Regulation 6 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Regulation 6 lets an Indian entity that has made ODI by way of equity pledge the equity of the foreign entity, or create a charge on assets in India or abroad, to secure facilities for itself or for the foreign entity and its step down subsidiaries. Whether the pledge or charge counts towards the financial commitment limit depends on who borrows. Paragraph 21(5) and (6) of the Reserve Bank's Master Direction set it out in a table and list further conditions.
As per the copy of the notification consulted (No. FEMA 400/2022-RB, as notified on 22 August 2022), an Indian entity which has made ODI by way of equity capital may pledge that equity, and may create a charge on its assets in India or on the assets of the foreign entity abroad. Where the facility is for the foreign entity, the lesser of the value of the pledge or charge and the amount of the facility is reckoned towards the financial commitment limit; where the facility is for the Indian entity itself, the Master Direction shows nil.
The text and its footing
The Regulations are made by the Reserve Bank under sub-section (1) and clause (a) of sub-section (2) of section 47 of the Foreign Exchange Management Act, 1999; see sections 47 and 48 and section 6. The text is taken from a third-party copy of the notification as notified on 22 August 2022; later amendments are not shown. The Master Direction - Overseas Investment (FED Master Direction No.15/2024-25, July 24, 2024, "Updated as on April 01, 2026") is read beside it. Later amendments and circulars should be checked on the Reserve Bank and Gazette sites. The Overseas Investment Rules, 2022 that fix the financial commitment limit are not in the sources consulted. Our ODI reporting team can help you place a pledge or charge within the limit.
Regulation 6(a): pledge of equity
An Indian entity which has made ODI by way of investment in equity capital in a foreign entity may pledge the equity capital of the foreign entity in which it has made ODI, or of its step down subsidiary outside India, held directly by the Indian entity in a foreign entity and indirectly in a step down subsidiary, in favour of:
- an AD bank, a public financial institution in India or an overseas lender, for availing fund based or non-fund based facilities for itself or for any foreign entity in which it has made ODI or its step down subsidiaries outside India; or
- a debenture trustee registered with SEBI, for availing fund based facilities for itself.
Regulation 6(b): charge on assets
The Indian entity may create a charge by way of mortgage, pledge, hypothecation or any other identical mode on:
- (i) its assets in India, including assets of its group company or associate company, promoter or director, in favour of an AD bank, a public financial institution in India or an overseas lender, as security for fund based or non-fund based facilities for any foreign entity in which it has made ODI or for its step down subsidiary outside India; or
- (ii) the assets outside India of the foreign entity in which it has made ODI or of its step down subsidiary, in favour of an AD bank in India or a public financial institution in India, as security for facilities for itself or any such foreign entity or step down subsidiary, or in favour of a debenture trustee registered with SEBI in India for fund based facilities for itself.
The proviso: three conditions
(i) The value of the pledge or charge or the amount of the facility, whichever is less, is reckoned towards the financial commitment limit in force at the time of the pledge or charge, provided the facility has not already been reckoned towards that limit and excluding cases where the facility has been availed by the Indian entity for itself. (ii) The overseas lender shall not be from any country or jurisdiction in which financial commitment is not permissible under the Overseas Investment Rules, 2022. (iii) The creation or enforcement of the pledge or charge shall be in accordance with the Act and the rules, regulations and directions under it.
The Explanation
(i) "Public financial institution" has the meaning in clause (72) of section 2 of the Companies Act, 2013. (ii) A "negative pledge" or "negative charge" created by an Indian entity, or a bid bond guarantee obtained in accordance with the Regulations for participation in a bidding or tender procedure for acquisition of a foreign entity, is not reckoned towards the financial commitment limit in regulation 3(1). See the article on regulations 1 to 4.
