Non-residents can pledge shares of Indian company

Recent changes introduced in the foreign direct investment (FDI) policy of the government of India and the introduction of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (takeover code), enable non-residents to secure their payment obligations by creating a pledge over shares held by them in an Indian company (including a listed company), subject to certain conditions.

FDI policy

On 30 September, the Department of Industrial Policy and Promotion issued circular 2 of 2011, which outlines the consolidated FDI policy in India with effect from 1 October. A significant change in the FDI policy is the introduction of provisions permitting the creation of a pledge over shares of an Indian company by a non-resident.

The change was made to incorporate the provisions of a circular issued by the Reserve Bank of India (RBI) on 2 May, which permitted a pledge of shares of an Indian company by a non-resident in favour of (i) an authorized dealer bank in India to secure credit facilities being extended to a resident investee Indian company for bona fide business purposes and (ii) an overseas bank to secure credit facilities being extended to a non-resident investor or promoter of the Indian company or its overseas group company, subject to certain specified conditions.

Mohit Gogia is a lawyer at S&R Associates, a law firm with offices in New Delhi and Mumbai. The views expressed above are those of the author and not a substitute for legal advice.