RBI revisits charge creation regulations for Indian Party – liberalizes overseas investment norms

TG Team 31 Dec 2014 7,243 Views 0 comment Print Company Law | Articles

RBI has been constantly revisiting the FEMA regulations pertaining to overseas direct investment, foreign investments in India and others in view of current scenario and amending the same. With a view to grant greater flexibility to Indian Companies, RBI vide Notification No. FEMA.322/RB-2014 dated 14^th October 2014[1] amended the FEMA (Transfer or Issue of any Foreign Security) Regulations, 2000 ( the Regulations) and the amendment became effective from the date of publication in the official gazette i.e. 3^rd December, 2014. RBI thereafter issued RBI/2014-15/371 A.P. (DIR Series) Circular No.54 dated 29^th December, 2014[2] ( the Circular).

Creation of charge for fund based and non fund based facility (the said facilities) has been revisited and Step down subsidiaries (irrespective of the level) have also been covered under the ambit of eligible entities whose shares may be pledged by an Indian Party[3] for availing the said facilities by Indian Party or its group companies / sister concerns / associate concerns or by any of its JV / WOS / SDS subject to conditions as discussed in the latter part. Further, the requirement to obtain prior RBI approval for creation of charge on assets (except shares of JV/ WOS) of the Indian Party or the group company has been done away with. Instead approval of RBI is only required on invocation of charge in favour of domestic or overseas lender.

The Circular specifies couple of other restrictions as well. A quick comparison between the extant and the amended regulations are discussed hereunder.

