RBI Liberalizes Opening of Escrow Accounts for FDI Transactions

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May 16 – In order to support foreign direct investment into India, the RBI has loosened up the rules and now permits foreign investors to raise funds by pledging shares of Indian companies to banks without its authorization.

The Reserve Bank of India has liberalized the opening of escrow accounts for foreign direct investment transactions vide A. P. (DIR Series) Circular 58 on May 2, 2011. Previously, the opening of escrow/special bank accounts by non-resident corporates for the use of acquisitions, share transfers, or convertible debentures of an Indian company was allowed only in cases of open offers, delistings, or exit offers subject to compliance with Securities and Exchange Board of India (SEBI) Regulations.

The RBI is aware that the time taken in the legal and due diligence process is prolonged and to facilitate the operation smoothly for new issues of transfer of shares to or from the NRIs, the authorization process needs to be amended.

  • All Category–I Authorized Dealer Banks (in India) to open and retain Non-Interest Bearing Escrow Accounts in Indian Rupees on behalf of Residents and/or Non-Residents towards payment of Share Purchase Consideration
  • SEBI Authorized Depository Participants to open and maintain Escrow Account for the Securities

Conditions with respect to above liberalization of escrow accounts are as follows:

  • The account can be opened jointly
  • The securities kept/linked with such accounts can be linked with the DEMAT account with the SEBI authorized depository participants
  • The account should not be interest bearing
  • No fund or non fund-based facilities to be permitted against the balances in the account
  • Permitted credits to the account would relate to foreign inward remittance towards consideration in case of non-resident acquirers or rupee consideration in case of resident acquirers acquiring from non-resident shareholders
  • Allowed debits to the account would relate transfer into the bank account of the beneficiary (in India or overseas) or refund/remittance to the initial remitter in case of failure/non ¬materialization of the transaction (including balance if any post completion of all formalities)
  • The primary transaction to be amenable with Foreign Exchange Management Act, 1999 (FEMA)/SEBI regulations
  • The account to remain operational for a maximum period of six months from its date of opening and prior permission required from Reserve Bank for maintenance/operation beyond that period
  • Fulfillment with KYC guiding principle issued by RBI/SEBI
  • The stipulations of the account should form part of the share purchase agreement and other documents
  • Repatriation/refund of the entire amount shall be done at the prevailing exchange rate after fulfillment of all conditions

Dezan Shira & Associates is boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in India. To contact the firm, please email india@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

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