such a situation the principles of res judicata will apply and the arbitral award will be final and binding on the parties and persons claiming under it.
No, there are no restrictions on foreign lenders (including for EU and non-EU lenders) commencing proceedings against a company in India or enforcing security rights in India, provided that any remittance of the proceeds of such enforcement complies with FEMA (see Question 7).
If the borrower is a going concern, the lender’s entitlement to repayment of the loan will be governed by the loan facility agreement. However, where the borrower is insolvent, its assets must be distributed in accordance with section 53 of the Insolvency and Bankruptcy Code 2016 (IBC), which stipulates that insolvency and liquidation costs rank above amounts owing to workmen (for a period of 24 months preceding the liquidation date) and amounts owing to secured lenders. Under the Industrial Disputes Act 1947, workman means any person employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward.
From an Indian law perspective, in our view, there will generally be no impact if the UK ceases to be a member of the EU, when the agreement either:
See Question 35
Law firms in India generally issue opinions on matters concerning Indian law in relation to cross-border loan financing transactions. Legal opinions issued by Indian law firms are generally in the form of Standard documents:
Domestic company and foreign law documents
Law firms in India, subject to certain assumptions and qualifications, generally issue opinions on:
Law firms in India may also provide additional opinions (at their discretion and if specifically requested by the lender) on:
Foreign company and domestic-law documents
Law firms in India, subject to certain assumptions and qualifications, generally issue opinions on:
Law firms in India may also provide additional opinions (at their discretion and if specifically requested by the lender) on:
Domestic company and domestic-law documents
Law firms in India, subject to certain assumptions and qualifications, generally issue opinions on:
Law firms in India may also provide additional opinions (at their discretion and if specifically requested by the lender) on:
Legal opinions from foreign lawyers are generally required if:
Checklist, Legal opinion letters: Cross-border may need to be amended to include the consents and approvals required from third parties/lenders in relation to the transaction.Foreign company and domestic law documents
Foreign lawyers/law firms are generally asked to provide their opinions on:
Domestic company and foreign law documents
Foreign lawyers/law firms are generally requested to provide their opinion on:
Legal opinions are generally addressed to the lender or the lender’s agent or security trustee.
Legal are no specific requirements for legal opinions in India. Generally, as a pre-disbursement condition, lenders require a legal opinion issued by the lender’s counsel to cover, in particular, the validity and enforceability of financing documents, creation and perfection of security, filings and registrations, corporate status and capacity, authorizations of the obligors, payment of stamp duty on the financing documents. Legal opinions are generally addressed to the lender or the lender’s agent or security trustee. Legal opinions clearly state who can and cannot rely on them.
Law firms in India generally provide a disclosure in the opinion stating that:
”This opinion is addressed to you solely for your benefit, solely for the purpose of the Facility Agreement. It is not to be transmitted to anyone else (except that it may be disclosed to, but not relied upon by, your professional advisors, auditors, regulators, or any potential transferees or sub-participants to the Facility Agreement) nor is it to be relied upon by anyone else or for any other purpose or quoted or referred to in any public document or filed with anyone without our express consent, except that it may be disclosed as may be required in connection with any legal process or the inquiry or demand of any governmental authority with jurisdiction over any of the foregoing.”
The Advocates Act 1961 (Advocates Act), read with the Bar Council of India Rules (BCI Rules), governs the conduct, qualifications and right of lawyers to practise the profession of law in India.
Only lawyers can practise law in India (section 29, Advocates Act). There is no bar or restriction on a law firm or individual lawyer providing an opinion on any matters concerning Indian law in a cross-border loan transaction.
Chapter II of the BCI Rules (Standards of Professional Conduct) lays down the standards of professional conduct to be observed by an advocate qualified to practise in India. An advocate who has, at any time, advised in connection with the institution of a suit, appeal or other matter or has drawn pleadings, or acted for a party, must not act, appear or plead for the opposite party (section II, Standards of Professional Conduct).
Legal opinions issued by law firms in India usually contain certain standard qualifications and assumptions to mitigate the firms’ potential liability. Law firms may also insert specific language in the opinion to limit any potential liability to an amount equal to the fees they receive for the transaction. See also Question 4 for a disclosure generally included in legal opinions.