Paragraph 21(5) of the Master Direction: the table
The Master Direction summarises regulation 6 in a table:
| Security by Indian entity | In whose favour | Facility availed | Amount reckoned towards financial commitment |
|---|---|---|---|
| A) Pledge of equity capital of the foreign entity or its step down subsidiary outside India | AD bank, public financial institution in India or overseas lender | Fund or non-fund based facilities for the Indian entity | Nil |
| A) as above | Same | Fund or non-fund based facilities for any foreign entity or its step down subsidiaries | Value of the pledge or amount of the facility, whichever is less |
| A) as above | A debenture trustee registered with SEBI in India | Fund based facilities for the Indian entity | Nil |
| B) Charge on its assets in India (including those of its group company or associate company, promoter and/or director) | AD bank, public financial institution in India or overseas lender | Fund or non-fund based facility for any foreign entity or its step down subsidiary | Value of the charge or amount of the facility, whichever is less |
| B) as above | Overseas or Indian lender | Fund or non-fund based facilities for the Indian entity | Nil |
| C) Charge on assets outside India of the foreign entity or its step down subsidiary | An AD bank in India or a public financial institution in India | Fund or non-fund based facility for any foreign entity or its step down subsidiary | Value of the charge or amount of the facility, whichever is less |
| C) as above | Same | Fund or non-fund based facility for the Indian entity | Nil |
| C) as above | A debenture trustee registered with SEBI in India | Fund based facilities for the Indian entity | Nil |
Paragraph 21(6): further conditions
Financial commitment by pledge or charge is subject to these conditions in the Master Direction:
- the value of the pledge or charge, or the amount of the facility, whichever is less, is reckoned towards the limit provided the facility has not already been reckoned;
- the overseas lender shall not be from a country or jurisdiction in which financial commitment is not permissible under the Rules;
- creation or enforcement shall comply with the Act, rules, regulations and directions;
- the assets on which the charge is created are not securitised;
- the period of charge, if not specified upfront, shall be co-terminus with the period of the facility for which the charge is created;
- on enforcement of a charge on domestic assets, the assets shall be transferred by sale to a person resident in India only; and
- where the charge involves pledge of shares of an Indian company in favour of an overseas lender, the pledge is also governed by the existing FEMA provisions in the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, which are not in the sources consulted.
The last four conditions appear in the Master Direction but not in the regulation as printed in the copy consulted.
Example
Kaveri Polymers Ltd has made ODI by way of equity in a foreign entity and wants a loan for its own working capital from an overseas lender, secured by a pledge of the foreign entity's shares it holds. The facility is for the Indian entity itself, so the Master Direction's table shows nil towards the limit, but the overseas lender must not be from a jurisdiction where financial commitment is not permissible. Suppose later Kaveri pledges the same shares to secure a ₹40 crore loan to the foreign entity, with the pledge value at ₹55 crore. The lesser, ₹40 crore, is reckoned towards the limit, provided the facility has not already been reckoned. The legal limit sits in the OI Rules, not in the sources consulted.
Common mistakes
- Treating every pledge as an addition to the limit. If the facility is for the Indian entity itself, the table shows nil.
- Ignoring the lender's jurisdiction. The proviso bars an overseas lender from a country in which financial commitment is not permissible.
- Creating a charge on securitised assets; the Master Direction does not allow it.
- Leaving the period of charge open; if not specified upfront, it is co-terminus with the facility.
- Counting a negative pledge or a bid bond guarantee towards the limit; the Explanation excludes them.
Need help with security for an overseas facility?
The structure of the security decides whether the commitment is counted and how it is reported. Our ODI reporting team can review the facility and the security and prepare the Form FC filings.
Key takeaways
- An Indian entity with ODI by equity may pledge equity or create a charge in the ways regulation 6 lists.
- The lesser of the value of the security and the amount of the facility is reckoned where the facility is for a foreign entity.
- Where the facility is for the Indian entity itself, the Master Direction's table shows nil.
- Negative pledge, negative charge and bid bond guarantee are not reckoned.
- The Master Direction adds conditions on securitised assets, period of charge and enforcement.
Read next
- Guarantees for a foreign entity: regulation 5
- Deferred payment and mode of payment: regulations 7 and 8
- Financial commitment by equity, debt, guarantee and pledge
- Setting up a subsidiary abroad: Indian company guide
Disclaimer: Based on the rules, regulations and Reserve Bank Master Directions under the Foreign Exchange Management Act, 1999 that this article names, each in the version and up to the date stated in the article, as consulted on 2 October 2026. Some texts are third-party copies or older prints and are identified as such. Limits, forms and time limits change by amendment and circular; later changes should be checked on the Reserve Bank and Gazette sites. This article is general information, not legal advice; check the official text before acting.