RBI/2013-14/633
A.P. (DIR Series) Circular No.141
June 6, 2014
To
All Category – I Authorised Dealer Banks
Madam/ Sir,
Pledge of shares for business purposes in favour NBFCs
Attention of Authorised Dealer Category – I (AD Category – I) banks is
invited to the provisions of Para. 2 (i) of
A. P. (DIR Series) Circular No. 57
dated May 2, 2011, in terms of which shares of an Indian company held by the
non-resident investor can be pledged in favour of a bank in India to secure the
credit facilities being extended to the resident investee company for bonafide
business purposes subject to the conditions stipulated therein.
- With a view to further rationalising the process and reducing the
transaction time, it has been decided to delegate to the AD Category – I banks
the powers to allow pledge of equity shares of an Indian company held by
non-resident investor/s in accordance with the FDI policy, in favour of the Non
- Banking Financial Companies (NBFCs) – whether listed or not, to secure the
credit facilities extended to the resident investee company for bona-fide
business purposes / operations, subject to compliance with the conditions
indicated below:
- only the equity shares listed on a recognised stock exchange/s in India can be
pledged in favour of the NBFCs ;
- in case of invocation of pledge, transfer of shares should be in accordance with
the credit concentration norm as stated in the Master Circular
DNBS(PD).DNBS.(PD).CC.No.333/03.02.001/2013-14 dated July 01, 2013 as amended
from time to time;
- (i) The AD may obtain a board resolution ‘ex ante’, passed by the Board of
Directors of the investee company, that the loan proceeds received consequent to
pledge of shares will be utilised by the investee company for the declared
purpose; (ii) The AD may also obtain a certificate ‘ex post’, from the statutory
auditor of investee company, that the loan proceeds received consequent to
pledge of shares, have been utilised by the investee company for the declared
purpose;
- the Indian company has to follow the relevant SEBI disclosure norms, as
applicable;
- under no circumstances, the credit concentration norms should be breached by the
NBFC. If there is a breach on invocation of pledge, the shares should be sold
and the breach shall be rectified within a period of 30 days from the date of
invocation of pledge.
- Reserve Bank has since amended the Principal Regulations through the Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident outside
India) (Fifth Amendment) Regulations, 2014 notified vide
Notification No. FEMA.
305/2014-RB dated May 22, 2014, c.f. G.S.R. No.370(E) dated May 30, 2014.
- AD Category - I banks may bring the contents of this circular to the notice
of their constituents and customers concerned.
- The directions contained in this circular have been issued under sections
10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and
are without prejudice to permissions / approvals, if any, required under any
other law.
Yours faithfully
(B.P. Kanungo)
Principal Chief General Manager