Law firms in India generally structure legal opinions as follows:
Legal opinions on financing documents do not usually cover tax related matters (other than stamp duty) unless this is specifically requested by the lender. If any tax matters are included in the opinion, the relevant tax partner must also sign off the opinion.
We would not make any changes to the following standard documents:
See Question 1 and Question 2.
The expression “in good standing” has no legal meaning under Indian law.
Our firm has a strict internal review process. A legal opinion is reviewed at two levels, after it has been prepared by an attorney. The final review is conducted by a review partner who is well aware of the transaction and has knowledge in the relevant practice area. All our opinions are signed by partners of the firm who are authorized to do so.
We also conduct a conflict check of the lender to whom the opinion is being issued, and a brief check on the background of the borrower in relation to which the opinion is being given.
Our opinions always clearly state the scope of the opinion and the persons who can rely on it.
We generally conduct detailed due diligence only if specifically requested to do so in the engagement letter.
However, if the borrower, guarantor and/or security provider are domestic entities (irrespective of the jurisdiction in which the lender is incorporated), we review their status, constitutional documents and corporate authorizations, to check the borrowing power, security creation powers, and common seal requirements (if any), and to ensure that the signatories to the documents are validly authorized to execute them.
Other checks are made on documents and filings available on the Ministry of Corporate Affairs’ website (for a specific period of time, usually three years) and websites of the relevant courts (where online search is available). Physical searches may be carried out at the office of the Sub Registrar of Assurances (if immovable property is being offered as security). We also review material contracts (including existing financing agreements) executed by the borrower, guarantor and/or security provider, to establish whether there are any consent or approval requirements from third parties.
If the borrower, guarantor and/or security provider are foreign entities, we do not conduct any due diligence on those entities, instead relying on a foreign counsel opinion relevant to the jurisdiction in which they are incorporated.
If the lender, in respect of a foreign currency loan (that is, external commercial borrowing) or trade credit transaction, is incorporated in a different jurisdiction, we check whether such lender is a “recognised lender” under the Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers, issued by the Reserve Bank of India. We also check that the lending transaction is not prohibited under this Master Direction, Circulars or Notifications released by RBI from time to time or under any other Indian laws.
Law firms in India generally sign an opinion before the schedules. However, certain law firms may follow the practice of signing the opinion letter after the schedules.
Prior to or at the time of execution, and in any event before giving a legal opinion on a domestic borrower, guarantor and/or security provider, it is customary to obtain and examine, in addition to the documents listed in Standard documents, Legal opinion: domestic company and foreign-law documents: Cross-border: Schedule 1 and Legal opinion: domestic company and domestic-law documents: Cross-border: Schedule 1:
Relevant certificates from compliance officers stating, among other things, that the relevant resolutions have not been superseded and are effective as of the date of the certificate, and that the copies of the constitutional documents are up to date.
Generally, a public search is carried out on the website of the Ministry of Corporate Affairs to check the status of the obligors and relevant corporate filings (including filings related to shareholders’ resolutions and amendments to constitutional documents). If immovable property is being offered as security in the transaction, a firm will either (as required by the lender):
A search of the various statutory registers that must be maintained by the borrower under the Companies Act 2013, including the register of shareholders, debenture holders and register of charges, is also carried out.
A firm will also rely on certificates issued by the borrower’s compliance officer or authorized person and independent chartered accountants or company secretaries on issues pertaining to borrowing powers, validity of the resolutions and constitutional documents provided, and any consents or approvals that may be required from other lenders or third parties for the transaction.
A firm will generally not undertake any searches at the trade mark registry or any similar registry dealing with intellectual property, or other similar registers (unless the mandate specifically requires the firm to do so), and will rely on certificates from independent practising attorneys in the matter.
Stamp duty is levied on documents in India. Additionally, registration fees must be paid for documents that are required to be registered with the office of the Sub-Registrar of Assurances.
Matters covered by certificates provided by chartered accountants and approvals given by statutory or regulatory authorities, such as income tax authorities (if applicable), as well as resolutions and corporate authorizations, are some matters which can only be confirmed as of the date of issue of such certificates, approvals and resolutions but cannot be confirmed as at the time of the issue of the opinion letter.
