- The Reserve Bank of India (“RBI”) has made a significant change to the overseas direct investment regime by restoring the previous limit for an Indian company of 400% of its net worth.
- We review the impact of the RBI’s Circular 141, which allows non-resident shareholders of Indian listed companies to pledge shares in favour of non-banking financial companies.
- The Ministry of Corporate Affairs has proposed certain amendments to the rules under the Companies Act 2013 in order to provide private companies with certain exemptions.
The main features of these developments are discussed below.
RBI amends overseas direct investments regime to restore 400% limit
The RBI has announced a significant change to the regime governing overseas investments by Indian companies. In a welcome move, the RBI has now restored the total overseas direct investment (“ODI”) and financial commitment (“FC”) limit by an Indian corporate to up to 400% of the Indian corporate’s net worth.
Background
The movement of capital from India, as with other emerging markets, is highly regulated. In August 2013, the RBI announced that an Indian company was not permitted to make a total ODI/FC to overseas companies, joint ventures or subsidiaries of more than 100% of the Indian company’s net worth (determined by its paid up capital and free reserves based on its latest audited accounts). Under the previous regime, which was put in place on 16 September 2007, the ODI/FC limit by an Indian company was up to 400% of its net worth.
Restoration of ODI/FC limit for Indian companies
The RBI has restored the ODI/FC limit to 400%, which has taken automatic effect by a circular dated 3 July 2014. However, in a change from the pre-August 2013 regime, any ODI/FC exceeding USD $1 billion in a financial year (even if within the ODI/FC limit of 400%) will require prior approval from the RBI. All other aspects of the previous regime will remain the same. This increase in the ODI/FC limit will significantly help Indian corporates to make future outbound investments and to support existing offshore investments.
Non-residents now permitted to pledge the shares of an Indian listed company to a NBFC
The RBI has announced that it will now allow non-resident shareholders of Indian listed companies to pledge shares in favour of non-banking financial companies (“NBFCs”) – a welcome change which benefits foreign shareholders and should allow Indian companies to access finance from a much wider segment of NBFCs.
Background
Under the previous regime, non-resident shareholders were permitted to pledge shares in favour of an Indian bank; however any pledge by a non-resident shareholder to a NBFC was restricted without prior RBI approval. Therefore, if an Indian company wanted to benefit from NBFC financing through its foreign shareholders, providing security to the NBFC through a pledge of shares was a time consuming and difficult process.
Benefits now available to non-resident shareholders of Indian companies
Through a circular dated 6 June 2014 (“Circular 141”), the RBI has relaxed the provisions relating to the pledging of shares held by non-resident shareholders in Indian listed companies in favour of NBFCs to enable Indian companies to leverage themselves for bona fide business purposes.
In order to rationalise the process and reduce transaction time, the RBI has delegated to the Authorised Dealers Category - 1 (“AD”) the power to allow the pledge of these shares in favour of NBFCs subject to the following conditions:
- only equity shares listed on a recognised stock exchange in India can be pledged in favour of the NBFCs;
- prior to the loan, the AD must obtain a board resolution from the investee company stating that the loan proceeds will be utilised for the declared purpose;
- after the approval of the loan and use of such loan, the investee company’s auditor must submit a certificate to the AD confirming that the loan proceeds have been utilised for the declared purpose; and
- the Indian company must follow the relevant SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011.
Implications of Circular 141
This move will have significant merits to both Indian companies and foreign promoters/shareholders as it will:
- enable Indian companies to secure additional credit facilities;
- provide access for Indian companies to a much larger pool of capital for various uses, as NBFCs are not subject to the strict regulations that Indian banks are subjected to; and
- allow non-resident shareholders to leverage their shareholding in an Indian listed company.
Exemptions under the Companies Act 2013 may be extended to private companies in India
On 24th June, 2014 the Ministry of Corporate Affairs (“MCA”) in India placed a draft before both Houses of Parliament to provide certain privileges and exemptions to private companies under the Companies Act 2013 (“Act”).
The MCA’s draft seeks the following exemptions for private companies:
| Act | Provision | Proposed amendment |
| Section 43 | The share capital of a private company shall be of two kinds – (1) equity share capital; and (2) preference share capital. | Shall not apply to private companies. |
| Section 47 | Company members have a right to vote on every resolution. | Shall not apply to private companies. |
| Section 62(1) and section 62(2) | Deals with the time period for a rights issue – being less than fifteen days and not exceeding thirty days from the date of the offer and if the offer has not been accepted during that period it shall be deemed to have been declined. | Shall apply to private companies but the period is not less than seven days and not exceeding fifteen days. |
| Section 62(1)(b) | Employee stock options – Where a company proposes to increase its subscribed share capital by the issue of further shares, such shares shall be offered to employees under a scheme of employees’ stock option. | Shall apply to private companies. However instead of a special resolution, an ordinary resolution will be required. |
| Section 73(2) | Prohibition on acceptance of deposits by private companies. | Shall not apply to private companies with less than 50 members if they accept monies from their members not exceeding 25% of the aggregate of the paid up capital and free reserves or 100% of the paid up capital, whichever is more. |
| Section 101 to 107 | Provisions regarding General Meetings – including notice, explanatory statement, quorum, chairman, proxies, etc. | Shall apply to private companies unless otherwise provided in their Articles. |
| Section 109 | Demand for poll. | Shall apply to private companies unless otherwise provided in their Articles. |
| Section 141(3)(g) | Prohibits auditors from being appointed to more than 20 companies. | Shall not apply to private companies. |
| Section 160 | Any person, other than a retiring director, shall be eligible for appointment as a director. | Shall not apply to private companies. |
| Section 162 | Appointment of directors to be voted individually – a motion for the appointment of 2 or more directors is currently not permitted unless the motion has first been agreed at the meeting. | Shall not apply to private companies. |
| Section 180 | Restriction on powers of the board to only exercise certain powers with approval of the company by a special resolution. | Shall not apply to private companies. |
| Section 185 | Provision regarding loans to directors. | Shall not apply to a private company: (a) that has borrowings from banks or financial institutions or any bodies corporate not more than twice of their paid up share capital or Rs. 50 crore, whichever is lower; and (b) in whose share capital no other body corporate has invested any money. |
| Section 188 | Related party transactions. | Shall not apply to private companies. |
| Sections 196(4) and 196(5) | Provision regarding the appointment of a managing director, a whole-time director or a manager. | Shall not apply to private companies. |
| Section 203(3) | Appointment of key managerial personnel. | Shall not apply to private companies. |
Please note this is a draft notification and has not been enacted. It is available for viewing on the MCA’s website – please use this link - http://tinyurl.com/prwqewe
We are very grateful to Khaitan & Co, the leading Indian law firm with offices in Mumbai, New Delhi, Kolkata and Bangalore, for allowing us to use their newsletters to prepare this briefing note.
You can contact Khaitan & Co at [email protected] for further information or specific advice on the issues covered by this briefing note.
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