Rules Governing Pledge of Shares in External Commercial Borrowings

Here are the notes on the rules governing pledge of shares in external commercial borrowings (ECBs):

  • What is a pledge of shares?

A pledge of shares is a security interest created by a borrower over its shares in favor of a lender. The lender acquires a right to sell the shares if the borrower defaults on its loan repayment obligations.

  • What are the rules governing pledge of shares in ECBs?

The Reserve Bank of India (RBI) has issued guidelines governing the pledge of shares in ECBs. These guidelines are set out in the Master Circular on External Commercial Borrowings and Trade Credits.

The key provisions of the guidelines are as follows:

  • Pledge of shares can be used as security for ECBs up to a maximum of USD 500 million.
  • The shares that can be pledged must be fully paid-up shares.
  • The pledge must be created in favor of an authorized dealer (AD) bank.
  • The pledge must be registered with the registrar of companies.
  • The borrower must obtain the prior approval of the RBI if the pledge is created over shares held by a non-resident investor.
  • What are the benefits of pledging shares in ECBs?

There are several benefits to pledging shares in ECBs. These benefits include:

  • It can help borrowers to obtain ECBs at lower interest rates.
  • It can provide borrowers with a more flexible repayment schedule.
  • It can help borrowers to reduce their debt burden.
  • What are the risks of pledging shares in ECBs?

There are also some risks associated with pledging shares in ECBs. These risks include:

  • If the borrower defaults on its loan repayment obligations, the lender may sell the shares.
  • This could result in the borrower losing control of the company.
  • The borrower may also have to pay a penalty to the lender if the shares are sold at a loss.
  • MCQs on the rules governing pledge of shares in ECBs

Here are some MCQs on the rules governing pledge of shares in ECBs:

  1. Which of the following is not a requirement for pledging shares in ECBs?
    • The shares must be fully paid-up.
    • The pledge must be created in favor of an AD bank.
    • The pledge must be registered with the registrar of companies.
    • The borrower must obtain the prior approval of the RBI if the pledge is created over shares held by a non-resident investor.
    • The correct answer is (c). The pledge does not need to be registered with the registrar of companies.
  2. What is the maximum amount of ECB that can be secured by a pledge of shares?
    • USD 50 million.
    • USD 100 million.
    • USD 200 million.
    • USD 500 million.
    • The correct answer is (d). The maximum amount of ECB that can be secured by a pledge of shares is USD 500 million.
  3. Who can create a pledge of shares in ECBs?
    • Only resident borrowers.
    • Only non-resident borrowers.
    • Both resident and non-resident borrowers.
    • Neither resident nor non-resident borrowers.
    • The correct answer is (c). Both resident and non-resident borrowers can create a pledge of shares in ECBs.