A legal opinion will clearly state that it is valid in respect of the facts and background only as at the date of the documents that are being opined on and of the corporate authorizations, constitutional document, reports and certificates that are being relied on. Alternatively, a firm can clearly set out the assumption that the facility agreement and other documents relied on have not been modified, rescinded or replaced.
Our firm usually conducts a last-minute check on the website of the Ministry of Corporate Affairs to confirm the status of the borrower and any obligors. A copy of the search is also attached to our legal opinion, for clarity.
An opinion letter is usually effective as at the date of its issue, which is also the date on which it is signed. The opinion letter does not cover matters after such date, and qualifications and assumptions to this effect are clearly included in all our legal opinions.
An opinion letter issued under Indian law to an overseas lender can be delivered by email to the lender, already signed, and then held by such lender pending disbursement of the loan, if the legal opinion is a pre-requisite for disbursement. Law firms in India usually issue their opinion on cross-border loan transactions immediately before the disbursement of the loan.
It is possible for irregularities or deficiencies to arise in the internal procedures of a borrower, security provider or guarantor in relation to approving and signing of the documents.
To safeguard against and reduce any risk to lenders from such irregularities or deficiencies, lenders must procure necessary shareholders’ and board resolutions (authorising the signing of the documents and approving their terms) and certificates issued by independent practising company secretaries or compliance officers of the company, stating that the resolutions or authorizations have not been rescinded, revoked or replaced. These are usually examined and covered in a legal replaced
We broadly recommend adding the following assumptions and qualifications to those set out in Standard documents, Legal opinion: domestic company and foreign-law documents: Cross-border: Schedule 3 and Schedule 4, Legal opinion: foreign company and domestic-law documents: Cross-border: Schedule 3 and Schedule 4 and Legal opinion: domestic company and domestic-law documents: Cross-border: Schedule 3 and Schedule 4:
Assumptions
The terms of the [Documents] OR [RELEVANT DOCUMENT] correctly reflects the intentions (commercial and otherwise) of the parties to it and each party has received independent legal advice in relation to the [Documents] OR [RELEVANT DOCUMENT] and made its own independent decision to enter into the [Documents] OR [RELEVANT DOCUMENT].
That the relevant electronic filings as required under [JURISDICTION] shall be made within the time period specified under the laws of [JURISDICTION] for creation and perfection of the security proposed to be created pursuant to the [RELEVANT SECURITY DOCUMENT] by the [RELEVANT OBLIGOR]; and certificates evidencing the creation and registration of such charge in favour of Lender shall be submitted to the Lender within the time specified under law as applicable in [JURISDICTION].
The genuineness of all signatures and seals of the parties and the authenticity of the documents provided for the purpose of the review.
All statements, warranties, representations, assurances and confirmations made in the documents and serving as grounds for the conclusions of this opinion are true, accurate and complete.
All statements as to matter of fact, financial or technical data (or opinions pertaining to financial or technical data) contained within the documents are correct.
The borrower is in compliance with all its obligations, covenants and undertakings contained in all agreements with third parties.
Or such other assumptions, as deemed fit by the lender’s counsel, may be added in the closing opinion depending on the transaction.
Qualifications
Insofar as matters herein are stated to be in our knowledge, such knowledge means the actual knowledge of lawyers presently at [INSERT REFERENCE TO LAW FIRM ISSUING THE OPINION].
We express no opinion regarding any financial or technical data in the [Documents].
Any waiver of statutory rights by the [OBLIGORS] may not be enforceable if the waiver is considered to have been given otherwise than on an “informed” basis or if the waiver is considered to be in breach of the principles of natural justice.
Enforcement may be limited by general principles of equity and, pursuant to the Specific Relief Act 1963, certain obligations cannot be specifically enforced. For example, equitable remedies or specific performance may not be available where damages are considered by the court to be an adequate remedy, or where the court does not regard specific performance to be the appropriate remedy. Provisions concerning the obligations to use “best efforts” or “endeavours”, may be unenforceable for the purpose of specific performance and incapable of specific performance.
