Subsequent to amending the FEM ( Transfer or Issue of any Foreign Security) Regulations, 2000 with respect to the charge creation norms vide notification No. FEMA.322/RB-2014 dated October 14, 2014[1] effective from 3rd December, 2014, the Reserve Bank of India ( RBI) on 1st January, 2015 modified the extant External Commercial Borrowings (ECB) norms[2] in relation to creation of charge over securities for ECB availed by borrower.

Under the extant ECB guidelines, the choice of security to be provided to the overseas lender / supplier for securing ECB is left to the borrower. The norms were formerly stipulated vide RBI/2008-09/92 A. P. (DIR Series) Circular No. 01 dated July 11, 2008[3] However, RBI has decided that in order to liberalise, expand the options of securities and consolidate various provisions related to creation of charge over securities for ECB at one place, AD Category-I banks may allow creation of charge on immovable assets, movable assets, financial securities and issue of corporate and / or personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised / raised by the borrower, subject to ensuring compliance of conditions discussed hereunder

Comparison between Extant and the Amended Regulations

Extant Regulation Amended Regulation In a Nutshell

The choice of security to be provided to the overseas lender / supplier for securing ECB was left to the borrower and borrower was supposed to take “No Objection” from an Authorised Dealer (Category I) Bank (AD bank) for creation of charge on immovable assets, financial securities and issue of corporate or personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised by the borrower.

The AD bank   used to grant a “No Objection” only on fulfillment of following conditions by the Borrower:

i.        The ECB is strictly in compliance with ECB Regulations and guidelines,

ii.      The loan agreement has a specific security clause that makes it mandatory for the borrower to create charge on immovable assets / financial securities / furnish corporate or personal guarantee,

iii.    the loan agreement has been signed by both the parties i.e. lender and the borrower, and

iv.   the borrower has obtained Loan Registration Number (LRN) from the Reserve Bank

AD Category-I banks have been allowed to permit creation of a charge on immovable assets, movable assets, financial securities and issue of corporate and / or personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised / raised by the borrower, subject to satisfying themselves that:

i.        the underlying ECB is in compliance with the extant ECB guidelines,

ii.      there exists a security clause in the Loan Agreement requiring the ECB borrower to create charge, in favour of overseas lender / security trustee, on immovable assets / movable assets / financial securities / issuance of corporate and / or personal guarantee, and

iii.    No objection certificate, wherever necessary, from the existing lenders in India has been obtained

· While the requirement to obtain NoC from AD banks has not been specifically stated, the intent still remins the same as AD Bank are required to “allow” or “permit” creating of charge if the conditions stipulated are met.

 

·         Requirement to furnish signed copy of loan agreement and having obtained the LRN is not required any more.

 

·         Conditions for providing NOC and permission are same with the exception that the requirement of ensuring that the loan agreement has been signed by both the parties and that the borrower has obtained Loan Registration Number (LRN) from the Reserve Bank has been done away with. However, wherever necessary NOC is required to be obtained fromexisting lenders in India.

Creation of Charge on Immoveable Assets
NoC for creation of charge may be conveyed subject to fulfillment of following conditions:

i.        ‘No objection’ shall be granted only to a resident ECB borrower.

ii.      The period of such charge on immovable assets has to be co-terminus with the maturity of the underlying ECB

iii.    Such ‘no objection’ should not be construed as a permission to acquire immovable asset (property) in India, by the overseas lender / security trustee.

iv.    In the event of enforcement / invocation of the charge, the immovable asset (property) will have to be sold only to a person resident in India and the sale proceeds shall be repatriated to liquidate the outstanding ECB.

i.        Such security shall be subject to provisions contained in the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000

ii.      The permission should not be construed as a permission to acquire immovable asset (property) in India, by the overseas lender / security trustee.

iii.    In the event of enforcement / invocation of the charge, the immovable asset / property will have to be sold only to a person resident in India and the sale proceeds shall be repatriated to liquidate the outstanding ECB.

