Finance Agreement

When your company borrows from a group entity, signs an external commercial borrowing with an overseas lender, or creates a mortgage over factory land to secure a term loan, a downloaded template will not protect you. A finance agreement governs exactly who owes what, at what cost, against which assets, and what happens when things go wrong — and it needs to be structurally correct from day one, not patched after a default.

Whether the structure is a plain-vanilla term loan, an inter-corporate deposit under Section 186, a convertible note, or an ECB under RBI's Master Directions, the drafting must address Companies Act limits, FEMA and RBI compliance, CERSAI security registration, stamp duty, Section 194A TDS, and SARFAESI and IBC enforcement routes. Legal Suvidha handles the full stack — architecture, drafting, negotiation, registration, and ongoing compliance.

At a Glance

• Who needs it: Companies borrowing from NBFCs, banks, group entities, promoters, or overseas lenders; lenders seeking enforceable, priority-ranked security over Indian assets.
• Governing law: Companies Act 2013 (Sections 185, 186, 188); FEMA 1999 and RBI ECB Master Directions; SARFAESI Act 2002; IBC 2016; Income Tax Act (Sections 194A, 269SS/T, 195, 56(2)(viib)).
• Turnaround: Drafting in 3–7 working days; full documentation including security creation, CERSAI registration, and ECB filings completed in 4–7 weeks total.
• Section 186 cap: 60% of paid-up capital + free reserves + securities premium, OR 100% of free reserves + securities premium — whichever is higher — without a shareholder special resolution.
• CERSAI deadline: Security interest (mortgage, hypothecation, pledge) must be registered at CERSAI within 30 days of creation. Missing this date directly weakens your enforcement position.
• Section 269SS / 269T: Loans and deposits of ₹20,000 or more cannot be accepted or repaid in cash. Violation attracts a penalty equal to 100% of the loan amount — imposed without court proceedings.
• ECB all-in-cost: RBI's ECB Master Directions prescribe all-in-cost ceilings above the benchmark rate (SOFR + prescribed spread); a single clause out of line forces the approval route and delays drawdown.

What's New for FY 2026-27

Several regulatory changes since April 2025 directly affect how finance agreements are structured, filed, and taxed.

• Form 10F e-filing now mandatory: Foreign lenders claiming treaty-rate withholding under Section 195 must file Form 10F electronically on the income tax portal. Physical forms are no longer accepted. Your ECB agreement should include Form 10F delivery as a condition precedent to reduced-rate interest payment.
• DPDP Act 2023 — data clauses required: Where lenders collect borrower financial data digitally — bank feeds, GST data, AIS extracts — the finance agreement must now include data-processing, retention, and deletion clauses compliant with the Digital Personal Data Protection Act 2023.
• AIS / TIS cross-verification live: The Income Tax Department auto-matches interest income reported by lenders and TDS deducted under Section 194A against the borrower's AIS. Mismatches between the agreement's interest schedule and actual TDS filings now trigger notices automatically.
• TCS on LRS remittances above ₹10 lakh: Effective October 2024, TCS at 20% applies to LRS remittances beyond ₹10 lakh per financial year. ECB interest outflows via the LRS route must be factored into the all-in-cost computation and the agreement's gross-up or tax-indemnity clause.
• IBC threshold enforcement tighter: Post-Supreme Court rulings, Section 7 financial creditor applications face stricter default-amount scrutiny at the admission stage. Default-event definitions and acceleration mechanisms must be drafted precisely to survive IBC admission hearings.
• RBI ECB end-use expansion: Updated RBI Master Directions now permit ECB proceeds for additional infrastructure sub-sectors under the automatic route. Confirm current end-use eligibility before finalising the end-use covenant in the agreement.

Who Needs a Properly Drafted Finance Agreement

• Companies borrowing inter-corporately: Any loan, guarantee, or security given to another body corporate triggers Section 186. The agreement must document the board resolution, confirm the interest rate is not below the government security yield, and stay within the 60% or 100% cap — or include the shareholder resolution.
• Promoter or director lending to the company: Section 185 prohibits most director loans, but carve-outs exist for whole-time directors under employee schemes and for NBFCs in the ordinary course. The agreement must be structured into the correct exception or it is void.
• Startups raising convertible notes: A convertible note must specify the conversion formula, valuation cap, discount rate, and trigger events precisely. An incorrectly drafted note creates a Section 56(2)(viib) deemed-gift tax problem for the issuing company at the time of conversion.
• Companies taking ECB from overseas: RBI's automatic-route ECB requires the agreement to cap all-in cost, specify minimum average maturity, restrict end-use, and route through an AD bank. Missing any element forces the approval route and delays drawdown by weeks.
• Secured lenders protecting priority: Without CERSAI registration of mortgage or hypothecation within 30 days, your security interest loses priority against subsequently registered lenders — a critical gap in any default or insolvency scenario.
• NBFCs structuring securitised or mezzanine debt: Pass-through certificate structures, direct-assignment agreements, and mezzanine facilities each need a bespoke agreement. Standard term-loan templates do not capture the tranching, credit-enhancement mechanism, or priority-of-payment waterfall.