Under Indian law, the payment of damages is governed by the provisions of the Indian Contract Act 1872. A party which suffers as a result of a breach of a contract is entitled to receive, from the party in breach, compensation for any loss or damage caused which naturally arose in the usual course of things from such breach, or which the parties knew when they made the contract to be likely to result from such breach. Therefore, the compensation does not usually cover any remote and indirect loss or damage sustained by reason of the breach, unless this is specifically contracted for.
Claims may become barred under the Limitation Act 1963 or may be or become subject to the defence of set-off or counter-claim.
Enforcement of obligations may be limited by the provisions of Indian law applicable to agreements held to have been frustrated by events happening after their execution.
Or such other qualification, as deemed fit by the lender’s counsel, may be added in the closing opinion depending on the transaction.
From an Indian law perspective, in our view, there will generally be no impact of Brexit in relation to the issue of a legal opinion for a cross-border loan financing transaction in which either:
We would not make any adjustments to our firm’s assumptions and qualifications in a legal opinion as a result of the United Kingdom leaving the European Union.
Checklist: Loan facility agreement signing
No, it is not necessary under Indian law (except in certain cases) for the parties (or their lawyers) to attend a meeting at which the facility agreement and other documents are signed and exchanged between the parties.
However in practice, lenders in India insist that their lawyers and all the parties to the transaction attend the meeting at which the facility agreement and other documents are signed between the parties. Copies of identity documents (of the persons signing the documents on behalf of the borrower, guarantor or security provider) and specimen signatures of these persons are also procured at the time of the execution, to ensure the identity of the persons executing the documents as authorized under the relevant authorizations or resolutions passed by the entity.
If the security is created over immovable property by way of an “English mortgage” (as defined in section 58 of the Transfer of Property Act 1882) or by mortgage through the deposit of title deeds (in certain Indian states, where registration of a mortgage is compulsory), then the parties to such security documents are required to attend the office of the relevant registrar having jurisdiction over such immovable property, in accordance with sections 32 and 32A of the Indian Registration Act 1908 (Registration Act). In such a scenario, the parties must execute, or admit the execution of, the security documents in the registrar’s presence, following which the registrar provides a registration number for the registered document. The parties to such security documents are also required to affix their respective photographs to the relevant documents submitted for registration.
In addition, certain documents, such as powers of attorney and affidavits, will have to be notarised. Such documents are then executed by the relevant parties in the presence of the notary, who maintains a record of the documents so executed and notarised in the registers maintained by them.
The governing law of the document or the jurisdiction of incorporation of one or more of the parties will not affect the above response.
If a meeting is not required by the lender, the facility agreements and other documents can be confirmed by the parties through emails and by executing the documents in counterparts. Each counterpart, when executed, will have the same effect as if the signatures on the respective counterparts were on a single copy of the relevant document. Usually to provide for such execution in counterparts, a specific clause is inserted in the documents which states that:
”This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument.”
Except for the types of document listed in the First Schedule to the Information Technology Act 2000 (IT Act), there is no specific requirement for the same document to be signed by the parties, and signed pages can be added to the rest of an agreement to form a signed agreement.
The documents can be separately executed (without a meeting) by way of electronic execution. In this case, the parties can execute the documents by affixing their respective electronic or digital signatures in accordance with the provisions of the IT Act. Stamp duty must be paid for each document executed electronically. The stamp paper procured in respect thereof may mention the details or particulars of the document and the transaction in respect of which the stamp paper has been procured. A stamp paper is a paper issued by the relevant authority (person or agency duly authorized by the state government) bearing stamp embossed or engraved on that paper and denoting the value of stamp duty paid on the instrument to which the stamp paper is affixed or attached.
It is also to be noted that certain financing and security documents (which require compulsory registration under section 17 of the Registration Act) should be registered within a period of four months from their date of execution.
The governing law of the document or the jurisdiction of incorporation of one or more of the parties will not affect the above response.
Generally, under Indian law, the date on which the last party signs the agreement becomes the effective date of such agreement, unless otherwise specifically agreed under the agreement itself.
The parties can agree on a date preceding the date of actual signature as the effective date under the facility agreements and other documents. However, lenders in India generally keep the date of the actual signature as the effective date of such agreements.
Yes, lenders in India prefer to include in the agreement a set of conditions that must be satisfied before the first drawdown, and then a set of conditions that must be satisfied before each subsequent drawdown.
