Rule 9 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.
Rule 9(8) of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 permits a pledge of equity instruments of an Indian company, or of units of an investment vehicle, in three situations: by a promoter to secure external commercial borrowing raised by the company, by a non-resident holder to secure credit from an Indian bank, an overseas bank or a registered NBFC, and on invocation of the pledge. Each situation has its own conditions.
This article is based on the Rules as notified on 17 October 2019 (S.O. 3732(E)) as amended by the notifications named in this article; the latest amendment consulted is S.O. 4870(E) dated 2 September 2026. Rule 9(8) is as notified on 17 October 2019; none of the 19 amending notifications up to 2 September 2026 changes it. Amendments made after that date should be checked in the Gazette. There is no official consolidated text. If a pledge is part of an external commercial borrowing, our ECB reporting service covers the borrowing side.
Under rule 9(8), a pledge of equity instruments or units is allowed only on the terms in three items. Item (i): a promoter may pledge shares of the borrowing company or its associate resident companies to secure the company's external commercial borrowing, for a period co-terminus with the ECB, with a statutory auditor's end-use certificate and a no-objection from an authorised dealer bank. Item (ii): a non-resident holder may pledge in favour of an Indian bank, an overseas bank or a registered NBFC on the stated purposes. Item (iii): on invocation, the transfer follows entry routes, caps and pricing as at the time the pledge was created.
Item (i): promoter pledge for external commercial borrowing
Item (i) says any person being a promoter of a company registered in India (the "borrowing company") which has raised external commercial borrowing in compliance with the "Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000" may pledge the shares of the borrowing company or of its associate resident companies for the purpose of securing the external commercial borrowing raised by the borrowing company, subject to four further conditions:
| Condition | Text |
|---|---|
| (A) | The period of the pledge is co-terminus with the maturity of the underlying external commercial borrowing |
| (B) | On invocation of the pledge, transfer is made in accordance with the Rules and directions issued by the Reserve Bank |
| (C) | The statutory auditor has certified that the borrowing company shall utilise or has utilised the proceeds of the borrowing for the permitted end-use only |
| (D) | No person shall pledge any such share unless a no-objection has been obtained from an authorised dealer bank that the above conditions have been complied with |
A note on the name. The Rule prints the 2000 Regulations under the title "Borrowing and Lending in Foreign Exchange"; the Reserve Bank's Master Direction - Foreign Investment in India (updated up to June 15, 2026) repeats the same title in paragraph 7.11.1. That is a stale cross-reference. The Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 have since been issued; see our article on the ban on borrowing and lending, defined terms and end-use limits. The reader should check which instrument now governs the borrowing before relying on the Rule's wording.
Item (ii): pledge by a person resident outside India
Item (ii) says any person resident outside India holding equity instruments in an Indian company or units of an investment vehicle may pledge them:
- (A) in favour of a bank in India to secure the credit facilities being extended to such Indian company for bona fide purposes;
- (B) in favour of an overseas bank to secure the credit facilities being extended to such person, or to a person resident outside India who is the promoter of such Indian company or the overseas group company of such Indian company;
- (C) in favour of a non-banking financial company registered with the Reserve Bank to secure the credit facilities being extended to such Indian company for bona fide purposes;
- (D) subject to the authorised dealer bank satisfying itself of the compliance of the conditions stipulated by the Reserve Bank in this regard.
The Rule itself does not list those Reserve Bank conditions. The Master Direction, in paragraph 7.11.2, sets them out. They are the Master Direction's own directions to authorised dealers and not part of the Rule. In summary, it asks for: for an Indian bank lender, transfer on invocation under the instructions in force when the pledge was created, an annual statutory auditor's certificate on use of loan proceeds, SEBI disclosure norms where relevant, and compliance with section 19 of the Banking Regulation Act, 1949; for an overseas bank lender, a loan availed only from an overseas bank, used for genuine business purposes overseas and not for investment in India directly or indirectly, no resulting capital inflow into India, and a chartered accountant's certificate; for an NBFC lender, compliance with the NBFC credit concentration norm, an ex ante board resolution and ex post auditor's certificate on use of proceeds that the authorised dealer may obtain, and a 30-day period to cure a credit concentration breach on invocation. It adds, in paragraph 7.11.2.1, that pledged shares must be unencumbered and that the company must obtain a no-objection certificate from existing lenders, if any. Any other pledge needs prior Reserve Bank approval (paragraph 7.11.3). The Rule says nothing of these points.
Item (iii): invocation of the pledge
Item (iii): in case of invocation of the pledge, the transfer of equity instruments of an Indian company, or units, shall be in accordance with the entry routes, sectoral caps or investment limits, pricing guidelines and other attendant conditions at the time of creation of the pledge. So the conditions are tested as at creation, not as at invocation. That matters when a sector's cap or route has since changed. The pricing floors are explained in our article on pricing of share transfers and swaps.
Item (i)(B) uses a slightly different formula ("in accordance with these rules and directions issued by the Reserve Bank") from item (iii). Read the two items separately.
A worked example
Lakshya Components Private Limited has raised an external commercial borrowing. Its promoter, Mr. Rao, wishes to pledge his shares to secure it. Item (i) permits that if the pledge lasts no longer than the borrowing, the statutory auditor has certified the end-use, and an authorised dealer bank has issued a no-objection. Separately, Nordvik Holdings, a non-resident shareholder, wants to pledge its Lakshya shares to a bank in India for a working-capital loan to Lakshya. Item (ii)(A) allows that, with the authorised dealer bank satisfied that the Reserve Bank's conditions are met. If the bank invokes the pledge years later, the transfer must meet the entry route, cap and pricing conditions that applied when the pledge was created.
Need help with a pledge linked to foreign borrowing?
A pledge sits between the lender's security documents, the company's FEMA position and the borrowing's reporting. Our ECB reporting team can help line up the certificates and reports around it.
Key takeaways
- Rule 9(8) is as notified; none of the 19 amendments to 2 September 2026 changes it.
- A promoter's ECB pledge must be co-terminus with the ECB, backed by an auditor's end-use certificate and an authorised dealer no-objection.
- A non-resident may pledge in favour of an Indian bank, an overseas bank or a registered NBFC, subject to the Reserve Bank's conditions as the authorised dealer finds them satisfied.
- On invocation, entry route, cap and pricing are tested as at the creation of the pledge.
- The 2000 borrowing regulations named in the Rule have been replaced; check the current instrument.
Read next
- Rule 9(4) to (7) of the FEM (Non-debt Instruments) Rules, 2019: gift, optionality, deferred payment and escrow
- Rule 9(1) to (3) of the FEM (Non-debt Instruments) Rules, 2019: sale of shares between residents and non-residents
- ECB: external commercial borrowings under FEMA
- Rule 21 of the FEM (Non-debt Instruments) Rules, 2019: pricing of shares issued to non-residents
Disclaimer: Based on the Gazette text of the instrument this article names, as notified and as amended by the notifications named in the article (for the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 the latest amendment consulted is S.O. 4870(E) dated 2 September 2026), as consulted on 2 October 2026. There is no official consolidated text; the provisions were read with each amendment applied. Sectoral caps, entry routes, conditions, forms and time limits change by notification, press note and circular; later changes should be checked on the Gazette, DPIIT and Reserve Bank sites. This article is general information, not legal advice; check the official text before acting.