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Reserve Bank Of India Eases Rules On Pledge Of Shares By Non-Residents And For Opening Of Escrow Accounts


The Reserve Bank of India ("RBI") has taken another step towards the liberalisation of existing exchange control rules by easing the requirements for the pledge of shares of Indian companies by non-residents and the opening of escrow accounts in cross-border transactions. Taxand India summarises the changes introduced by the RBI.

Pledge of shares of Indian companies by non-resident investors
The RBI has delegated its powers to authorised bankers (Category I banks). Non-resident investors will be permitted to pledge the shares held in Indian companies in favour of Indian or overseas banks by approaching authorised bankers, subject to specified conditions. Prior to this change RBI approval was required for every pledge of shares of an Indian company, whenever a non-resident was involved in the transaction.

Opening of escrow accounts in cross-border transactions
With a view to provide greater operational flexibility and to facilitate cross-border transactions, the RBI has relaxed the rules for escrow accounts, and permission has been granted to authorised bankers (Category I banks). Prior to this change, approval from the RBI was required for opening an escrow account on behalf of non-residents, except in case of certain transactions (open offers/ delisting/ exit offers) pertaining to listed securities.

Going forward, authorised bankers (Category I banks) will be permitted to open and maintain non-interest bearing escrow accounts in Indian Rupees in India, for transactions involving non-resident investors.

Taxand's Take

In general it is felt that these changes are a postive move from the RBI. With regards to the pledge of shares the dispensation of prior RBI approval, will reduce the time frame for the mobilisation of debt funds. In addition, basic checks have also been prescribed by the RBI to ensure that such a facility is available to non-resident investors for only genuine business purposes, and funds raised overseas based are not invested back into India itself.

The modification of the opening of escrow accounts will promote a better framework for foreign investment. This is a long overdue change brought about by the RBI. It remains to be seen whether going forward the RBI will consider permitting indemnity escrow accounts with extended timelines in order to facilitate post closure indemnities / contingencies.

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