The Companies Act 2013 (Companies Act) does not provide any definition for a common seal. A common seal is generally the seal of a company which can be affixed only with the approval of the company’s board of directors and in accordance with the company’s constitutional documents. A company has only one common seal on its incorporation.
It is not mandatory to affix the common seal on a facility agreement and other financing documents, unless so specified in these documents or a lender insists as a matter of their internal policy.
However, if the charter documents of a company stipulate that the common seal be affixed on certain documents, then affixing of the common seal on such documents should be carried out. Presently, it is common practice to ensure that companies affix their common seal on loan and security documents (although companies incorporated under the Companies Act are now not required to have a common seal, as stated above).
The Notaries Act 1952 (Notaries Act) gives a public notary the power to notarise certain types of documents such as powers of attorney and affidavits, either at the notary’s office or at the place of execution. Section 139 of the Code of Civil Procedure 1908 and section 297 of the Code of Criminal Procedure 1973 require affidavits to be notarised (unless they are administered before any court or magistrate or officer appointed by the concerned High Court), in order to be admissible as evidence.
Notarisation is needed for any instrument intended to take effect in any country or place outside India where the instrument is intended to operate (section 8, Notaries Act).
A nominal fee will be payable for notarisation.
There is no particular form in which an agreement or security document needs to be prepared. If the documents require the common seal to be affixed, then the common seal of the borrower or security providers should be affixed in accordance with the resolutions of their respective boards of directors and articles of association.
Companies must maintain a register giving the particulars of every charge (together with a copy of the security document) created on their assets and undertakings (section 85, Companies Act; Rule 10, Companies (Registration of Charges) Rules 2014 (Registration of Charges Rules)).
Further, under section 77 read with section 79 of the Companies Act, the charges created or modified by a company on its assets must be registered with the relevant Registrar of Companies (that is, the office of the registrar with whom the company is registered under the Companies Act) within a period of 30 days of such creation or modification. A nominal fee applies for the filing of the notification form, in accordance with the Registration of Charges Rules.
If the security is created over immovable property by way of a simple mortgage, an “English mortgage” (as defined under section 58 of the Transfer of Property Act 1882) or by a mortgage through the deposit of title deeds (in certain Indian states, where registration or a mortgage is compulsory), then these security documents must also be registered with the Registrar of Assurances with jurisdiction over such immovable property. A registration fee is payable in respect thereof, under the Indian Registration Act.
Banks and financial institutions must register the details of any security interest created in their favour with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) within a period of 30 days from the date of creation of the security interest (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002). A fee is payable, as prescribed by Rule 7 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Central Registry) Rules 2011.
In addition, lenders must register any security interest created in their favour with an information utility (a public company that is part of an information network that stores financial data and supplies this information to lenders and insolvency professionals), in accordance with the provisions of section 215 of the Insolvency and Bankruptcy Code 2016 and the associated rules. A fee is also payable as per the structure and formula prescribed in Regulation 32 of the IBBI (Information Utilities) Regulations 2017 (IBBI Regulations), and as agreed between the financial institution or lender and the information utility.
That said, lenders in India generally only check the public records of a corporate borrower or security provider (registered as a company or a limited liability partnership (LLP)) which are maintained with the Registrar of Companies and the Sub-registrar of Assurances, or the filings made by other lenders in relation to securities charged in their favour by the borrower. In respect of non-corporate borrowers or security providers, only the public register maintained with the Sub-registrar of Assurances is verified in order to check the charges and mortgages registered with the aforesaid public registry on the immovable properties of such borrowers or security providers. “Sub-Registrar” means a person who has been appointed by the state government to be the sub-registrar of several sub-districts to exercise the powers and discharge other functions under the Indian Registration Act 1908 including the registration of documents.
A lender’s charge over a particular security interest granted by a corporate borrower or security provider (registered as a company or an LLP) on their assets will be recognised only if it has been registered with the relevant Registrar of Companies in order to enjoy priority over subsequent charges, unless otherwise agreed by the lender with subsequent lenders (section 77, Companies Act and section 34, Rule 24, LLP Act) and to be counted as a secured lender in the event of winding up or liquidation of the company.