Quick Comparison between Amended Regulations and Erstwhile Regulations

Extant Regulation	Amended Regulation	Additional conditions as specified in the Circular	In a nutshell
18.Pledge of Shares of Joint Ventures and Wholly Owned Subsidiaries	18. Pledge of Shares of Joint Venture (JV), Wholly Owned Subsidiary (WOS) and Step down Subsidiary (SDS)
An Indian Party may transfer, by way of pledge, shares held in a Joint Venture or Wholly Owned Subsidiary outside India as a security for availing of fund based or non-fund based facilities for itself or for the Joint Venture or Wholly Owned Subsidiary from an authorised dealer or a public financial institution in India [4]or to an overseas lender, provided the lender is regulated and supervised as a bank and the total financial commitment of the Indian Party remains within the limit stipulated by the Reserve Bank for overseas investments in JV/WOS.	An Indian Party may create charge, by way of pledge, on the shares of Joint Venture (JV) or Wholly Owned Subsidiary (WOS) or Step Down Subsidiary (SDS) outside India [held directly by the Indian party in JV or WOS and indirectly in SDS] as a security in favour of an Authorized Dealer or a public financial institution in India or an overseas lender, for availing of fund based or non-fund based facility for itself (i.e. the Indian party) or for its JV / WOS / SDS whose shares have been pledged, or for any other JV / WOS / SDS of the Indian party. Provided that a. The value of the fund based or non-fund based facility is reckoned as financial commitment for the Indian party and the total financial commitment of the Indian party remains within the limit stipulated by the Reserve Bank for overseas direct investments in the JV / WOS from time to time; b. In case of the facility from an overseas lender, it should be regulated and supervised as a bank; and c. Subject to the additional terms and conditions prescribed by the Reserve Bank from time to time.”	⇒ Compliance of Regulation 6 and 7 (if applicable) to be ensured. Regulation 6 specifies what constitutes total financial commitment. Regulation 7 specifies compliances required to be done when the Indian party making investment outside India is engaged in financial services. ⇒ Period of charge, if not specified, to be co-terminus with end use for which charge created. ⇒ Loan/ facility availed by JV/ WOS/ SDS to be utilized for its core business activities overseas and not for investing back in India in any manner whatsoever. ⇒ A certificate from statutory auditors of the Indian Party to the effect that the loan/ facility availed by JV/ WOS/ SDS has not been utilized for direct or indirect investments in India, to be furnished to AD Bank ⇒ The said facilities extended by domestic lender will be governed by prudential norms and guidelines issued by RBI – DBOD	· Shares of Step down subsidiary (SDS) can now be pledged in favour of domestic/ overseas lender. · Security can be created for the the said facilities availed for itself or for its JV/ WOS/ SDS whose shares have been pledged or for any other JV/ WOS/ SDS of Indian Party. · Value of the said facilities to form part of financial commitment for Indian Party. Total financial commitment to remain within 400% of networth. · Overseas lender needs to be necessarily regulated an supervised as a Bank
[5]18A Creation of charge on immovable / movable property and other financial assets	18A Creation of charge on domestic and foreign assets
An Indian Party, with prior approval of the Reserve Bank, may transfer, by way of mortgage / pledge / hypothecation, the immovable / movable property and other financial assets (except shares of JV / WOS) of the Indian party and its group companies as a security for availing of fund based and/or non-fund based facilities for its JV or WOS from an authorised dealer bank or a public financial institution in India or to an overseas lender, provided the lender is regulated and supervised as a bank, the total financial commitment of the Indian Party remains within the limit stipulated by the Reserve Bank for overseas investments in JV/WOS and a ‘No Objection’ is submitted by the Indian party and its group companies from their resident lenders.	(1) An Indian party may create charge (by way of mortgage, pledge, hypothecation or otherwise) on its assets [including the assets of its group company, sister concern or associate company in India, promoter and / or director] in favour of an overseas lender as security for availing of the fund based and/or non-fund based facility for its Joint Venture (JV) or Wholly Owned Subsidiary (WOS) or Step Down Subsidiary (SDS) outside India. Provided that a. The value of the facility is reckoned as financial commitment for the Indian party and the total financial commitment of the Indian party remains within the limit stipulated by the Reserve Bank from time to time for overseas direct investments in the JV / WOS; b. The overseas lender is regulated and supervised as a bank as per the law of the host country; c. A ‘No Objection’ is obtained from the domestic lender in whose favour if charge is already created on the domestic assets; and d. Subject to the additional terms and conditions prescribed by the Reserve Bank from time to time.”	In addition to the abovementioned: ⇒ Domestic assets, on which charge is being created, should not be securitized. ⇒ Overseas lender to undertake that, in the event of enforcement of charge, they shall transfer the domestic assets by way of sale to residents only. ⇒ In case of invocation of charge, resultant remittance exceeding the prescribed limit of the financial commitment of the Indian party (prevailed at the time of creation of charge) shall require prior approval of the Reserve Bank. ⇒ Pledge of shares of Indian Company, if made, will be governed by FEMA provisions and FDI policy issued by DIPP from time to time.	⇒Regulation 18 A (1) deals with creation of charge in favour of overseas lender for the said facilities availed by JV/ WOS/ SDS outside India. ⇒Requirement of prior approval of RBI done away with. Approval required only if remittance post invocation exceeds the financial commitment limit that prevailed at the time of creation of charge. · Security can be created on the assets of Indian Party, its sister concern, group company, associate company, promoter and/or director for securing the said facilities availed for JV/ WOS or SDS outside India subject to following: ⇒ Value of fund based- non fund based facility to form part of financial commitment for Indian Party. Total financial commitment to remain within 400% of networth. ⇒ Overseas lender needs to be necessarily regulated an supervised as a Bank ⇒ NoC from domestic lender needed, if charge already exists on those assets in favour of domestic lender
(2) An Indian party may create charge (by way of mortgage, pledge, hypothecation or otherwise) on the assets of its overseas JV or WOS or SDS in favour of an AD bank in India as security for availing of the fund based and/or non-fund based facility for itself or its JV or WOS or SDS outside India. Provided that a. The value of the facility is reckoned as financial commitment for the Indian party and the total financial commitment of the Indian party remains within the limit stipulated by the Reserve Bank from time to time for overseas direct investments in the JV / WOS; b. The overseas lender is regulated and supervised as a bank as per the law of the host country; c. A ‘No Objection’ is obtained from the overseas lender or domestic AD bank in whose favour if charge is already created on the overseas assets; d. The facility extended by the domestic AD bank to the Indian party / JV / WOS / SDS is governed by the prudential norms and other guidelines issued by the Department of Banking Operations and Development, Reserve Bank; and e. Subject to the additional terms and conditions prescribed by the Reserve Bank from time to time	In addition to the conditions specified under Regulation 18 above: ⇒ Overseas assets, on which charge is being created, should not be securitized. ⇒ Invocation of charge requiring domestic lender to acquire overseas assets will require prior approval of RBI.	⇒ Regulation 18 A (2) deals with creation of charge in favour of domestic AD Bank lender for the said facilities availed for Indian Party or JV/ WOS/ SDS outside India ⇒ Requirement of prior approval of RBI done away with. Prior approval required only on invocation of charge and acquiring of overseas assets. ⇒ Security can be created on the assets of JV/ WOS/ SDS outside India, in favour of an AD Bank in India for securing the said facilities availed for itself or JV/ WOS or SDS outside India subject to following: – Value of the said facilities to form part of financial commitment for Indian Party. Total financial commitment to remain within 400% of networth. – Overseas lender needs to be necessarily regulated an supervised as a Bank as per laws of host country – NoC from overseas lender/ domestic AD bank needed, if charge already exists on those overseas assets in their favour – Facility by Domestic AD Bank will be governed by prudential norms issued by DBOD.·

