Share security over an onshore company is worth what the registry will record.

A lender to a structure with an onshore asset company usually asks for a pledge of the company's shares. The pledge is cheap to draft and, in the lender's home law, simple: a document, a notice to the company, an entry in its register, and on default the lender takes or sells the shares. In the state the company sits in, the pledge has to pass two tests, and it often fails the second. The first is whether the state's registry will record a pledge over shares in that kind of company, in that form, at all. The second is whether, on enforcement, the shares can pass to anyone the lender can find, given the state's rules on who may own a company of that kind. A pledge that fails the first is a contract; one that fails the second is a perfected interest that delivers nothing the lender can take.

This note sets out the two tests, what each state's registry records for each form of company, the foreign-ownership ceilings that cap what a pledge can deliver, the enforcement mechanics that survive the ceilings, the alternatives that deliver more, India's own rules, the interaction with the category question and the 1446H registration, a comparison, a worked package as a type, cases, what each party holds, the sequence, questions, terms and what to read.

The first test: the registry

A company's shares are recorded in a register the state keeps, a commercial registry for limited liability companies, a companies registry or a depository for joint-stock companies, and a pledge over them binds third parties only when it is recorded there in the form the registry accepts. Some registries record pledges over shares in limited liability companies; some do not, because the state's law treats such interests as partnership interests rather than securities. Some record them only for joint-stock companies, whose shares are securities the depository holds. Some require the pledge instrument to be in Arabic, notarised, in a prescribed form, with the company's own consent evidenced by a resolution of its shareholders. The Kingdom's 2020 movables registry records security over shares to the extent the regime lists them, with Saudi counsel confirming the treatment of each form. Counsel in the state knows which registry records what, and the pledge is drafted to be recordable or it is a contract between the lender and the borrower.

The second test: enforcement and ownership

A pledge enforced is a transfer of the shares to the lender or to a buyer the lender finds. If the lender is a foreign bank and the company is one a foreign person may not own, or may own only with a licence the lender does not hold, or only up to a percentage the pledged stake exceeds, the transfer cannot be recorded and the pledge cannot be enforced in the way the lender planned. Kuwait's default limit of forty-nine per cent on foreign ownership of a Kuwaiti company, raised only by a 2013 licence in a non-restricted sector, caps what a foreign lender can take. The Kingdom's excluded activities close certain companies to foreign owners entirely, and a foreign buyer must be registered under the 1446H law. Qatar's 2019 law requires approval of a foreign investor in a Qatari company. India's sectoral caps limit foreign ownership by sector, and the pricing rules govern any transfer between a resident and a non-resident. Each is a ceiling on what a pledge can deliver, and a lender that did not read it has a pledge whose enforcement ends in a buyer the state will not register.

What each state's registry records

In the Kingdom, a pledge over shares in a joint-stock company is recorded through the depository for listed shares and as the Companies Law and the movables regime provide for unlisted ones; a pledge over shares in a limited liability company is recorded as the movables registry's treatment of such interests permits, with the commercial registry's annotation where the practice requires; Saudi counsel confirms each.

In Qatar, a pledge over shares in a State company is recorded in the commercial registry where the company's form permits, with the company's consent and the registry's form; shares in a Centre company are pledged under the Centre's rules and recorded in its registry.

In Kuwait, a pledge over shares in a Kuwaiti company is recorded in the commercial registry for the forms that permit it, with the company's articles read for any restriction on pledges and transfers; Kuwaiti counsel reads the practice.

In India, a pledge over dematerialised shares is created by entry with the depository, a charge over a company's assets by registration with the companies registrar within the period, and the pledge's enforcement is a transfer subject to the sectoral caps and the pricing rules.

The enforcement mechanics that survive

A pledge drafted for a state with ownership ceilings provides for enforcement by sale to a qualified buyer rather than by transfer to the lender. The lender, on default, conducts a sale to a buyer the state permits: a domestic buyer, a registered foreign buyer, a buyer with the licence the sector requires, at a price the sale process produces. The mechanics are in the pledge and in the company's articles: the company's consent to the transfer given in advance, the other shareholders' pre-emption waived or priced for an enforcement sale, the registry's form for the transfer on enforcement, and in the Kingdom the movables route's commercially reasonable sale. A pledge that provides only for transfer to the lender provides for a transfer the registry will not record.

