Hero Motors’ loan covenants limit governance and financing

Hero Motors’ loan covenants limit governance and financing because facility agreements require lender consent or intimation for ownership changes, dividends, new borrowing and management appointments. As of July 31, 2026, Hero Motors had Rs 619.40 crore of sanctioned company facilities and Rs 427.017 crore outstanding; a default can trigger acceleration, security enforcement, board representation or equity conversion.

How much borrowing is subject to Hero Motors’ lender terms?

Hero Motors disclosed Rs 619.40 crore of sanctioned company facilities and Rs 427.017 crore outstanding as of July 31, 2026. Fund-based facilities accounted for Rs 475.879 crore of sanctioned limits and Rs 298.536 crore outstanding, while non-fund-based facilities accounted for Rs 143.521 crore sanctioned and Rs 128.481 crore outstanding. Fund-based facilities provide funds, whereas non-fund-based facilities include letters of credit and bank guarantees.

The Rs 427.017 crore outstanding company total included Rs 169.783 crore of cash credit or working-capital demand loans, Rs 126.562 crore of letters of credit, Rs 119.762 crore of term loans, Rs 8.991 crore of overdraft against fixed deposits and Rs 1.919 crore of bank guarantees. Letters of credit represented Rs 126.562 crore of the Rs 128.481 crore outstanding non-fund-based facilities, making them the principal non-fund-based exposure.

The four listed subsidiaries had Rs 154.905 crore of sanctioned facilities and Rs 116.313 crore outstanding on July 31, 2026. HMTL accounted for Rs 56.186 crore, or about 48% of the listed subsidiaries’ outstanding facilities, followed by HEL at Rs 47.615 crore. Ramesh C Agrawal & Co., Chartered Accountants, certified on September 9, 2026 that Hero Motors and its subsidiaries had no defaults with banks or financial institutions as of the red herring prospectus date.

Which Hero Motors decisions need lender consent or notice?

Hero Motors’ facility agreements and sanction letters can require prior lender consent or intimation for changes to capital, ownership, corporate structure, operations, management, distributions and financing. The disclosed covenants apply to Hero Motors and its subsidiaries STPL, HMTL, Hero EDU and HEL. The prospectus calls the list typical and indicative, so individual loan documents may contain additional conditions.

A central condition addresses a change in ownership, control, management or beneficial ownership below 51%, including a pledge of promoter or sponsor shareholding to a third party. Lender involvement may also be required where another person directly or indirectly manages or controls Hero Motors’ business or operations. The same list includes changes to constitutional documents and the issuance of unissued share capital or creation of new shares.

Mergers, amalgamations, compromises, reconstructions, dividend declarations and share buybacks are also listed as actions subject to the covenant framework. Hero Motors may need lender consent or may need to notify lenders before undertaking those actions, depending on the applicable facility documentation. The terms specifically restrict dividends and shareholder distributions when interest, commission or instalments are in default under the underlying facility.

The restrictions extend to business and management decisions. Listed matters include changing the general nature of the business, an expansion or investment that could have a material adverse effect, appointing or removing key managerial personnel, making further investments in another entity, obtaining additional loans, and changing directors’ remuneration or sitting fees. The covenant list also includes appointing public-issue intermediaries such as investment banks, escrow collection banks, public-issue account banks and refund banks.

What collateral and repayment obligations support the facilities?

Hero Motors’ working-capital facilities are generally secured by a first pari passu charge over present and future current assets, while term loans are generally secured by a first pari passu charge over present and future movable fixed assets. A pari passu charge means lenders rank equally over the charged asset pool. The arrangements may also include corporate guarantees and standby letters of credit.

Working-capital facilities of Hero Motors, STPL, HMTL, Hero EDU and HEL are repayable on demand. Term loans of Hero Motors, STPL, Hero EDU and HMTL are repayable in quarterly instalments under the relevant repayment schedules. Hero Motors’ term loans from Axis Bank Limited, Kotak Mahindra Bank Limited and ICICI Bank Limited have five-year tenors, while specified demand loans from those banks have tenors of up to 12 months.

Hero Motors’ working-capital rates range from 7.10% to 7.84% a year and its term-loan rates range from 7.35% to 8.10% a year. Disclosed subsidiary working-capital rates range from 3.59% a year for HMTL to 8.15% a year for STPL. This range reflects that the facility pricing differs across borrowers and instruments.

Specified term loans permit prepayment but can carry charges. Hero Motors’ Axis Bank term loans have charges of 1% to 2% of the prepaid amount; its Kotak Mahindra Bank facility has a 1% penal charge on the outstanding loan amount; and its ICICI Bank facility has a 1% premium on prepaid principal during the tenor. Hero Motors states that its bankers consented to waive prepayment charges where repayment uses initial public offering proceeds.

What happens if Hero Motors defaults under its facilities?

A Hero Motors default can permit lenders to demand immediate repayment, cancel undrawn commitments, suspend withdrawals and enforce security. Listed events include missed payments, a breach of finance documents, a change in control below 51%, an event prejudicing security, cessation or disposal of a material part of business, inaccurate representations and an insolvency application or notice under the Insolvency and Bankruptcy Code, 2016.

The disclosed events also include litigation, arbitration, regulatory proceedings or investigations that could have a material adverse effect. An unauthorised attempt to create a mortgage, charge, pledge, hypothecation, lien or other encumbrance over lender security is another event. A material adverse effect that has occurred or is likely to occur in relation to Hero Motors or its assets is separately listed.

The remedies can extend beyond repayment collection. Lenders may appoint a nominee or observer to the board, sell or otherwise deal with secured assets or secured third-party assets, and convert outstanding obligations into Hero Motors equity share capital or other securities. Hero Motors states that it must provide shareholder resolution or authorisation to allow lenders to facilitate those conversions under the relevant arrangements.

Conclusion

Hero Motors’ disclosed facilities combine Rs 427.017 crore of company outstanding facilities as of July 31, 2026 with lender controls over ownership, capital structure, shareholder distributions, additional financing, investments and management. Where security is required, the company’s working-capital and term-loan arrangements use charges over current assets and movable fixed assets, respectively.

The disclosed point to watch is the planned use of initial public offering proceeds for prepayment, because Hero Motors says lenders have consented to waive applicable prepayment charges in that case. Hero Motors also states that it obtained necessary lender consents for offer-related activities, while cautioning that its covenant and default lists are indicative and that individual loan documents may contain additional conditions.