The Reserve Bank of India (RBI) prescribes stringent norms on external commercial borrowings (ECBs) as also the grant of security in favour of foreign lenders or suppliers who have extended ECBs to Indian borrowers. While clarity has been developing over the years, there has often been doubt regarding specific types of securities and guarantees to be granted.
Now, the RBI has issued a circular consolidating and clarifying the types of security and guarantee that can be provided in support of ECBs in favour of a foreign lender or supplier. Authorised dealers may allow the creation of security or the issue of guarantees for ECBs as long as they satisfy certain conditions, viz: (i) the underlying ECB itself must be in compliance with the required guidelines, (ii) there must be an appropriate security clause in the loan agreement providing for creation of the security, and (iii) no-objection certificates, where required, of the existing Indian lenders have been obtained.
Immovable Property: Security may be created under the relevant regulations, provided that in the case of enforcement of the security the lender must sell the property to an Indian resident and repatriate the sale proceeds towards discharge of the loan. In other words, the foreign lender may not appropriate the property to itself.
Movable Property: In this case, the rules are more liberal and permit the foreign lender to take over the property (including taking possession outside India) to the extent of the outstanding claim.
Financial Securities: The typical security on this count is a pledge of shares of the promoters in the borrower company, which is permitted. In case of enforcement of the pledge by the foreing lender, however, any transfer of securities to it ought to be in accordance with the relevant sectoral caps prescribed under the foreign investment policy. The circular also provides for treatment of other financial assets such as corporate bonds, government securities, loan assets and current assets.
Corporate or Personal Guarantee: This is permitted subject to the provisions of the Foreign Exchange Management (Guarantees) Regulations, 2000.
This circular introduces greater clarity and flexiblity to borrowers and lenders to be able to arrive at the optimal security package for ECBs.