How It Actually Works

Finance agreement work runs in six stages — architecture first, documentation second, registrations and compliance third.

Step 1: Architecture and Regulatory Route

We start with your lender and borrower profiles, the loan amount and currency, end-use, available security, and tax position. This determines the structure — term loan, ICD, ECB, NCD, or convertible note — and the regulatory route, including whether you need Section 186 shareholder approval, an RBI ECB LRN, or a SEBI debenture trustee. Getting the architecture right prevents compliance surprises after execution.

Step 2: Drafting the Core Agreement

The finance agreement covers principal amount and currency, interest rate and computation convention (actual/365 or 30/360), repayment schedule (instalment, bullet, cash-sweep, or PIK), security package, positive and negative covenants (minimum DSCR, debt cap, no-encumbrance, change-of-control), representations, events of default, MAC clause, cross-default, acceleration, governing law, and dispute-resolution clause. It is drafted as one consistent document — not a patchwork of clauses from different templates.

Step 3: Security Documentation

Security is documented separately: a mortgage deed for immovable property, a hypothecation deed for stock and book debts, a pledge agreement for shares, a corporate or personal guarantee, and a debenture trust deed for NCD structures. Each security document precisely describes the secured asset, the obligations covered, enforcement triggers, and the appointed receiver or trustee — drafted from the start to be SARFAESI-enforceable under Section 13(2) and 13(4).

Step 4: Counterparty Negotiation and Mark-Up

Most finance agreements go through two to four rounds of mark-up. The commercial points typically contested are: prepayment premium and notice period, financial covenant levels (DSCR, leverage), MAC clause scope and materiality threshold, cross-default basket size, security-release conditions, and cure periods for soft defaults. We represent your position through each round and produce a clean, signature-ready version with a negotiation summary.

Step 5: Stamping and Registration

The finance agreement and security documents are stamped at the applicable state-schedule rate before execution. Mortgage deeds require registration at the sub-registrar's office. For ECB structures, the Loan Registration Number (LRN) is obtained from the FIRMS portal via the AD bank before the first drawdown. Stamp duty rates, registration fees, and ad valorem caps vary by state — Maharashtra, Karnataka, Delhi, and Tamil Nadu each have different rules.

Step 6: CERSAI, RoC Filing, and Drawdown

Security interest is registered at CERSAI within 30 days of creation. Form CHG-1 is filed with the Registrar of Companies separately under the Companies Act — both tracked to confirmed acknowledgement. Before the first drawdown, conditions precedent (board resolutions, security creation, CERSAI registration, legal opinions, insurance endorsements) are cleared. Post-drawdown, we issue a compliance calendar covering TDS deposit deadlines, ECB-2 monthly returns, quarterly compliance certificates, and CERSAI charge satisfaction on repayment.

A Real Example: ₹8 Crore Term Loan from a Group NBFC

XYZ Manufacturing Pvt Ltd (Pune) borrows ₹8 crore from ABC Capital Ltd, a group NBFC, to fund a plant expansion. Here is how the agreement architecture plays out in practice.

• Section 186 check: XYZ's paid-up capital is ₹2 crore; free reserves are ₹6 crore. The 100% of free reserves limit is ₹6 crore. The 60% of (₹2 cr + ₹6 cr) limit is ₹4.8 crore. The higher figure is ₹6 crore — so the ₹8 crore loan requires a shareholder special resolution before execution. This is caught at architecture stage, not after signing.
• Interest and Section 194A TDS: Interest is 12% p.a. on ₹8 crore = ₹96 lakh per year. Section 194A TDS at 10% = ₹9.6 lakh deducted annually and deposited with the government. Net interest received by ABC Capital = ₹86.4 lakh. The agreement specifies that TDS certificates (Form 16A) are delivered within 15 days of each quarter end.
• Security and stamp duty: Security is a mortgage over XYZ's factory land (market value ₹12 crore). Maharashtra stamp duty on mortgage: 0.3% of the secured amount capped at ₹10 lakh — stamp duty here is ₹2.4 lakh. CERSAI filing must occur within 30 days of the mortgage deed's execution date; missing this window compromises ABC Capital's enforcement priority.
• Financial covenant example: Minimum DSCR of 1.25x tested every quarter. If DSCR falls below 1.0x for two consecutive quarters, it is a hard event of default triggering acceleration. Between 1.0x and 1.25x, it is a soft default with a 30-day cure period before the lender can accelerate.

This structure — Section 186 shareholder approval, TDS mechanics, stamp duty, CERSAI timing, and tiered covenant levels — is embedded in the agreement from drafting, not added as an afterthought when a problem arises.

After Signing: Keeping the Agreement in Good Standing

A finance agreement generates recurring compliance obligations through the entire loan tenure — not just at execution.

