Creation of Charge on Immovable Property or financial securities in favour of overseas lender

RBI Master direction on ECB updated as of Sept. 30, 2022, FED Master Direction No. 5/2018-19 specifies that AD that Category I banks are permitted to allow the creation/cancellation of charges on immovable assets, movable assets, financial securities, and the issue of corporate and/or personal guarantees in favour of overseas lender/security trustee, to secure the External Commercial Borrowings ( ECB )to be raised/raised by the borrower.

Before according to ‘no objection’ under FEMA, 1999, AD Category – I banks should ensure and satisfy themselves that

• the underlying ECB is strictly in compliance with the extant ECB guidelines,
• there exists a security clause in the Loan Agreement requiring the ECB borrower to create/cancel the charge, in favour of overseas lender/security trustee, on immovable assets/movable assets/financial securities/issuance of corporate and/or personal guarantee, and
• the loan agreement has been signed by both the lender and the borrower and
• the borrower has obtained a Loan Registration Number (LRN) from the Reserve Bank., subject to satisfying themselves that:
• No objection certificate, as applicable, from the existing lenders in India has been obtained in case of the creation of a charge.

Once the aforesaid stipulations are met with the above conditions, AD Category – I banks may convey their ‘no objection’, under FEMA, 1999 for the creation of charge on immovable assets, financial securities, and the issue of personal or corporate guarantee, subject to the conditions indicated below:

a) The ‘no objection’ for the creation of charge on immovable assets may be conveyed under FEMA, 1999 either in favour of the lender or the security trustee, subject to the following conditions:

‘No objection’ shall be granted only to a resident ECB borrower.

The period of such charge on immovable assets has to be co-terminus with the maturity of the underlying ECB.

 ‘No objection’ issued by the bank should not be construed as permission to acquire an immovable asset (property) in India, by the overseas lender/security trustee.

In the event of enforcement/invocation of the charge, the immovable asset (property) will have to be sold only to a person resident in India and the sale proceeds shall be repatriated to liquidate the outstanding ECB.

RBIs Master direction on ECB includes charges created on property in India and nothing is specifically specified for immovable property outside India.

Charge creation on financial securities:

The AD Category I bank may permit the creation of charges on movable assets like pledges of shares and other financial securities like bonds and debentures, Government Securities, Government Savings Certificates, deposit receipts of securities, and units of any mutual funds, standing in the name of ECB borrower/promoter subject to the following conditions.

• The period of such pledge shall be a co-terminus with the maturity of the underlying ECB.
• In case of invocation of the pledge, the transfer shall be under the extant FDI policy.
• A certificate from the Statutory Auditor of the company shall be obtained stating that the ECB proceeds have been / will be utilized for the permitted end-use/s.

AD Category – I banks may convey their ‘no objection’ under FEMA, 1999 only to an ECB borrower. A certificate should be obtained from the Statutory Auditor of the company stating that the ECB proceeds have been / will be utilized for the permitted end-use/s. In case of invocation of pledge, transfer of financial securities shall be under the extant FDI/FII policy including provisions relating to sectoral cap and pricing as applicable read with the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.

AD Category – I banks may invariably specify that the ‘no objection’ is issued from the foreign exchange angle under the provisions of FEMA, 1999, and should not be construed as an approval by any other statutory authority or Government under any other law/ regulation. If further approval or permission is required from any other regulatory/statutory authority or Government under the relevant laws/regulations, the applicant should obtain the approval of the authority concerned before undertaking the transaction. Further, the ‘no objection’ should not be construed as regularizing or validating any irregularities, contravention, or other lapses, if any, under the provisions of FEMA or any other laws or regulations.

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