Loan Agreement

A loan agreement is more than a promise to pay. When the borrower stops paying, the agreement is the only thing standing between your money and a multi-year recovery battle. Banks treat their loan documentation as an asset because that is exactly what it is. You should too.

Whether you are lending to a sister company, taking foreign currency from a parent overseas, or extending credit to a vendor, the same document must clear five different rule books — Companies Act, Income-tax Act, RBI Master Directions, State Stamp Acts, and SARFAESI. A template downloaded from the internet rarely clears even one of them cleanly.

At a Glance

• Who needs this: Any company, LLP, or individual lending or borrowing in a structured way — inter-corporate, shareholder, ECB, related-party, or third-party commercial loans.
• Governing laws: Companies Act 2013 (Sections 185, 186, 188), Income-tax Act (Sections 194A, 195, 269SS, 269T), RBI Master Direction on ECB, SARFAESI Act 2002, Indian Contract Act 1872, and State Stamp Acts.
• Turnaround: 2-4 weeks for drafting and negotiation; another 2-3 weeks for stamping, security creation, CERSAI, and MCA filings.
• Section 186 ceiling: 60% of paid-up plus free reserves plus securities premium, or 100% of free reserves plus securities premium (whichever is higher), without shareholder special resolution.
• Section 269SS cap: No cash loan of ₹20,000 or above — every rupee must move through a banking channel, NEFT, RTGS, UPI, or account-payee instrument.
• TDS on interest: 10% under Section 194A for residents above the ₹40,000 / ₹50,000 thresholds; Section 195 applies for non-resident lenders at DTAA rates with Form 10F and TRC.
• Charge filing windows: Form CHG-1 with MCA within 30 days of creating any charge; CERSAI within 30 days for property and movable asset security.

What's New for FY 2026-27

Loan documentation has tightened on several fronts over the past two years. Here is what changed and what you should account for in any agreement signed this year.

• ECB cost ceiling refresh: RBI's all-in-cost ceiling continues at benchmark rate plus 550 basis points for both INR-denominated and foreign currency ECBs. Minimum average maturity stays at 1 year for ECBs up to USD 50 million and 5 years above that.
• FIRMS portal fully digital: ECB returns in Form ECB-2, Loan Registration Number issuance, and AD bank validation are now end-to-end online with auto-reconciliation. Manual filings have been retired.
• DPDP Act 2023 in force: Borrower KYC, financial statements, and credit data fall under personal data protections. Consent, purpose limitation, and storage caps must be drafted into the agreement, not assumed.
• Angel tax repeal carryover: Section 56(2)(viib) has been abolished from FY 2025-26 for all classes of investors. Convertible loan structures with foreign lenders are now significantly cleaner on the tax side.
• E-stamping standardised: Maharashtra, Karnataka, Delhi, Tamil Nadu, and most other major states have moved to e-stamping. Physical stamp papers above ₹500 are discontinued in these jurisdictions.
• Form CHG-1 V3 portal: MCA's V3 portal is now the only filing channel. Filings beyond 30 days carry additional fees up to 12 times the normal rate, and beyond 120 days require a condonation petition before the Regional Director.

Why You Need a Properly Drafted Loan Agreement

• Without specific default events, recovery starts in court not in private workout: Generic 'material breach' language gives the borrower months of legal cover. Specific triggers — missed instalment, financial covenant breach, cross-default, change of management — let you accelerate and enforce immediately.
• Security is enforceable only if it is documented properly: A handshake mortgage is no mortgage. SARFAESI rights and CERSAI priority require a separately registered mortgage deed, not a single clause buried inside the loan agreement.
• Section 186 and 185 breaches carry director-level penalties: An inter-corporate loan above the 60%/100% ceiling, or a loan to a director outside permitted carve-outs, attracts fines on the company and on individual directors running into several lakhs each.
• Section 269SS turns a cash loan into a 100% penalty: Accept a loan of ₹20,000 or above in cash and you face a penalty equal to the loan amount under Section 271D. The agreement must specifically record the banking channel used.
• ECB defects freeze drawdown and remittance: A loan from a foreign parent without an LRN, without correct end-use, or above the all-in-cost ceiling cannot be drawn down. Interest cannot be remitted abroad without a compounding application and penalty to RBI.

