How NCD security structures work in India — what lenders actually require

Component 1 — First charge on immovable property (mortgage). The most common and most valued security in Indian private credit is a mortgage over land and building — either an English mortgage (full title transfer to the lender, reverted on repayment) or an equitable mortgage (deposit of title deeds with the trustee). The value of the mortgage is assessed by an approved valuer at current market value; lenders typically lend at 50-65% of this value for a real estate or industrial asset.

For industrial land, the borrower must verify that the land title is clear — no pending litigation, no encumbrance registered by a prior lender, and, critically, no restriction on mortgaging under the original allotment or lease terms. Industrial land in MIDC or GIDC estates is frequently subject to restrictions on creating security without the development authority's prior approval. This approval takes 4-8 weeks and is required before any charge can be created.

Component 2 — Assignment of receivables. For businesses with predictable receivable streams — manufacturer selling to established corporate buyers, hospital operator with regular insurance reimbursements, project developer with customer collection agreements — assignment of receivables provides lenders with direct access to future cash flows.

A receivable assignment involves the borrower formally assigning its right to collect from named debtors to the debenture trustee, with an escrow account into which the assigned receivables are deposited. The trustee then authorises release of funds above the debt service buffer for business use. This structure provides lenders with real-time visibility into cash flow and direct access to it in a stress scenario.

Component 3 — Promoter personal guarantee. A personal guarantee from the promoter — the individual owner or founders of the borrowing company — is almost universally required for mid-market private credit transactions in India. The guarantee creates personal liability for the promoter in the event of default. Its value is assessed against the promoter's personal net worth, which lenders verify through a statement of assets and liabilities, income tax returns for 3 years, and in larger transactions, an independent due diligence of personal assets.

The personal guarantee is a deterrent, not a recovery mechanism. Lenders know that enforcing a personal guarantee is legally complex and time-consuming. Its primary value is that it ensures the promoter has personal skin in the transaction and cannot walk away from a corporate default without personal consequences.

Component 4 — Share pledge. For borrowings by companies with identifiable equity value — where the borrowing entity has subsidiaries, investments, or a business that could be sold — a pledge over the promoter's shares in the borrowing entity gives the lender the right to sell or transfer those shares in an enforcement scenario, effectively transferring ownership of the business to the lender or its nominee.

Share pledges are particularly relevant for holding company structures, where the borrowing entity's primary asset is its ownership stake in operating subsidiaries. In these cases, the pledge over the holding company's shares provides the lender with effective control over the operating businesses in an enforcement scenario.

Component 5 — Fixed deposit lien. Some transactions include a first lien on a fixed deposit maintained with a scheduled bank — typically 6-12 months of interest payments — as additional liquidity support. This is not a primary security but provides lenders with quick access to at least partial recovery without the delays of property enforcement.

Stamp duty. Creating a mortgage requires payment of stamp duty, which varies by state — from 0.1% in some states to 5-6% on the loan value in others. For a ₹100 crore NCD with security in Maharashtra, stamp duty can be ₹2-5 crore. This is a real transaction cost that must be factored into the economics of the borrowing. Many deals are structured with security created across multiple states specifically to minimise stamp duty.

Existing lender consent. If the borrower already has a secured term loan from a bank or NBFC with a first charge over the same assets proposed as NCD security, the existing lender must either release the charge (which typically requires prepayment) or agree to a pari passu or second charge arrangement. Negotiating charge release or pari passu consent adds 2-6 weeks to the security creation timeline and is often the primary cause of placement delays.

RBI approval for foreign-subscribed NCDs. Where an NCD is subscribed by a foreign lender (directly or through an AIF with offshore investor capital), creation of security over Indian immovable property in favour of the foreign lender requires prior RBI approval under FEMA regulations. This approval process can take 8-16 weeks and must be factored into the transaction timeline from the outset.

The Debenture Trust Deed (DTD) is the contract between the borrower and the debenture trustee that governs the NCD throughout its life. It specifies: the security package and how it will be maintained, the financial covenants the borrower must meet quarterly, the events of default that trigger enforcement, the process for applying repayment proceeds, the trustee's rights and obligations, and the process for investor consents on any waiver or amendment.

The quality of the DTD determines how effectively the trustee can protect investor interests in a stress scenario. A well-drafted DTD with specific, testable covenants and clear enforcement mechanics provides investors with meaningful protection. A poorly drafted DTD — with vague covenants or insufficient enforcement rights — leaves investors exposed even if the security itself is adequate.