·         Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 a amended from time to time primarily restricts acquiring agricultural land, plantation property or farm house.

·         There is further clear bar on acquiring or transfer of immoveable property, without RBI approval, by person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan.

Creation of Charge on Moveable Assets

No specific provision.

In the event of enforcement / invocation of the charge, the claim of the lender, whether the lender takes over the movable asset or otherwise, will be restricted to the outstanding claim against the ECB. Encumbered movable assets may also be taken out of the country.

· Movable assets have been permitted.

 

Creation of Charge over Financial Securities

AD Category – I banks may convey their ‘no objection’ under FEMA, 1999 to the resident ECB borrower for pledge of shares of the borrowing company held by promoters as well as in domestic associate companies of the borrower to secure the ECB subject to the following conditions:

i.        ‘No objection’ shall be granted only to a resident ECB borrower.

ii.      In case of invocation of pledge, transfer shall be in accordance with the extant FDI policy.

i.        A certificate from the Statutory Auditor of the company that the ECB proceeds have been / will be utilized for the permitted end-use/s.

ii.      Pledge of shares of the borrowing company held by the promoters as well as in domestic associate companies of the borrower will be permitted. Pledge on other financial securities, viz. bonds and debentures, Government Securities, Government Savings Certificates, deposit receipts of securities and units of the Unit Trust of India or of any mutual funds, standing in the name of ECB borrower/promoter, will also be permitted.

iii.    In addition, security interest over all current and future loan assets and all current assets including cash and cash equivalents, including Rupee accounts of the borrower with AD Category-I banks in India, standing in the name of the borrower/promoter, can be used as security for ECB. The Rupee accounts of the borrower/promoter can also be in the form of escrow arrangement or debt service reserve account.

iii.    In case of invocation of pledge, transfer of financial securities shall be in accordance with the extant FDI/FII policy including provisions relating to sectoral cap and pricing as applicable read with the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.

·         Ambit of charge on financial security widened to include and debentures, Government Securities, Government Savings Certificates, deposit receipts of securities and units of the Unit Trust of India or of any mutual funds, standing in the name of ECB borrower/promoter.

·         Security interest over all current and future loan assets and all current assets including cash and cash equivalents, including Rupee accounts ( including in the in the form of escrow arrangement or debt service reserve account) of the borrower with AD Category-I banks in India, standing in the name of the borrower/promoter now permitted.

Issue of Corporate or Personal Guarantee
The ‘no objection’ to the resident ECB borrower for issue of corporate or personal guarantee under FEMA, 1999 may be conveyed after obtaining –

i.        Board Resolution for issue of corporate guarantee from the company issuing such guarantees, specifying names of the officials authorised to execute such guarantees on behalf of the company or in individual capacity.

ii.      Specific requests from individuals to issue personal guarantee indicating details of the ECB.

iii.    Ensuring that the period of such corporate or personal guarantee is co-terminus with the maturity of the underlying ECB.

        i.            A copy of Board Resolution for the issue of corporate guarantee for the company issuing such guarantee, specifying name of the officials authorised to execute such guarantees on behalf of the company or in individual capacity should be obtained.

      ii.            Specific requests from individuals to issue personal guarantee indicating details of the ECB should be obtained.

    iii.            Such security shall be subject to provisions contained in the Foreign Exchange Management (Guarantees) Regulations, 2000.

 

 

·         Foreign Exchange Management (Guarantees) Regulations, 2000 as amended from time to time specifies about guarantee which may be given by persons other than authorized dealer and inter alia provides that AD Bank may permit a person resident in India or on behalf such person to issue guarantee in favour of an overseas lender or security trustee to secure an external commercial borrowing availed under the provisions of the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000

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

[2]http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9443&Mode=0

[3] http://rbi.org.in/Scripts/NotificationUser.aspx?Id=4365&Mode=0

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

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