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.
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.
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.
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.
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.
Personal Guarantee: This is permitted subject to
the provisions of the Foreign Exchange Management (Guarantees) Regulations,
introduces greater clarity and flexiblity to borrowers and lenders to be able
to arrive at the optimal security package for ECBs.