By two separate circulars dated 29 December 2014 (RBI/2014-15/371 - AP (DIR Series) Circular No 54) and 1 January 2015 (RBI/2014-15/377 - AP (DIR Series) Circular No 55), the Reserve Bank of India (RBI) has now put in place a harmonised set of permissions and instructions in respect of creating security in favour of overseas lenders.
Security for financing availed by Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS) / Step Down Subsidiaries (SDS)
Under previous Indian law governing ODI, a pledge over the shares of a JV / WOS of an Indian party as security for financing availed by either the Indian party, or by the JV / WOS, was permitted under the automatic route without requiring the prior approval of either the RBI or the Indian party’s Authorised Dealer Category I bank (AD Bank). Now, the prior consent of the AD Bank will be needed before such a pledge is created. The pledge can be over the shares of any subsidiary of the Indian party (regardless of the level of step down), and also be offered as security for the financing availed by any of its group companies, sister concerns, associate concerns, or subsidiaries (regardless of the level of step down).
Further, any movable and immovable assets and financial securities of an Indian company (or its group companies, sister concerns, associate concerns, individual promoters or directors) can now be charged in favour of overseas lenders for securing the borrowings availed by its JV, WOS or SDS (regardless of level) subject to obtaining the prior approval of the AD Bank.
A charge can be created over the overseas movable and immovable assets and financial securities of a JV / WOS / SDS (regardless of level) of an Indian party, subject to the prior approval of the AD Bank, for any financing availed by the Indian party, its group companies, sister concerns, associate concerns, JV, WOS or SDS (regardless of level), provided that:
- any financing availed by the JV / WOS / SDS (regardless of level) of an Indian party must be used for its core business purposes and must not be re-routed back to India;
- the AD Bank must obtain and retain a certificate from the statutory auditors of the Indian party to the effect that any financing availed by the JV / WOS / SDS (regardless of level) has not been used for any direct or indirect investments in India;
- the charge is to be co-terminus in duration with the facilities being secured;
- the movable or immovable assets being charged must not be securitised;
- the overseas lender who is the beneficiary of any charge must undertake to the AD Bank to transfer the domestic movable or immovable assets only to Indian residents upon enforcement;
- where an overseas lender invokes a charge, remittance will be allowed under the automatic route only up till the financial commitment undertaken by the Indian party at the time of security creation;
- where a domestic lender enforces the charge over and acquires the movable or immovable assets of the overseas JV / WOS / SDS (regardless of level), permission of the RBI would be required; and
- all applicable laws, including in relation to FEMA and FDI, must be complied with at all stages (including enforcement and acquisition of movable or immovable assets).
Security for ECB
Hypothecation of movable assets as security for ECBs now requires prior permission of the AD Bank. The RBI has clarified that movable assets that can be offered as security for ECBs will now include all current assets of the borrower, including present and future loan assets, cash, cash equivalents and rupee accounts of the borrower maintained with AD Banks. Financial securities that can be pledged as security has been clarified to include bonds, debentures, Government Securities, Government Savings Certificates, deposit receipts of securities and units of the Unit Trust of India or of any mutual funds, or any type of financial security, whether held by the borrower or the promoters. Encumbered movable assets are allowed to be taken out of the country. However, on enforcement, the interest of the lenders is strictly restricted only to the extent of the outstanding claim under the ECB.
The AD Bank is now a single point of reference for creating security in favour of overseas lenders, whether for ECB or ODI transactions. While the circular in relation to ECB is largely clarificatory, the circular in relation to ODI liberalises the process of creating security in favour of overseas lenders to a large extent. There was also a question mark in the past as to whether a separate RBI approval would be needed at the time of enforcement of security by and remittance of proceeds to the overseas lender, which is now a settled principle. This move is expected to reduce the requirement of having to apply to the RBI for seeking any approvals on an ‘abundant caution’ basis and be in the interests of the overseas lenders