A lender should inspect the constitutional documents of the borrower, guarantor (if a corporate guarantor) and security provider, to check their corporate status and powers.
In the case of a company, the board and shareholder resolutions of each of these entities should also be reviewed to ensure that the loan, guarantee or security, together with drafts of the documentation, have been approved by the company’s board and shareholders (wherever required, under the law or the articles of association). In the case of other borrowers, guarantors or security providers (other than companies), their respective authorizations and constitutional documents should be examined.
The resolutions and relevant authorizations are reviewed to check and identify the authority of the signatory signing the documents on behalf of the borrower, guarantor or security provider.
Lenders generally procure a search report from a practising company secretary (a member of the Indian Institute of Company Secretaries), covering the status of the register of charges, the register of shareholders and debenture holders, and other things in respect of a corporate borrower, guarantor or security provider. This report should also cover details of the entity’s corporate status, specifying whether it is an active company which makes all its secretarial filings (this generally includes the filing of annual returns of the company, of various statutory forms such as ADT-1, MGT-4, MGT-7, DIR-2, and the routine filing of minutes of board and shareholding meetings of the company under the Company Act) regularly and giving details about its incorporation, shareholding structure and the restrictive clauses, if any, in its constitutional documents.
The company secretary or authorized officer of the borrower, guarantor and security provider is usually required to provide the lenders with certified copies of the constitutional documents and resolutions of the respective company at the time of execution or before the execution. Copies of identity documents (of the persons signing the documents on behalf of the borrower, guarantor or security provider) and specimen signatures of these persons are also procured at the time of the execution.
A legal opinion from the lender’s legal counsel is also required.
In addition, in respect of security in the form of a pledge or hypothecation over dematerialised securities a prescribed form (Form W) is required to be filed with the depository participants, in order to record the pledge or hypothecation in favour of the lender in their records.
In addition to the items listed in the Checklist, Loan facility agreement signing: Cross-border, the lenders will generally add due diligence reports and consent requirements.
Lenders generally prefer to arrange for a thorough review of the business and secretarial matters of the borrower by their legal counsel, and a report is usually submitted by the legal counsel to the lenders, before signing.
Often, the security stipulated by the lender involves the creation of a charge over the borrower’s rights and interests in material documents of a commercial nature (such as project documents). In these cases especially, the legal counsel of the lender submits a report to the lender to provide it with a list of parties from whom consent is required for execution of the transaction. Together with this report, the borrower also furnishes originals of all consents provided by various parties from whom consent is required.
In addition, certified copies of all constitutional documents and resolutions, together with certificates from practising chartered accountants or chartered secretaries are obtained by the lenders, confirming and certifying the following:
Checklist: Drawdown condition (CP)
CP checklists are an integral part of almost all lending transactions in India, unless it is lending in the form of invoice discounting or working capital (which may have only a small number of conditions precedent).
A CP checklist for a lending transaction in India does not differ much from the Checklist, Drawdown condition (CP): Cross-border. However, it would also typically include the following additional conditions precedent:
Generally, all facility agreements contain a clause or a schedule specifically detailing each CP that needs to be procured before a drawdown. See Question 11
Confidentiality agreement
Generally, the lender or arranger and the borrower enter into a confidentiality agreement or a term sheet containing a confidentiality clause before executing the financing documents, in the case of syndicated financing or where the original lender proposes to sell its exposure.
A non-disclosure clause is also included in the subsequent loan agreement; it stipulates the terms and conditions of disclosure and the confidentiality to be maintained in relation to the information provided by the borrower or security providers to the lenders (including its agent, trustee or representatives), with certain exceptions.
Standard document, Confidentiality agreement (loan financing): Cross-border would be enforceable in India; however, the enforcement of clause 3 and clause 7 may be restricted if the clauses do not comply with the applicable Indian laws.
Generally, Indian financing laws and regulations prescribe the manner and procedure for handling any information (including any dissemination of such information) received by the lender during the course of its business from its customers and proposed customers.
The confidentiality agreement needs to comply with the applicable Indian laws, such as the Indian Contract Act 1872 (ICA), the Information Technology Act 2000 (IT Act) and rules made under those statutes, as well as the central and state stamp laws as applicable.
