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Notification No. FEMA. 305/2014-RB dated 22nd May, 2014 Pledge of shares for business purposes in favour of NBFCs
Presently, a non-resident can pledge shares held by him in and Indian Company in favour of a bank in India to secure the credit facilities being extended to the Indian Company for bonafide business purposes.
This circular permits banks to allow pledge of equity shares of an Indian Company held by non-resident investor/s in favour of a NBFC – whether listed or not, to secure the credit facilities extended to the Indian Company for bonafide business purposes/operations, subject to compliance with the conditions indicated below: –
(a) Only the equity shares listed on a recognized stock exchange/s in India can be pledged in favour of the NBFC.
(b) In case of invocation of pledge, transfer of shares must be in accordance with the credit concentration norm.
(c) (i) Bank can obtain a board resolution ‘ex ante’, passed by the Board of Directors of the Indian Company, that the loan proceeds received consequent to pledge of shares will be utilised by it for the declared purpose. (ii) Bank can also obtain a certificate ‘ex post’, from the statutory auditor of Indian Company, that the loan proceeds received consequent to pledge of shares, have been utilised by the investee company for the declared purpose.
(d) Indian company has to follow the relevant SEBI disclosure norms, as applicable.
(e) Credit concentration norms cannot be breached by the NBFC under any circumstances. If there is a breach on invocation of pledge, the shares must be sold and the breach must be rectified within a period of 30 days from the date of invocation of pledge.