How It Actually Works

A proper loan agreement is built in layers — commercial first, regulatory second, security third, default last. Here is the sequence we follow on every engagement.

Step 1: Loan Architecture Decision

We start by mapping the lender and borrower against five regulatory routes: domestic inter-corporate under Section 186, shareholder loan covered by the deposit rules in Sections 73 and 76, ECB under the RBI Master Direction, bank or NBFC commercial loan, and related-party loan under Section 188 read with Section 40A(2) of the Income-tax Act.

The route decides everything that follows — interest rate floors, security options, end-use restrictions, withholding tax treatment, and the resolution path. Picking the wrong route at the start usually means redrafting from scratch later.

Step 2: Commercial Terms Lock

Principal, currency, interest rate, repayment schedule, prepayment rights, and prepayment penalty are pinned down with lender and borrower together. Debt service coverage projections are stress-tested against the proposed schedule.

Floating rate triggers reference a defined benchmark — MCLR, repo, T-bill, or SOFR — with a clear reset cadence. Ambiguity here costs both parties money during the life of the loan.

Step 3: Drafting the Master Agreement

The loan agreement runs across principal, interest computation, default interest, repayment, prepayment, representations, financial covenants, information covenants, events of default, acceleration, security references, governing law, and dispute resolution.

Each clause is drafted to the chosen route. An ICD draft reads differently from an ECB draft, and both read differently from a shareholder loan. Lifting clauses across routes is where most defects originate.

Step 4: Security Documents

Mortgage deed, hypothecation deed, pledge agreement, and corporate or personal guarantee are drafted as separate stand-alone documents. This matters because each goes to a different registry — sub-registrar for mortgage, CERSAI for both immovable and movable security, MCA for company charges.

Stand-alone documents also survive independently if the master loan agreement is later varied or replaced. Bundled clauses lose their security character the moment the parent document is amended.

Step 5: Stamping and Registration

Stamp duty rates differ by state. Maharashtra charges 0.2% capped at ₹10 lakh on a loan agreement, Karnataka 0.1% capped at ₹50,000, and Delhi follows a slab structure. Security documents are stamped separately at their own rates.

Registrations follow in a defined order: sub-registrar for the property mortgage, CERSAI within 30 days for all secured interests, Form CHG-1 with MCA within 30 days for company charges, and FIRMS portal for ECB LRN before any drawdown.

Step 6: Conditions Precedent and Drawdown

Conditions precedent — board resolutions, shareholder consents, security creation, opinion letters, KYC packs — are signed off by a CP satisfaction certificate before first drawdown.

Subsequent tranches carry their own CP satisfaction checks. A compliance calendar listing every periodic filing and covenant test is handed over at closing so neither side forgets the next deadline.

A Real Example: ₹8 Crore Inter-Corporate Loan

A Mumbai-based manufacturing company (the lender) wants to give ₹8 crore to a sister company (the borrower) for capex. Both are private limited. Here is the actual paperwork required.

• Section 186 check: Lender's paid-up plus free reserves plus securities premium is ₹50 crore. The 60% ceiling is ₹30 crore. Existing loans given by lender are ₹15 crore. Headroom for a new loan is ₹15 crore. The ₹8 crore loan fits inside — only a board resolution is required, no shareholder special resolution.
• Section 188 check: The two companies share two common directors. The loan is a related-party transaction. Audit committee approval and a board resolution under Section 188 are required, and the arm's length interest rate is documented in the resolution.
• Interest rate floor: Yield on a 5-year government security at the time is around 7.05%. The Section 186 floor is therefore 7.05%. The parties agree on 9.25% per annum, paid quarterly.
• TDS workings: Section 194A applies. On quarterly interest of about ₹18.5 lakh, the borrower deducts 10% TDS of ₹1.85 lakh, deposits it by the 7th of the next month, and files Form 26Q quarterly.
• Security: Hypothecation of the new plant and machinery being purchased. Form CHG-1 is filed with MCA within 30 days, and a CERSAI registration is filed in parallel.
• Stamp duty (Maharashtra): 0.2% of ₹8 crore is ₹1.6 lakh on the loan agreement itself; the hypothecation deed is stamped separately at the Maharashtra rate on secured amount.