Under the ICA, a confidentiality agreement needs to satisfy the essential conditions of a valid contract. Under section 10 of the ICA, to be enforceable the agreement must satisfy the following requirements:
Any “sensitive personal data or information” of any person in the possession of a body corporate needs to be dealt with in compliance with the IT Act and the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules 2011 (IT Rules).
In accordance with the Indian Stamp Act 1899 (Stamp Act) and the relevant state stamp laws, an instrument (including a confidentiality agreement) must be properly stamped in accordance with the Stamp Act to be admissible in a court of law in India.
Yes, the contractual obligations set out in a confidentiality agreement would be additional to banker-customer confidentiality obligations and will not replace them.
The types of information which cannot be protected by a confidentiality agreement, or are excluded from the definition of confidential information, are:
(Reserve Bank of India (RBI) Know Your Customer Direction, February 25, 2016.)
Under Indian law there is no difference between information held in paper form and information held in electronic form. It should be noted that, in the case of electronic information, this also needs to be originated, communicated and stored in compliance with certain Indian laws.
Under Indian law, any data or analysis derived from confidential information itself may not constitute confidential information unless this is provided for under the confidentiality agreement. However, even if the confidentiality agreement stipulates that it is confidential information, it may still not be treated as such if it falls within the categories set out in Question 4.
Yes, an undertaking by a lender not to disclose the fact that a confidentiality agreement or the fact that confidential information has been made available is enforceable, provided the essentials of the valid contract are satisfied in respect of the said undertaking as per the provisions of the Indian Contract Act (see Question 2).
Yes, an agreement by the borrower that it will provide confidential information after a confidentiality agreement has been entered into will constitute valid consideration. Under the ICA, consideration is an act, forbearance or promise done or given at the desire (intention) of the promisor. Consideration must be real and for some value in the eyes of law. It need not be adequate.
The following remedies are generally available in the case of a breach of the obligations set out in a confidentiality agreement:
In addition to the above, any person who is in breach of confidentiality obligations could also be liable to imprisonment with or without a fine under the IT Act. The IT Act provides that any person meeting all the following criteria will be liable to imprisonment for a term of up to three years, or with a fine of up to INR500,000, or both:
(Section 72A, IT Act.)
Obligations under a confidentiality agreement may continue to apply for any term agreed under the confidentiality agreement.
Under Indian law, the following are generally included as permitted disclosees under confidentiality agreements:
Any professional advisers or consultants engaged by the lender in connection with the proposed loan facilities.
The list of situations under the law where a lender is compelled to disclose the confidential information are:
Yes, undertakings not to entice away officers or employees or not to solicit customers of the disclosing party are generally enforceable under Indian law provided (in relation to employees or officers) this does not amount to a contract in restraint of trade under section 27 of the ICA.
No, under Indian law only parties to the agreement can enforce a confidentiality agreement.
No, under Indian law only parties to the agreement can enforce a confidentiality agreement (see Question 14). Where any breach is committed by the permitted disclosees, the borrower will have recourse against the lender for such breach.
No, under Indian law parties may execute the confidentiality agreement in counterparts, and they do not need to sign the same document.
No specific procedure is provided under Indian law for signature of separate (but identical) documents. Procedures applicable generally for execution of contracts should be followed in this scenario.
No, the law chosen as the governing law of a confidentiality agreement will not restrict the parties’ choice of law in respect of subsequent transaction documents. Choice of governing law by the parties is permitted under Indian law.
In the case of cross-border financing transactions entered into by borrowers in India, in our experience, foreign lenders are inclined to choose:
English law as the governing law of a confidentiality agreement.
English courts as the exclusive jurisdiction to decide any dispute that may arise from, or in connection with, the agreement.
Term sheet
The detail (or lack thereof) of the term sheet does not affect its effectiveness. Generally, lenders in India enter into a fairly detailed term sheet in relation to a loan facility. The term sheet will be contractually binding if it fulfils the essential conditions of a valid contract as set out in the ICA (see Question 2).
