Business Loan Agreement (India)

Inter-company loans (loans from one company to another) are regulated under Section 186 of the Companies Act 2013. Under Section 186(2), a company cannot make a loan to any person or body corporate in excess of 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. If the loan amount exceeds these limits, prior approval of the shareholders by special resolution is required. Additionally, under Section 186(3), before any loan above the limits is made, a special resolution passed in a general meeting is mandatory. Under Section 186(5), no loan can be made at a rate of interest lower than the prevailing yield of one-year, three-year, five-year, or ten-year Government Security closest to the tenor of the loan. This prevents companies from providing zero-interest or below-market-rate loans that could be used to transfer value to related parties. Under Section 186(7), companies that have defaulted on repayment of any deposits accepted before the commencement of the Act are prohibited from making loans under Section 186. NBFCs registered with RBI are exempt from Section 186 for loans made in the ordinary course of their business. Loans by a company to its wholly-owned subsidiary, or loans by a holding company to its subsidiary guaranteed by the holding company, are exempted from certain Section 186 requirements.

For a business loan in India, lenders typically take one or more of the following forms of security to protect against borrower default. Mortgage of immovable property: The borrower (mortgagor) creates a security interest over land or buildings in favour of the lender (mortgagee). Under the Transfer of Property Act 1882, a mortgage must be registered with the Sub-Registrar of Assurances if the principal amount exceeds ₹100. The most common form for business loans is the equitable mortgage (deposit of title deeds) or the English mortgage. Under the SARFAESI Act 2002, registered financial institutions can enforce mortgages without court intervention. Hypothecation of movable property: The borrower hypothecates (pledges without delivery) movable assets — stock, receivables, plant and machinery — to the lender. The hypothecation charge must be registered with the Registrar of Companies (ROC) in Form CHG-1 within 30 days of creation, under Section 77 of the Companies Act 2013. Failure to register within 30 days voids the charge against liquidators and creditors. Pledge of securities/shares: The borrower pledges shares, mutual fund units, or debentures to the lender as security. Shares in demat form are pledged through the depository participant system. Personal guarantee: The directors or promoters of the borrowing company provide personal guarantees, making them personally liable for the company's loan obligations. Corporate guarantee: A parent or related company guarantees the borrower's obligations.

Financial covenants are obligations the borrower undertakes regarding their financial health throughout the loan period. They protect the lender by giving early warning of deteriorating financial condition and triggering remedies before the borrower becomes insolvent. In Indian business loan agreements, financial covenants typically include: Debt Service Coverage Ratio (DSCR): The ratio of the borrower's net operating income to their total debt service obligations (principal + interest) must be maintained at or above a minimum (typically 1.25:1 or 1.5:1). A DSCR below 1 means the company cannot service its debt from operations. Current Ratio: The ratio of current assets to current liabilities must be maintained at or above a minimum (typically 1.2:1 or 1.33:1 as per RBI norms for working capital loans). Debt-to-Equity Ratio: Total debt relative to shareholders' equity must not exceed a maximum (e.g., 3:1 or 4:1 for manufacturing businesses). Net Worth Covenant: The borrower's tangible net worth must not fall below a minimum absolute amount. Profitability Covenant: The borrower must maintain a minimum EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) or net profit level. Leverage Ratio: Total debt relative to EBITDA must not exceed a maximum (e.g., 4x EBITDA). These covenants are tested periodically (typically quarterly or annually) based on the borrower's financial statements.

A Business Loan Agreement (India) does not legally require a lawyer in India, and individuals and businesses may draft and execute the document independently. The Negotiable Instruments Act, 1881 does not mandate legal representation for the creation or signing of this type of document. However, seeking independent legal advice from a qualified India lawyer is recommended for transactions involving substantial financial value, complex regulatory requirements, or cross-border elements where multiple legal jurisdictions may apply. A lawyer can verify that the document complies with all applicable statutory requirements, identify potential risks specific to the transaction, and confirm that the terms adequately protect the interests of all parties involved. The Supreme Court of India has jurisdiction over disputes arising from this type of document, and Registrar of Companies (ROC) may impose additional compliance obligations depending on the nature of the underlying transaction. Professional legal review is particularly advisable where the document will be submitted to government agencies or used as evidence in legal proceedings.

A Business Loan Agreement (India) does not legally require a lawyer in India, though legal advice is recommended. Under Indian law, the Indian Contract Act 1872 governs agreements. The Companies Act 2013 and Registrar of Companies (ROC) regulate corporate documents. The Information Technology Act 2000 governs electronic contracts and data protection. The Consumer Protection Act 2019 provides consumer rights. The Income Tax Act 1961 requires tax compliance. Forms-legal.com provides this template as a starting point — always review with a qualified Indian advocate for significant transactions. Under India law, Negotiable Instruments Act, 1881, parties should seek independent legal advice from a qualified lawyer to confirm compliance with all applicable requirements. Under Indian law, the Indian Contract Act 1872 governs contractual obligations, with Section 10 setting essential requirements for valid agreements. The Companies Act 2013 regulates corporate entities through the Registrar of Companies (ROC) and Ministry of Corporate Affairs (MCA). Forms-legal.com provides this template as a starting point for India-compliant documentation.