Extant Regulation

Amended Regulation

Additional conditions as specified in the Circular

In a nutshell

18.Pledge of Shares of Joint Ventures and Wholly Owned Subsidiaries

18. Pledge of Shares of Joint Venture (JV), Wholly Owned Subsidiary (WOS) and Step down Subsidiary (SDS)

An Indian Party may transfer, by way of pledge, shares held in a Joint Venture or Wholly Owned Subsidiary outside India as a security for availing of fund based or non-fund based facilities for itself or for the Joint Venture or Wholly Owned Subsidiary from an authorised dealer or a public financial institution in India [4]or to an overseas lender, provided the lender is regulated and supervised as a bank and the total financial commitment of the Indian Party remains within the limit stipulated by the Reserve Bank for overseas investments in JV/WOS.

An Indian Party may create charge, by way of pledge, on the shares of Joint Venture (JV) or Wholly Owned Subsidiary (WOS) or Step Down Subsidiary (SDS) outside India [held directly by the Indian party in JV or WOS and indirectly in SDS] as a security in favour of an Authorized Dealer or a public financial institution in India or an overseas lender, for availing of fund based or non-fund based facility for itself (i.e. the Indian party) or for its JV / WOS / SDS whose shares have been pledged, or for any other JV / WOS / SDS of the Indian party.

Provided that

a. The value of the fund based or non-fund based facility is reckoned as financial commitment for the Indian party and the total financial commitment of the Indian party remains within the limit stipulated by the Reserve Bank for overseas direct investments in the JV / WOS from time to time;

b. In case of the facility from an overseas lender, it should be regulated and supervised as a bank; and

c. Subject to the additional terms and conditions prescribed by the Reserve Bank from time to time.”

⇒ Compliance of Regulation 6 and 7 (if applicable) to be ensured. Regulation 6 specifies what constitutes total financial commitment. Regulation 7 specifies compliances required to be done when the Indian party making investment outside India is engaged in financial services.

⇒ Period of charge, if not specified, to be co-terminus with end use for which charge created.

⇒ Loan/ facility availed by JV/ WOS/ SDS to be utilized for its core business activities overseas and not for investing back in India in any manner whatsoever.

⇒ A certificate from statutory auditors of the Indian Party to the effect that the loan/ facility availed by JV/ WOS/ SDS has not been utilized for direct or indirect investments in India, to be furnished to AD Bank

⇒ The said facilities extended by domestic lender will be governed by prudential norms and guidelines issued by RBI – DBOD

· Shares of Step down subsidiary (SDS) can now be pledged in favour of domestic/ overseas lender.

· Security can be created for the the said facilities availed for itself or for its JV/ WOS/ SDS whose shares have been pledged or for any other JV/ WOS/ SDS of Indian Party.

· Value of the said facilities to form part of financial commitment for Indian Party. Total financial commitment to remain within 400% of networth.

· Overseas lender needs to be necessarily regulated an supervised as a Bank

[5]18A Creation of charge on immovable / movable property and other financial assets

18A Creation of charge on domestic and foreign assets

An Indian Party, with prior approval of the Reserve Bank, may transfer, by way of mortgage / pledge / hypothecation, the immovable / movable property and other financial assets (except shares of JV / WOS) of the Indian party and its group companies as a security for availing of fund based and/or non-fund based facilities for its JV or WOS from an authorised dealer bank or a public financial institution in India or to an overseas lender, provided the lender is regulated and supervised as a bank, the total financial commitment of the Indian Party remains within the limit stipulated by the Reserve Bank for overseas investments in JV/WOS and a ‘No Objection’ is submitted by the Indian party and its group companies from their resident lenders.

(1) An Indian party may create charge (by way of mortgage, pledge, hypothecation or otherwise) on its assets [including the assets of its group company, sister concern or associate company in India, promoter and / or director] in favour of an overseas lender as security for availing of the fund based and/or non-fund based facility for its Joint Venture (JV) or Wholly Owned Subsidiary (WOS) or Step Down Subsidiary (SDS) outside India.

