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RBI Liberalizes Offshore Pledge Regime

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Shobha Singh

The Reserve Bank of India (RBI) issued a circular yesterday, authorizing Authorized Dealers (essentially Indian Banks allowed to deal in foreign exchange) to allow non-resident shareholders of an Indian company to pledge the shares held by the non-resident shareholder in an Indian company for the following purposes:

(i)            Pledge of shares in favour of an Indian bank for securing credit facilities being availed by the Indian company from the Indian bank; and

(ii)           Pledge of shares in favour of an overseas bank for securing credit facilities being obtained by the non resident shareholder or its overseas group company.

The pledge would be subject to certain conditions including the condition that invocation of pledge the transfer of shares would happen in accordance with the FDI regulations (i.e. in compliance with sectoral limits and pricing guidelines).

The RBI had earlier liberalized the pledge regime in relation to external commercial borrowing (loans obtained by an Indian resident from offshore banks) but approval from the RBI was still required for pledges of the nature described above (which was a time consuming and uncertain process).

In most global financing transactions, lenders require security over all the assets of the borrowing entity/group. Creating security over the shares of an Indian company used to be a challenge in such transactions because of the requirement for obtaining RBI approval. This circular would make it much easier to implement such transactions.

The RBI Circular is available at

http://rbidocs.rbi.org.in/rdocs/notification/PDFs/APD57020511F.pdf

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