Introduction:

RBI has, through circular AP (DIR Series) Circular No. 55 dated 1st January, 2015, decided that now the AD Category-I banks may allow creation of charge on immovable assets, movable assets, financial securities and 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. This change has been brought with a view to liberalizing, expanding the options of securities and consolidating various provisions related to creation of charge over securities for ECB at one place. Under the earlier ECB Guidelines, the choice of security to be provided to the overseas lender  / supplier for securing ECB was  left to the borrower. These changes are effective with immediate effect subject to certain conditions. This article will provide a brief about the changes effected through the above mentioned circular and conditions subject to which the changes will be applicable.

 Common  Conditions  for  creation  of  charge  on  immovable  assets,  movable  assets, financial securities and issue of corporate and / or personal guarantees:

 RBI has allowed borrowers to access ECBs against charge on immovable assets, movable assets, financial securities and issue of corporate and / or personal guarantees in favour of overseas lender / security trustee, subject to the following conditions:

•  The underlying ECB is in compliance with the extant ECB guidelines,
• There exists a security clause in the Loan Agreement requiring the ECB borrower to create charge, in favour of overseas lender / security trustee, on immovable assets / movable assets  /  financial  securities  /  issuance  of  corporate  and  /  or  personal guarantee,
• No objection certificate, wherever necessary, from the existing lenders in India has been obtained, and
• The Security will co-terminate with the underlying ECB.

 Creation of charge on immoveable assets:

 A  charge  can  be  created  on  immoveable  property  by  the  ECB  Borrower,  in  favour  of  the overseas lender/ security trustee, subject to the following conditions:

•  Such  security  shall  be  subject  to  provisions  contained  in  the  Foreign  Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000.
• The permission should not be construed as a permission to acquire 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.

Creation of Charge on Movable Assets:

• The claim of  the  lender, in  case  of  enforcement /  invocation  of  the charge,  will  be restricted to the outstanding claim against the ECB.
• The lender can enforce the claim either by taking over the moveable property or by liquidating the same and repatriating its proceeds.
• Encumbered movable assets may also be taken out of the country.

 Creation of Charge over Financial Securities:

•  Pledge on following financial assets will be permitted
  • Shares of the borrowing company held by the promoters,
  • Shares in domestic associate companies of the borrower ,
  • Following financial securities, standing in the name of ECB borrower/promoter,
    • Bonds,
    • Debentures,
    • Government Securities,
    • Government Savings Certificates,
    • Deposit receipts of securities and
    • Units of the Unit Trust of India or of any mutual funds
  • Security interest over all current and future loan assets and all current assets including cash and cash equivalents, including Rupee accounts of the borrower with AD Category-I banks in India, standing in the name of the borrower/promoter.
• On invocation of pledge, transfer of financial securities shall be in accordance with 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.

 Issue of Corporate or Personal Guarantee:

•  For issue  of  corporate  or  personal  guarantee  for  an  ECB,  the  following  should  be obtained
  • In case of a corporate guarantee: A copy of Board Resolution for the issue of corporate guarantee for the company issuing such guarantee, specifying name of the officials authorized to execute such guarantees on behalf of the company or in individual capacity.
  • In  case  of  personal  guarantees:  Specific  requests  from  individuals  to  issue personal guarantee indicating details of the ECB.
• Such  security  shall  be  subject  to  provisions  contained  in  the  Foreign  Exchange Management (Guarantees) Regulations, 2000.