Under India’s External Commercial Borrowing (ECB) framework, companies are permitted to pledge shares to secure ECBs, subject to specific regulatory conditions. These provisions ensure that such pledges are aligned with corporate governance norms and foreign exchange regulations, while also protecting the interests of stakeholders.
Key Operational Guidelines for Pledge of Shares in ECB
- Purpose of Pledge
The pledge of shares is allowed solely for the purpose of securing an ECB facility availed by an eligible Indian borrower. - Eligible Shares for Pledge
- Shares held by the promoters of the borrowing company.
- Shares held by domestic associate companies of the borrower.
- Pledge Tenure
- The pledge period must be co-terminus with the maturity of the ECB.
- Early release or invocation must be governed by applicable contractual provisions and regulatory norms.
- Invocation of Pledge
- In the event of a default, the pledgee (ECB lender) is permitted to invoke the pledge and sell the shares.
- Such sale must be preceded by reasonable notice to the pledgor, in line with principles under the Indian Contract Act.
- According to advisory insights (e.g., Nishith Desai Associates), the invocation must not violate contractual or regulatory terms.
- Compliance with FDI Policy
- Any transfer of shares as a consequence of pledge invocation must fully comply with the prevailing Foreign Direct Investment (FDI) policy, including sectoral caps, pricing guidelines, and entry route conditions.
- Certification of End-Use
- The borrower must obtain a certificate from its Statutory Auditor confirming that the ECB has been or will be utilized for permitted end-uses in accordance with the RBI’s ECB guidelines.
- Hedging Requirements
- The borrower is required to adhere to the hedging provisions stipulated by:
- The RBI, and/or
- The relevant sectoral or prudential regulator, as applicable.
- This includes ensuring adequate protection against foreign exchange risk based on the tenure and structure of the ECB.
- The borrower is required to adhere to the hedging provisions stipulated by:
- Minimum Average Maturity
- ECBs of up to USD 20 million may include call/put options, provided a minimum average maturity of 3 years is maintained.
Regulatory and Compliance Framework
- Regulatory Authority:
The Reserve Bank of India (RBI) is the principal authority governing ECB regulations, including those related to security creation such as pledging of shares. - Role of Authorized Dealer (AD) Category-I Banks:
- Act as the primary interface between the borrower and the RBI.
- Responsible for verifying end-use certification, ensuring adherence to hedging requirements, and reporting ECB transactions to the RBI.
- Other Relevant Provisions:
ECB guidelines also include conditions regarding:- All-in-cost ceilings,
- Permitted and prohibited end-uses, and
- Minimum average maturity requirements based on the amount and source of ECB.
Conclusion
The pledge of shares as security for ECB is a regulated activity that balances the need for collateralization with investor protection and compliance with India’s foreign exchange management and FDI frameworks. Borrowers must ensure strict adherence to the operational and legal conditions laid out by the RBI and coordinate with their AD bank and legal counsel for implementation.
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