ON THE PROCEDURE FOR CREATING A CHARGE ON INDIAN PROPERTY TO SECURE A FOREIGN DEBT
A foreign entity may secure its loan given to an Indian entity by way of creating some form of security for the loan such as lien on a property owned by the Indian entity. It is essential to ensure that the foreign lender is a legal entity and has not transgressed the law in lending the money. The procedure governing the creation of such security is subject to Regulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000, and the foreign entity may create such a lien in accordance with the RBI guidelines on External Commercial Borrowings and Trade Credits.
The guidelines lay down a procedure for a foreign entity (“lender”) that seeks to secure its loan. This procedure is as follows:
1. The choice of security is left to the discretion of the lender.
2. In order to secure such property, the lender must obtain a No Objection Certificate. This will be granted to the lender by any AD Category – I bank. An AD Category-I Bank means a bank (Scheduled Commercial, State or Urban Cooperative) which is authorized under Section 10(1) of FEMA to undertake all current and capital account transactions according to the directions issued by the RBI from time to time.
3. Once the No Objection Certificate is obtained by the Indian entity (“borrower”) in favour of the lender the following documents have to be executed in order to enforce such security:
a. mortgage or lien agreement;
b. bank guarantee;
c. negotiable instrument;
d. and power of attorney
4. Such “No Objection” cannot be construed as a permission to acquire immovable asset (property) in India, by the overseas lender / security trustee.
5. In the event of enforcement / invocation of the charge, the immovable asset (property) will have to be sold only to a person resident in India and the sale proceeds shall be repatriated to liquidate the outstanding External Commercial Borrowing.
However, for a No Objection Certificate to be granted, a few requirements have to be met with. The bank may grant a “No Objection” only on the prior fulfillment of the following conditions by the borrower:
1. The External Commercial Borrowing (the loan) must be strictly in compliance with ECB Regulations and guidelines.
2. The loan agreement must have a specific security clause that makes it mandatory for the borrower to create a charge on immovable assets / financial securities / furnish corporate or personal guarantee
3. The loan agreement must be signed by both the parties i.e. lender and the borrower
4. The borrower must obtain a Loan Registration Number (LRN) from the RBI
5. The period of such charge on immovable assets has to expire with the maturity of the underlying ECB.