Presently, banks can convey ‘no objection’ to resident eligible borrowers, subject to certain conditions, for pledge of shares held by the promoters, in accordance with the Foreign Direct Investment (FDI) policy, in the borrowing company/domestic associate company of the borrowing company as security for the ECB. Pledge of shares in respect of all other FDI-related transactions requires prior permission of RBI.
This Circular has given powers to banks to permit pledge of shares of an Indian company held by non-resident investor(s) in accordance with the FDI policy in the following cases, subject to compliance with the conditions indicated below:
(i) Shares of an Indian company held by the non-resident investor can be pledged in favour of an Indian bank in India to secure the credit facilities being extended to the resident investee company for bona fide business purposes subject to the following conditions:
(a) In case of invocation of pledge, transfer of shares should be in accordance with the FDI policy in vogue at the time of creation of pledge;
(b) Submission of a declaration/annual certificate from the statutory auditor of the investee company that the loan proceeds will be/have been utilised for the declared purpose;
(c) The Indian company has to follow the relevant SEBI disclosure norms; and
(d) Pledge of shares in favour of the lender (bank) would be subject to compliance with the section 19 of the Banking Regulation Act, 1949.
(ii) Shares of the Indian company held by the non-resident investor can be pledged in favour of an overseas bank to secure the credit facilities being extended to the non-resident investor/nonresident promoter of the Indian company or its overseas group company, subject to the following conditions:
(a) Loan is availed of only from an overseas bank;
(b) Loan is utilised for genuine business purposes overseas and not for any investments either directly or indirectly in India;
(c) Overseas investment should not result in any capital inflow into India;
(d) In case of invocation of pledge, transfer should be in accordance with the FDI policy in vogue at the time of creation of pledge; and
(e) Submission of a declaration/annual certificate from a Chartered Accountant/Certified Public Accountant of the non-resident borrower that the loan proceeds will be/have been utilised for the declared purpose.
