Mumbai: In order to encourage foreign direct investment (FDI) in the country, the RBI on Tuesday relaxed the norms and allowed overseas investors to raise funds by pledging shares of Indian companies to banks without its permission.
Following a notification issued by the RBI, the authorized dealer banks on their own can allow foreign investors to pledge shares of the Indian company in favour of a domestic bank or an overseas bank to secure credit.
Earlier, such transactions required permission of the Reserve Bank of India (RBI).
“It has been decided to further liberalize, rationalize and simplify the processes associated with FDI flows to India and reduce transaction time,” the RBI said.
Accordingly, the RBI said that it has been decided to delegate powers to the authorized dealer category-I banks to allow pledge of shares of an Indian company held by non-resident investors in accordance with FDI policy.
However, such transactions will have to be within the framework of the FDI policy.
FDI in India declined by 25% to $18.35 billion during April-February from $24.6 billion in the same period of the previous fiscal.
Further, in an another notification, the RBI allowed banks to open and maintain, without its prior approval, escrow accounts on behalf of residents and non-residents, towards payment of share purchase for keeping securities to facilitate FDI transactions.
The escrow account, however, would be maintained in Indian rupee and it should be non-interest bearing.
Escrow mechanism facilitates FDI transactions in cases where parties to the share purchase agreement desire to complete the due diligence process they finalize the agreement.
Escrow account is an account in which funds are accumulated for specific disbursements.