• ECB-2 monthly returns: If your borrowing is an ECB, Form ECB-2 must be filed with RBI via the AD bank by the 7th of every following month. Missing even one filing can trigger RBI scrutiny and restrict further drawdowns under the same LRN.
• Section 186 annual board resolution: Each financial year, a fresh board resolution is required if the outstanding loan balance remains above zero. The resolution must confirm the loan stays within Section 186 limits and that the interest rate is at or above the prevailing government security yield.
• Section 194A TDS deposits: TDS on interest must be deposited with the government by the 7th of the month following deduction (30 April for March deductions). Form 26Q is filed quarterly; Form 16A is issued to the lender within 15 days of each quarter end.
• Compliance certificates: Most institutional finance agreements require a quarterly compliance certificate, signed by a director or CFO, confirming that all financial covenants are met and no event of default has occurred or is continuing.
• CERSAI charge satisfaction on repayment: When the loan is fully repaid, the charge registered at CERSAI must be formally satisfied within 30 days. Form CHG-4 is filed with the RoC simultaneously. Unsatisfied charges appear in due-diligence searches and can block future fundraising rounds.
• Form 15CA / 15CB for ECB interest remittance: Each time ECB interest is remitted abroad, Form 15CA (online tax portal) and Form 15CB (CA certificate) must be filed before the bank can process the outward payment. The bank will not release the remittance without both documents on record.

An unsatisfied CERSAI charge after loan repayment is one of the most common blockers during startup due diligence and acquisition. File CHG-4 within 30 days of the final repayment — do not wait.

Where Finance Agreements Go Wrong

• Missing the 30-day CERSAI window: Security created but not registered at CERSAI within 30 days loses priority against later-registered lenders and restricts the SARFAESI Section 13(2) enforcement route — a critical gap that only surfaces when you need to enforce.
• Section 186 limits breached without shareholder approval: Boards sometimes approve ICDs or loans to subsidiaries without running the 60% or 100% computation. A breach without the required special resolution exposes every officer in default to a ₹5,000 per day penalty under Section 186(13).
• Cash receipts violating Section 269SS: Accepting a loan above ₹20,000 in cash — even from a promoter or related party — attracts a penalty equal to 100% of the loan amount under Section 271D. The penalty lands on the borrower and requires no court order.
• TDS not deducted on interest (Section 194A): The borrower who fails to deduct TDS becomes liable for the tax amount plus interest at 1.5% per month from the deduction date to the deposit date. The interest expense also becomes disallowable in the borrower's income tax computation — a double cost.
• ECB end-use violations: Using ECB proceeds for equity investment, general working capital (in most cases), real estate, or onward lending violates RBI Master Directions. Penalties include compounding fees and mandatory conversion to the approval route.
• Security description too vague for SARFAESI enforcement: Recovery officers and DRTs have rejected enforcement actions where hypothecated assets were described generically as 'all movable property.' A current, itemised asset schedule with specific descriptions is essential for enforceable security.
• Missing Form 15CA / 15CB for ECB interest: Indian banks will not process outward remittance of ECB interest without Form 15CA (online tax portal filing) and Form 15CB (CA certificate). Missing these delays the payment and may breach the agreement's payment-date obligation, triggering a default.
• No gross-up clause in cross-border agreements: If the agreement is silent on tax gross-up, a future increase in withholding tax rates means the foreign lender receives less than the agreed net interest — a dispute built into the contract from day one.

What You Receive at the End

• Executed finance agreement covering principal, interest, repayment schedule, covenants, default events, and dispute resolution.
• Security documents — mortgage deed, hypothecation deed, pledge agreement, or corporate or personal guarantee, as applicable to your structure.
• Board and shareholder resolutions required under Section 186, Section 185 carve-outs, or Section 188 RPT approval.
• CERSAI charge registration acknowledgement and Form CHG-1 filing confirmation with the Registrar of Companies.
• ECB Loan Registration Number (LRN) from the FIRMS portal, if applicable.
• Conditions-precedent checklist with drawdown authorisation letter confirming all CPs are satisfied.
• TDS mechanics memo — Section 194A computation schedule and Form 15CA / 15CB workflow for cross-border interest remittances.
• Negotiation summary — key commercial and legal points agreed and conceded, for your internal records and future amendment reference.
• Compliance calendar covering all post-signing obligations, deadlines, and responsible parties for the entire loan tenure.
• Section 186 utilisation tracker — running computation updated after each drawdown and repayment to confirm headroom.

How to Get Started

Share a one-page brief covering: the lender and borrower entities (names, CINs, whether either is an NBFC, foreign entity, or related party), the loan amount and currency, the proposed security, the intended end-use, and whether this is a new borrowing or a refinancing. If you already have a term sheet or a counterparty draft, send that as well — we will work from your position rather than starting from a blank page.

Legal Suvidha assigns a finance law specialist within one business day. The regulatory architecture is confirmed in a kick-off call, drafting begins immediately, and you receive a first draft within 3–7 working days. Security creation, stamping, CERSAI, and ECB filings follow on a fixed-date schedule so you can plan your drawdown with certainty.