FEMA UPDATE CREATION OF CHARGE
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The document summarizes key changes made by the Reserve Bank of India to foreign exchange regulations relating to overseas direct investments by Indian parties. The changes liberalize rules around the creation of charges on shares and assets of joint ventures, wholly owned subsidiaries, and step-down subsidiaries. Specifically, the changes allow for the automatic routing of creating charges in favor of domestic or overseas lenders on shares and assets at any level of subsidiaries, extend this to group companies, and allow charges on domestic assets in favor of overseas lenders and overseas assets in favor of domestic lenders. The changes aim to provide more flexibility to Indian parties in availing foreign funding.
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Overseas Direct Investments by Indian
Party – Rationalization / Liberalization
In order to grant more flexibility to the Indian party Vide A.P. (DIR Series)
Circular No.54 RBI/2014-15/371 dated December 29, 2014 the
regulations relating to overseas direct investment by Indian party have
been liberalized. The Overseas Direct Investments by Indian Party is
governed by Notification No. FEMA.120/RB-2004 dated July 7,
2004[Foreign Exchange Management (Transfer or Issue of any Foreign
Security) (Amendment) Regulations, 2004] (the Notification).
The liberalization have been brought in regulations relating to creation of
charge,Regulation 18 and 18A of Notification No. FEMA.120/RB-2004
dated July 7, 2004 [Foreign Exchange Management (Transfer or Issue of
any Foreign Security) (Amendment) Regulations, 2004] (the
Notification).
Following are the key changes
(i) Creation of charge on shares of JV / WOS / step
down subsidiary (SDS) in favour of domestic /
overseas lender
Extant Position : In terms of the extant FEMA provisions, creation of
charge (pledge) on the shares of an JV / WOS of an Indian party in
favour of domestic / overseas lender for the purpose of availing
facilities (funded or non-funded) by the Indian party and / or the
concerned JV / WOS is under the automatic route.
Changed Position : It has been decided that the designated AD bank
may permit creation of charge / pledge on the shares of the JV / WOS
/ SDS (irrespective of the level) of an Indian party in favour of a
domestic or overseas lender for securing the funded and / or non-
funded facility to be availed of by the Indian party or by its group
companies / sister concerns / associate concerns or by any of its JV /
WOS / SDS (irrespective of the level) under the automatic route
subject to the following conditions:
Creation of charge
on shares of JV / WOS /
step down subsidiary
(SDS)
in favour of domestic /
overseas lender
Presently automatic
route but not allowed to
be used by Group
companies etc
presently Automatic
route but not allowed on
the shares of SDS
to be changed to include
the shares of SDS and
use to be extended to
group companies etc
on the domestic assets
in favour of overseas
lenders to the JV / WOS /
step down subsidiary
Presently requires prior
approval of RBI
to be changed to
Automatic route subject
to conditions
on overseas assets
in favour of domestic
lender
Presently requires prior
approval of RBI
Automatic route subject
to conditions](https://image.slidesharecdn.com/femaupdatecreationofcharge29thdec2014-141230033002-conversion-gate02/85/FEMA-UPDATE-CREATION-OF-CHARGE-2-320.jpg)
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The Indian party is complying with the provisions under
Regulation 6 (and Regulation 7, if applicable) of the
Notification No. FEMA.120/RB-2004 dated July 7,
2004 [Foreign Exchange Management (Transfer or Issue of
any Foreign Security) (Amendment) Regulations, 2004] for
undertaking financial commitment;
Compliance to the provisions under Regulation 18 of the
Notification ibid;
The period of charge, if not specified upfront, may be co-
terminus with the period of end use (like loan or other facility)
for which charge has been created;
The loan / facility availed by the JV / WOS / SDS from the
domestic / overseas lender shall be utilized only for its core
business activities overseas and not for investing back in India
in any manner whatsoever;
A certificate from the Statutory Auditors’ of the Indian party, to
the effect that the loan / facility availed by the JV / WOS / SDS
has not been utilized for direct or indirect investments in India,
is to be obtained and kept by the designated AD;
The invocation of charge resulting into the domestic lender
acquiring the shares of the overseas JV / WOS / step down
subsidiary shall be governed by the extant FEMA provisions /
regulations issued by the Reserve Bank from time to time;
The facilities (funded or non-funded) extended by the
domestic lender to the Indian party or to its group / sister /
associate concern or to any of its overseas JV / WOS / SDS
shall also be governed by the prudential norms and other
guidelines issued by the Department of Banking Regulation
(DBR, the erstwhile DBOD), Reserve Bank of India from time
to time; and
(ii) Creation of charge on the domestic assets in
favour of overseas lenders to the JV / WOS / step
down subsidiary
Extant Position : As per the extant FEMA provisions, creation of charge
on the domestic assets (movable / immovable / financial / other) of an
Indian party (or its group / sister / associate concern including the
individual promoter / director) in favour of an overseas lender to the
JV / WOS / step down subsidiary (SDS) requires prior approval of the
Reserve Bank.