Provided that

a. The value of the facility is reckoned as financial commitment for the Indian party and the total financial commitment of the Indian party remains within the limit stipulated by the Reserve Bank from time to time for overseas direct investments in the JV / WOS;

b. The overseas lender is regulated and supervised as a bank as per the law of the host country;

c. A ‘No Objection’ is obtained from the domestic lender in whose favour if charge is already created on the domestic assets; and

d. Subject to the additional terms and conditions prescribed by the Reserve Bank from time to time.”

In addition to the abovementioned:

⇒ Domestic assets, on which charge is being created, should not be securitized.

⇒ Overseas lender to undertake that, in the event of enforcement of charge, they shall transfer the domestic assets by way of sale to residents only.

⇒ In case of invocation of charge, resultant remittance exceeding the prescribed limit of the financial commitment of the Indian party (prevailed at the time of creation of charge) shall require prior approval of the Reserve Bank.

⇒ Pledge of shares of Indian Company, if made, will be governed by FEMA provisions and FDI policy issued by DIPP from time to time.

⇒Regulation 18 A (1) deals with creation of charge in favour of overseas lender for the said facilities availed by JV/ WOS/ SDS outside India.

⇒Requirement of prior approval of RBI done away with. Approval required only if remittance post invocation exceeds the financial commitment limit that prevailed at the time of creation of charge.

· Security can be created on the assets of Indian Party, its sister concern, group company, associate company, promoter and/or director for securing the said facilities availed for JV/ WOS or SDS outside India subject to following:

⇒ Value of fund based- non fund based facility to form part of financial commitment for Indian Party. Total financial commitment to remain within 400% of networth.

⇒ Overseas lender needs to be necessarily regulated an supervised as a Bank

⇒ NoC from domestic lender needed, if charge already exists on those assets in favour of domestic lender

(2) An Indian party may create charge (by way of mortgage, pledge, hypothecation or otherwise) on the assets of its overseas JV or WOS or SDS in favour of an AD bank in India as security for availing of the fund based and/or non-fund based facility for itself or its JV or WOS or SDS outside India.

Provided that

b. The overseas lender is regulated and supervised as a bank as per the law of the host country;

c. A ‘No Objection’ is obtained from the overseas lender or domestic AD bank in whose favour if charge is already created on the overseas assets;

d. The facility extended by the domestic AD bank to the Indian party / JV / WOS / SDS is governed by the prudential norms and other guidelines issued by the Department of Banking Operations and Development, Reserve Bank; and

e. Subject to the additional terms and conditions prescribed by the Reserve Bank from time to time

In addition to the conditions specified under Regulation 18 above:

⇒ Overseas assets, on which charge is being created, should not be securitized.

⇒ Invocation of charge requiring domestic lender to acquire overseas assets will require prior approval of RBI.

⇒ Regulation 18 A (2) deals with creation of charge in favour of domestic AD Bank lender for the said facilities availed for Indian Party or JV/ WOS/ SDS outside India

⇒ Requirement of prior approval of RBI done away with. Prior approval required only on invocation of charge and acquiring of overseas assets.

⇒ Security can be created on the assets of JV/ WOS/ SDS outside India, in favour of an AD Bank in India for securing the said facilities availed for itself or JV/ WOS or SDS outside India subject to following:

– Value of the said facilities to form part of financial commitment for Indian Party. Total financial commitment to remain within 400% of networth.

– Overseas lender needs to be necessarily regulated an supervised as a Bank as per laws of host country

– NoC from overseas lender/ domestic AD bank needed, if charge already exists on those overseas assets in their favour

– Facility by Domestic AD Bank will be governed by prudential norms issued by DBOD.·

[1] http://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9404&Mode=0

[2] http://rbi.org.in/scripts/NotificationUser.aspx?Id=9432&Mode=0

[3] k. ‘Indian party’ means a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932 or a Limited Liability Partnership (LLP) as defined under clause (ma) of Regulation 2 of this Notification making investment in a Joint Venture or Wholly Owned Subsidiary abroad, and includes any other entity in India as may be notified by the Reserve Bank: –

Provided that when more than one such company, body or entity make an investment in the foreign entity, all such companies or bodies or entities shall together constitute the ‘Indian party’

[4] Inserted vide Notification No. FEMA.164/2007-RB dated October 9, 2007 w.e.f. April 20, 2007

[5] Inserted vide Notification No.277/2013-RB dated May 8, 2013 w.e.f. March 28, 2012

[The above post is contributed by CS Vinita Nair and Aman Nijhawan at Vinod Kothari & Co. They can be contacted at vinita@vinodkothari.com and aman@vinodkothari.com respectively]

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