Legal opinions

In respect of dissemination of credit information of borrower companies, offshore lenders have been placed at a disadvantage by the Credit Information Companies Act, argues Hitesh Sanghvi.

The Credit Information Companies (Regulation) Act 2005 ("CIC Act") was enacted with a view to regulate credit information companies and to facilitate efficient distribution of credit information and other related matters.

When the economy is robust, the demand for credit offtake is also high. Certain borrowers could take advantage of the system by moving from one lender to another, despite being defaulters in its previous banking relationships.

That is exactly where dissemination of credit information becomes useful and enables lenders to assess the risks involved while lending to a borrower company. Credit information companies such as the Credit Information Bureau (India) Limited maintain a central database of credit information as received from its members, collate and disseminate the same on demand, in the form of commercial credit information reports pertaining to credit facilities availed by borrowers as well as the payment track record to assisting lenders in the loan appraisal process.

However, in respect of dissemination of credit information of borrower companies, offshore lenders have been placed at a disadvantageous position owing to certain provisions, as discussed below, of the CIC Act.

In this context, it would be relevant to note the provisions of Sections 2(f) and (l) of the CIC Act which provide for a "credit institution" and "specified user". The term "credit institution" means a banking company and includes a non-banking financial company, a public financial institution, state financial corporation and housing finance institution, amongst other.

Further, a "specified user" would mean any "credit institution", amongst others. An offshore lender, in terms of Sections 5(b) and 5(c) of the Banking Regulation Act 1949, would not qualify as a banking company.

In view of the above, an offshore lender is unable to be construed either as a 'credit institution' or a 'specified user' to become entitled to gaining access to credit information of potential borrower companies.  

It is pertinent to mention that Sections 2 (f) (vii) and 2 (l) of the CIC Act empower the Reserve Bank of India (“RBI”), for the purposes of the Act, to specify any other institution / class of institution as a “credit institution” or a “specified user”.
Unfortunately, the RBI has not issued any directions/notifications in respect of offshore lenders.

In case of a proposed syndicated lending alongwith a domestic bank, the offshore lender - as far as assessment of credit history based on the disseminated credit information of the borrower company is concerned - may rely upon the commercial acumen of the syndicate member which has qualified as a “credit institution” or a “specified user” under the CIC Act.

It can also be argued that offshore banks are not regulated by the RBI and, therefore, not covered under the relevant provisions of the CIC Act as discussed.

It should, however, be noted that offshore lenders provide large, long-term and low-cost financing to Indian companies and should, therefore, be placed on an equal footing with domestic lenders and granted with the right to having access to credit information of potential borrower companies to enable itself in taking informed credit decisions.

Although it is possible for an offshore lender to make representations before the RBI requesting it to be notified as a 'credit institution' or a 'specified user' under Section 2(f)(vii) or Section 2(l) of the CIC Act, the timeframe involved and the outcome with regard to such representations is uncertain.  
Hitesh Sanghvi is a corporate lawyer and established Hitesh Sanghvi Law Offices, a Mumbai-based business law firm.