INDIA: RBI relaxes India rules on pledge of shares for business purposes

Wednesday May 4 2011

In order to further liberalise, rationalise and simplify the processes associated with FDI flows to India and reduce transaction times, the Reserve Bank of India has decided to delegate powers to the AD Category &I banks to allow 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 bonafide business purposes subject to the following conditions:

– 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;

– submission of a declaration/ annual certificate from the statutory auditor of the investee company that the loan proceeds will be / have been utilized for the declared purpose;

– the Indian company has to follow the relevant SEBI disclosure norms; and- 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 / non-resident promoter of the Indian company or its overseas group company, subject to the following conditions:

– loan is availed of only from an overseas bank;

– loan is utilized for genuine business purposes overseas and not for any investments either directly or indirectly in India;

– overseas investment should not result in any capital inflow into India;

– 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

– 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 utilized for the declared purpose. Click on the above link for more details.