Search this article on Google: What are the key legal provisions related to Leveraged and Acquisition Finance in India?
As one of India’s leading law firms, SimranLaw has been instrumental in navigating the complex legal landscape of leveraged and acquisition finance in India. The firm’s seasoned legal experts in Chandigarh have elucidated the key legal provisions and regulations that govern this finance domain, alongside occasionally reflecting on significant case law and judgments.
Leveraged finance and acquisition finance generally pertain to the strategies employed by companies contemplating high stake purchases and takeovers. The funding for these acquisitions is often raised through substantial borrowing, which is typically secured against the assets of the company being purchased.
1. Companies Act, 2013:
Under Section 186 of the Companies Act, 2013, a company is prohibited from giving loans, guarantees or security or acquiring securities of another company exceeding 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more. This restriction is critical in leveraged finance and acquisitions as it limits the level of debt that can be taken on board by a company.
2. Insolvency and Bankruptcy Code, 2016:
The Code introduces a time-bound process to resolve insolvency among companies. It is an essential provision impacting leveraged deals as it provides a legal framework for debt restructuring, necessary in cases where a company is unable to meet its financial obligations due to excessive borrowing.
3. Foreign Exchange Management Act (FEMA), 1999:
When an Indian company is being purchased by an overseas entity using leveraged finance, FEMA regulations come into play. These stipulate the process, permissions, and constraints on borrowing from foreign sources.
4. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)
The SARFAESI Act provides for the enforcement of security interests by a secured creditor without the intervention of a court or tribunal. In the context of leveraged and acquisition finance, this act is pertinent as it prescribes the procedure to be followed in case of default by a borrower.
Case Law Perspective:
1. Tata Motors Limited vs Pharmaceutical Products of India Limited and Others 
The legal provisions were put to test in this case, where Tata Motors Limited sought a merger with Pharmaceutical Products of India Limited. The court highlighted the need to comply with Section 391-394 of the Companies Act regarding mergers and acquisitions. This case emphasized the stringent adherence to legal provisions in acquisition finance.
2. Bhushan Steel Ltd insolvency case 
This case following the Insolvency and Bankruptcy Code, 2016, raised many questions on the resolve and enforceability of the Code. The National Company Law Tribunal (NCLT) played a vital role in ensuring adherence to the Code. The success of this insolvency resolution process marked a milestone in India’s insolvency and bankruptcy legal framework.
Leveraged and acquisition finance is governed by a multifaceted legal framework in India, making it all the more crucial to have proficient legal counsel on board. SimranLaw, with its expertise and years of experience, continues to demystify these complexities, enhancing reader’s understanding of these legal provisions.