RBI liberalises pledge of shares of Indian Company by Non-Resident Investors for business purposes

Hitherto, Authorised Dealers Category – I Banks (AD) were allowed to permit pledge of shares held by the Promoters as security for External Commercial Borrowings (ECB) availed by the Borrowing Resident Investee Company subject to prescribed conditions. As a measure of liberalisation and simplifications, the Reserve Bank of India (RBI) has now permitted ADs to allow pledge of shares of an Indian Company held by Non-Resident Investor/s subject to certain key conditions outlined below.

The Pledge as security for the credit facilities availed by the Resident Investee Company from an Indian bank for bonafide business purposes would be subject to the following:

1. Transfer of shares pursuant to invocation of pledge to be in accordance with the Foreign Direct Investment (FDI) policy in vogue at the time of creation of pledge;
2. Submission of a declaration / annual certificate from the Statutory Auditor of the Investee Company for utilisation of loan proceeds for declared business purposes;
3. Compliance with relevant Securities and Exchange Board of India (SEBI) disclosure norms; and
4. Compliance with Section 19 of the Banking Regulation Act, 1949.

The Pledge of Shares of the Indian Company held by the Non-Resident Investor/s in favour of an Overseas Bank to secure credit facilities for the Non-Resident Investor / Non-Resident Promoter or its Overseas Group Company would be subject to the following:

1. The loan is from the Overseas Bank and is utilised for Overseas business and not for any investments directly or indirectly in India;
2. The overseas investment should not result in any capital inflow into India;
3. Transfer of shares pursuant to invocation of pledge should be in accordance with the FDI policy in vogue at the time of creation of pledge; and
4. Submission of a declaration / annual certificate from the Chartered Accountant/ Certified Public Accountant of the Non-Resident Borrower for the utilisation of loan proceeds for declared business purposes.

Our Comments – The liberalisation concerning pledge is a welcome initiative and enhances the business purpose borrowing ability of the Indian Investee Company as well as its Non-Resident Investors. This would ease the approval and compliance processes associated with such arrangement and add a feather in India’s quest of becoming one of the world’s most favourite FDI destinations.