The full documentation cycle runs about three weeks. The borrower's auditor flags the inter-corporate loan in CARO, and the lender's auditor reviews Section 186 compliance in its audit report. Both sides have a clean paper trail.

What Compliance Looks Like After You Sign

Signing the agreement is the first step. The compliance calendar starts immediately and runs through the entire life of the loan.

• Form CHG-1 with MCA: Filed within 30 days of charge creation with charge particulars, security documents, and the stamp duty challan. Late filing up to 120 days carries additional fees; beyond 120 days, a condonation petition before the Regional Director is required.
• CERSAI charge filing: Within 30 days of security creation. A single filing covers mortgage and hypothecation if the underlying security is property and movable assets together.
• Section 194A TDS deposit: By the 7th of the next month for each interest payment, and quarterly TDS return in Form 26Q within the deadline. Late deposit triggers interest under Section 201.
• ECB Form ECB-2: Monthly return to RBI through the AD bank reporting outstandings, drawdowns, and repayments. Filed even in nil months for the life of the loan.
• Section 269T on repayment: Loan repayment of ₹20,000 or above must flow through a banking channel. Cash repayment triggers a 100% penalty under Section 271E on the recipient.
• Financial covenant testing: Debt service coverage, leverage, and current ratio are tested quarterly or half-yearly per the agreement. Compliance certificates signed by the borrower's CFO are submitted within the agreed window.

A missed Form CHG-1 deadline beyond 120 days does not just mean a higher fee — your charge ranks behind everyone else who filed correctly, and you lose first-priority enforcement rights.

Where It Goes Wrong

After hundreds of loan engagements, the same six mistakes keep showing up. Each one is fixable at the drafting stage and painful to fix later.

• Treating an inter-corporate loan as informal: Two group companies, common ownership, common directors — and a one-page IOU. The Section 186 board resolution is missing, Form CHG-1 was never filed, and the Section 188 audit committee never approved. It comes apart in the next statutory audit.
• Charging interest below the Section 186 floor: The section requires interest at least equal to the yield on a matching-maturity government security. A token 4% on an inter-corporate loan invites disallowance of the lender's interest income claim and questions on Section 36(1)(iii) deductibility for the borrower.
• Cash loans above ₹20,000: Sections 269SS and 269T are absolute — no de minimis exception, no good-faith defence. Any single transaction or aggregate above ₹20,000 in cash triggers a 100% penalty equal to the loan amount.
• ECB drawn before LRN issued: The foreign lender wires the money, the borrower deposits it — but the FIRMS portal LRN was never obtained. The result is a compounding application to RBI with a penalty and a long wait.
• Mortgage created but never registered with the sub-registrar: The agreement uses the word 'mortgage' but the property registration is missing. In recovery, the lender ranks as an unsecured creditor and loses SARFAESI rights entirely.
• Default events drafted in generic terms: 'Material breach' with no specifics. The borrower disputes the default, the judge agrees there is room for interpretation, and twelve months pass before the lender can take any enforcement action.

What You Receive at the End

• Master loan agreement, stamped, registered where applicable, and signed by both parties
• Hypothecation deed, mortgage deed, or pledge agreement as separate stand-alone security documents
• Corporate guarantee or personal guarantee documents where applicable
• Board resolutions for lender and borrower under Sections 186 and 188 as applicable
• Shareholder special resolution where the Section 186 ceiling is exceeded
• Form CHG-1 filing acknowledgement from the MCA V3 portal
• CERSAI charge filing acknowledgement
• ECB Loan Registration Number letter from the FIRMS portal for foreign currency loans
• Conditions precedent satisfaction certificate signed off before first drawdown
• Compliance calendar listing every periodic filing, covenant test, and TDS deadline for the life of the loan

How to Get Started

Share a one-page brief — who is lending, who is borrowing, how much, in what currency, for what purpose, and against what security. Add the latest audited financial statements of both parties and a copy of any existing loan documentation. We use this to map the regulatory route and confirm Section 186 headroom or ECB eligibility before drafting begins.

Once the route is clear, we send a fixed-fee proposal along with a list of conditions precedent. Drafting starts the same week. You will see the first draft of the master agreement within five working days, the security documents within ten, and a closing checklist by the end of week three. Negotiation with the counter-party runs in parallel so nothing is lost to sequencing.