Changed Position : It has been decided that the designated AD bank
may permit creation of charge (by way of pledge, hypothecation,
mortgage, or otherwise) on the domestic assets of an Indian party (or
its group companies / sister concerns / associate concerns including
the individual promoters / directors) in favour of an overseas lender for
securing the funded and / or non-funded facility to be availed of by the
JV / WOS / SDS (irrespective of the level) of the Indian party under
the automatic route subject to the following:
The Indian party is complying with the provisions under
Regulation 6 (and Regulation 7, if applicable) of the
Notification No. FEMA.120/RB-2004 dated July 7, 2004
[Foreign Exchange Management (Transfer or Issue of any
Foreign Security) (Amendment) Regulations, 2004] for
undertaking the financial commitment;
Compliance to the provisions under Regulation 18A(1) of the
Notification ibid;
The domestic assets, on which charge is being created, are
not securitized;
The period of charge, if not specified upfront, may be co-
terminus with the period of end use (like loan or other facility)
for which charge has been created;
The loan / funds raised overseas by the JV / WOS / SDS shall
be utilized only for its core business activities overseas and
not for investing back in India in any manner whatsoever;
A certificate from the Statutory Auditors’ of the Indian
party, to the effect that the loan / funds raised overseas
The matter relating to the setting up / acquiring the
multi-layered structure of overseas entities by the
Indian party, wherever applicable, is under the
examination of the Reserve Bank](https://image.slidesharecdn.com/femaupdatecreationofcharge29thdec2014-141230033002-conversion-gate02/85/FEMA-UPDATE-CREATION-OF-CHARGE-3-320.jpg)
FEMA UPDATE CREATION OF CHARGE
- 1. Taxpert Professionals Private Limited Adding value with Quality and Commitment Key changes in Foreign Exchange laws in India Investor Focus l
- 2. 2 Overseas Direct Investments by Indian Party – Rationalization / Liberalization In order to grant more flexibility to the Indian party Vide A.P. (DIR Series) Circular No.54 RBI/2014-15/371 dated December 29, 2014 the regulations relating to overseas direct investment by Indian party have been liberalized. The Overseas Direct Investments by Indian Party is governed by Notification No. FEMA.120/RB-2004 dated July 7, 2004[Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004] (the Notification). The liberalization have been brought in regulations relating to creation of charge,Regulation 18 and 18A of Notification No. FEMA.120/RB-2004 dated July 7, 2004 [Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004] (the Notification). Following are the key changes (i) Creation of charge on shares of JV / WOS / step down subsidiary (SDS) in favour of domestic / overseas lender Extant Position : In terms of the extant FEMA provisions, creation of charge (pledge) on the shares of an JV / WOS of an Indian party in favour of domestic / overseas lender for the purpose of availing facilities (funded or non-funded) by the Indian party and / or the concerned JV / WOS is under the automatic route. Changed Position : It has been decided that the designated AD bank may permit creation of charge / pledge on the shares of the JV / WOS / SDS (irrespective of the level) of an Indian party in favour of a domestic or overseas lender for securing the funded and / or non- funded facility to be availed of by the Indian party or by its group companies / sister concerns / associate concerns or by any of its JV / WOS / SDS (irrespective of the level) under the automatic route subject to the following conditions: Creation of charge on shares of JV / WOS / step down subsidiary (SDS) in favour of domestic / overseas lender Presently automatic route but not allowed to be used by Group companies etc presently Automatic route but not allowed on the shares of SDS to be changed to include the shares of SDS and use to be extended to group companies etc on the domestic assets in favour of overseas lenders to the JV / WOS / step down subsidiary Presently requires prior approval of RBI to be changed to Automatic route subject to conditions on overseas assets in favour of domestic lender Presently requires prior approval of RBI Automatic route subject to conditions
- 3. 3 The Indian party is complying with the provisions under Regulation 6 (and Regulation 7, if applicable) of the Notification No. FEMA.120/RB-2004 dated July 7, 2004 [Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004] for undertaking financial commitment; Compliance to the provisions under Regulation 18 of the Notification ibid; The period of charge, if not specified upfront, may be co- terminus with the period of end use (like loan or other facility) for which charge has been created; The loan / facility availed by the JV / WOS / SDS from the domestic / overseas lender shall be utilized only for its core business activities overseas and not for investing back in India in any manner whatsoever; A certificate from the Statutory Auditors’ of the Indian party, to the effect that the loan / facility availed by the JV / WOS / SDS has not been utilized for direct or indirect investments in India, is to be obtained and kept by the designated AD; The invocation of charge resulting into the domestic lender acquiring the shares of the overseas JV / WOS / step down subsidiary shall be governed by the extant FEMA provisions / regulations issued by the Reserve Bank from time to time; The