If the parties propose to make the term sheet binding, then it is advisable that an express provision to that effect be included in it, and that the stamp duty applicable in the relevant state in India (where such term sheet is proposed to be signed or executed) be paid. An unstamped term sheet will not be admissible in a court of law in India (section 35, Stamp Act). Stamp duty varies from state to state in India, and may be fixed or ad valorem, and rates vary substantially. If a document is stamped in one state but the original or copy of the document is brought into another state that has a higher stamp duty, the difference between the two amounts of stamp duty may need to be paid on the document. Stamp duty on a confidentiality agreement is generally fixed, rather than ad valorem (the amount being up to a maximum of INR300).
A non-binding term sheet, executed by the relevant authorized person of the parties, may clearly state that the parties to the term sheet intend to execute it as legally non-binding document. In the absence of such an express stipulation regarding the non-binding nature in the document, the term sheet may be presumed to be binding between the parties, depending on the facts of each case.
If the parties intend that a term sheet should be binding, then the term sheet will be deemed to be conclusive in relation to the rights and obligations of the parties provided for under the term sheet, unless the parties subsequently sign a loan agreement.
Where a loan agreement is subsequently signed, the parties generally agree that the terms and conditions of the term sheet are expressly subsumed into the loan agreement, or that the loan agreement expressly supersedes the term sheet.
The points which are covered in a detailed facility agreement and which do not appear in a legally binding term sheet are subject to negotiation and agreement between the lender and the borrower prior to finalisation and execution of the facility agreement.
There is no such duty recognized under Indian law.
Yes, a term sheet can be partially binding and partially non-binding under Indian law. Such an intention of the parties should be expressly provided for in the term sheet itself with respect to the relevant provisions.
As a general rule, the amount of detail contained in a term sheet does not determine whether the term sheet is binding or not.
The Standard document, Term sheet: syndicated acquisition finance facilities: Cross-border includes the preliminary terms and conditions of a proposed loan facility; it does not create any commitment on the part of the lender to disburse the facility on the basis of such terms and conditions unless relevant financing documents are executed and pre-disbursement conditions are satisfied. Once the parties agree and sign the terms of the such a term sheet, it becomes binding on the parties and the points agreed will need to be replicated in the facility agreement or annexed as a schedule to the financing agreement.
A borrower generally negotiates the term sheet with the lender before finalisation of the same. Though at times the lenders provide their standard term sheets to the borrower for acceptance, the borrower can negotiate them. The negotiation power of the borrower will depend on various factors, such as its reputation, its credit standing and the amount of loan.
Generally, the borrower and lender in India sign the term sheet once it is finalized between them. Once signed, the term sheet will be effective and binding on the parties, provided the essential conditions of a valid contract are satisfied (see Question 2) and the intention is not to make it a non-binding term-sheet
Yes, a term sheet generally refers to the conditions which need to be satisfied before a borrower can draw down a loan as either “drawdown conditions” or “conditions precedent”.
Waiver and consent letter
A promisee (the lender) has a right to dispense with, or remit wholly or in part, the performance of any promise made to them by the promisor (the borrower) (section 63, Indian Contract Act 1872).
It is possible for a lender to unilaterally relinquish any right it has under a facility agreement or other finance document. In case of a consortium or syndicate financing, the lead lender, majority lenders or the facility agent will generally waive the rights of the lenders under the facility agreement or other finance document on their behalf.
Where a lender relinquishes its rights under a facility agreement governed by Indian law, this is generally referred to as a “waiver”. Facility agreements usually contain a specific waiver clause giving the lender, majority lenders or the facility agent the right to waive any condition of the facility agreement if the borrower fails to fulfil the condition for any reason whatsoever. Such waiver may or may not be conditional.
A waiver may be oral or in writing. However, lenders generally prefer to issue waivers in the form of a written letter usually at the request of the borrower.
Under the facility agreements governed by Indian law, lenders generally do not restrict waiver and consent to specified provisions of the finance documents.
Irrespective of the governing law of a waiver and consent letter, any director or officer or authorized person of an Indian borrower who is authorized to do so by a resolution (passed by the board of directors in accordance with the Companies Act 2013) in terms of the relevant constitutional document or authorizations, is entitled to countersign the waiver and consent letter on behalf of the Indian borrower. However, if a waiver and consent letter is governed by foreign law, then such foreign law should also be complied with.