What changed
Previously, pledge of shares for FDI-related transactions required RBI prior approval, except for ECB-linked pledges. Now, AD Category-I banks can directly allow non-resident investors to pledge shares of an Indian company in two scenarios: to secure credit for the resident investee company from an Indian bank, or to secure overseas loans for the non-resident investor or its group company from an overseas bank.
What it means for you
This liberalization reduces transaction time and compliance burden for banks and borrowers by eliminating the need for RBI approval in these pledge cases. Banks must ensure adherence to FDI policy on share transfer upon invocation, and obtain annual auditor/CA declarations on loan usage. It also requires compliance with SEBI norms and Banking Regulation Act for domestic pledges.
What you must do
- Update internal policies to process pledge requests from non-resident investors under the new delegated powers without seeking RBI approval.
- Verify that pledge documentation includes conditions for invocation, ensuring share transfers comply with FDI policy at time of pledge creation.
- Obtain and review annual declarations from statutory auditors (for domestic loans) or CAs/CPAs (for overseas loans) confirming loan proceeds are used for declared purposes.
- Ensure compliance with SEBI disclosure norms and Section 19 of Banking Regulation Act, 1949 for pledges in favor of Indian banks.
- Train staff on the two distinct pledge scenarios and their specific conditions to avoid misapplication.
Who it affects
AD Category-I banks, Non-resident investors holding shares in Indian companies, Resident investee companies seeking credit secured by promoter shares, Non-resident borrowers availing overseas loans against Indian company shares
Can a non-resident investor pledge shares to an Indian bank for a loan to the investee company?
Yes, under the new circular, AD Category-I banks can allow such pledges if the loan is for bonafide business purposes, subject to conditions like compliance with FDI policy on share transfer upon invocation and submission of annual auditor declarations.
What happens if the pledge is invoked and shares need to be transferred?
The transfer must be in accordance with the FDI policy that was in effect at the time the pledge was created, not the policy at the time of invocation.
Does this circular apply to pledges for loans from overseas banks?
Yes, it covers pledges to overseas banks for loans to non-resident investors or their overseas group companies, provided the loan is used for genuine overseas business purposes and does not result in capital inflow into India.