facilities (funded or non-funded) extended by the domestic lender to the Indian party or to its group / sister / associate concern or to any of its overseas JV / WOS / SDS shall also be governed by the prudential norms and other guidelines issued by the Department of Banking Regulation (DBR, the erstwhile DBOD), Reserve Bank of India from time to time; and (ii) Creation of charge on the domestic assets in favour of overseas lenders to the JV / WOS / step down subsidiary Extant Position : As per the extant FEMA provisions, creation of charge on the domestic assets (movable / immovable / financial / other) of an Indian party (or its group / sister / associate concern including the individual promoter / director) in favour of an overseas lender to the JV / WOS / step down subsidiary (SDS) requires prior approval of the Reserve Bank. Changed Position : It has been decided that the designated AD bank may permit creation of charge (by way of pledge, hypothecation, mortgage, or otherwise) on the domestic assets of an Indian party (or its group companies / sister concerns / associate concerns including the individual promoters / directors) in favour of an overseas lender for securing the funded and / or non-funded facility to be availed of by the JV / WOS / SDS (irrespective of the level) of the Indian party under the automatic route subject to the following: The Indian party is complying with the provisions under Regulation 6 (and Regulation 7, if applicable) of the Notification No. FEMA.120/RB-2004 dated July 7, 2004 [Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004] for undertaking the financial commitment; Compliance to the provisions under Regulation 18A(1) of the Notification ibid; The domestic assets, on which charge is being created, are not securitized; The period of charge, if not specified upfront, may be co- terminus with the period of end use (like loan or other facility) for which charge has been created; The loan / funds raised overseas by the JV / WOS / SDS shall be utilized only for its core business activities overseas and not for investing back in India in any manner whatsoever; A certificate from the Statutory Auditors’ of the Indian party, to the effect that the loan / funds raised overseas The matter relating to the setting up / acquiring the multi-layered structure of overseas entities by the Indian party, wherever applicable, is under the examination of the Reserve Bank
- 4. 4 by the JV / WOS / SDS has not been utilized for direct or indirect investments in India, is to be obtained and kept by the designated AD; The overseas lender undertakes that, in the event of enforcement of charge, they shall transfer the domestic assets by way of sale to a resident only; In case of invocation of charge, the resultant remittance of the proceeds exceeding the prescribed limit of the financial commitment of the Indian party (prevailed at the time of creation of charge) shall require prior approval of the Reserve Bank; Wherever creation of charge involves pledge of shares of an Indian company, the pledge shall also be governed by the extant FEMA provisions / regulations issued by the Reserve Bank and the consolidated Foreign Direct Investment (FDI) policy issued by the Government of India from time to time; and (iii) Creation of charge on overseas assets in favour of domestic lender Extant Position: Creation of charge on the overseas assets of JV / WOS / SDS of an Indian party in favour of a domestic lender to the Indian party or to its group / sister / associate concern or to any of its overseas JV / WOS / SDS requires prior approval of the Reserve Bank. Changed Position : It has been decided that the designated AD bank may permit creation of charge (by way of hypothecation, mortgage, or otherwise) on the overseas assets (excluding the shares) of the JV / WOS / SDS (irrespective of the level) of an Indian party in favour of a domestic lender for securing the funded and / or non-funded facility to be availed of by the Indian party or by its group companies / sister concerns / associate concerns or by any of its overseas JV / WOS / SDS (irrespective of the level) under the automatic route subject to the following: a. The Indian party is complying with the provisions under Regulation 6 (and Regulation 7, if applicable) of the Notification ibid for undertaking financial commitment; b. Compliance to the provisions under Regulation 18A(2) of the Notification ibid; c. The overseas assets, on which charge is being created, are not securitized; d. The period of charge, if not specified upfront, may be co- terminus with the period of end use (like loan or other facility) for which charge has been created; e. The loan / facility availed by the JV / WOS / SDS from the domestic lender shall be utilized only for its core business activities overseas and not for investing back in India in any manner whatsoever; f. A certificate from the Statutory Auditors’ of the Indian party, to the effect that the loan / facility availed by the JV / WOS / SDS has not been utilized for direct or indirect investments in India, is to be obtained and kept by the designated AD; g. The invocation of charge resulting into the domestic lender acquiring the overseas assets shall require prior approval of the Reserve Bank; Contributed by CA. Sudha G. Bhushan For any further clarification you may get in touch with your team at Taxpert Professionals Visit us at: www.taxpertpro.com Contact us at : info@taxpertpro.com || vinay@taxpertpro.com Call us at 09769033172 ||| 09769134554