Why lenders reach for the share pledge first

The share pledge is the security a lender's home counsel knows how to draft, and it is the one that appears in the first term sheet because the term sheet is drafted at home. It also appears to deliver everything: the company, and with it the asset, the receivables, the contracts and the management. In a jurisdiction where any person may own any company and the registry records any pledge, it does deliver everything. In the Gulf and in India it delivers what the registry records and what a permitted buyer will pay, and the difference between the appearance and the delivery is discovered at enforcement unless counsel in the state is asked at the term sheet. The instinct is not wrong; the jurisdiction is different, and the package is designed to the jurisdiction.

The company's consent and the articles

An onshore company's articles commonly restrict transfers, give the other shareholders a pre-emption, and require the company's or the shareholders' consent to a pledge. Each restriction binds the registry, which records a transfer only when the articles' conditions are met, and a pledge taken without the consents the articles require is a pledge the registry will not act on. The lender's counsel reads the articles before the pledge and obtains, in advance, the company's consent to the pledge and to an enforcement transfer, the other shareholders' waiver of pre-emption on an enforcement sale or a priced pre-emption that does not make them the only buyer, and where the articles require it an amendment recorded before the pledge. A joint venture partner's consent is the hardest to obtain and the most necessary, because a partner that holds a pre-emption at the lender's sale is the single buyer.

The enforcement sale, run

An enforcement sale of onshore shares to the permitted class is run by the lender or its agent under the state's process: in the Kingdom the movables route's notices, cure period and commercially reasonable sale; elsewhere the process the pledge and the state's law provide. The lender identifies the permitted class, markets to it, obtains bids, sells to the best, and presents the transfer to the registry with the company's consent and the buyer's standing evidenced: a registration under the 1446H law, an approval under the 2019 law, a 2013 licence or a domestic identity. The registry records the transfer, and the lender applies the proceeds. A sale run outside the process, or to a buyer outside the class, is a sale the registry does not record and the court may set aside.

Where it surfaces

At the registry, when the pledge is presented and the company's form is one whose shares the registry does not record pledges over.

At the articles, when the company's consent to the pledge was never obtained and the registry declines to annotate.

At enforcement, when the permitted class is found to be the joint venture partner alone.

At the pricing rules, when the Indian buyer's price is capped at a valuation the business no longer supports.

At the centre pledge, when the lender discovers that control of the chain is not possession of the asset.

The cost of getting it wrong

A share pledge that fails the first test costs the lender its security over the company; one that fails the second costs the recovery, which is the single permitted buyer's price. A package weighted to the share pledge alone costs the lender its advance rate and the borrower its margin. Counsel in the state reading the registry, the articles and the ceiling before the term sheet costs a fortnight, and the package that results is weighted to what delivers.

The alternatives that deliver more

Security over the shares of a domestic holding company, whose ownership the lender's likely buyer could take, interposed between the foreign chain and the asset company, so that the enforcement sale is of a company a domestic buyer can own.

Security over the asset and the receivables beneath the company, in the state's registry, which does not depend on who may own shares: a mortgage over the parcel, a charge over the receivables and the accounts, the movables route in the Kingdom.

A guarantee from a parent in a jurisdiction where the lender can collect, which is a claim rather than a security but a claim against a person with assets the lender can reach.

Security over the shares of a centre holding company above the onshore company, perfected in the centre's registry and enforced in the centre's court, which delivers control of the chain while the asset-level route runs, and whose enforcement sale is of a centre company any buyer may own.

The package is weighted to what the registry will record and the state will permit, and the share pledge over the onshore company is one item in it rather than the whole of it.

India's own rules

A pledge over shares of an Indian company held by a non-resident is enforced by a transfer that is itself a transfer between a non-resident and whoever buys, and if the buyer is a resident the pricing rules apply: the resident pays no more than the certified fair value, which caps the lender's recovery at the valuation. If the buyer is a non-resident, the sectoral caps and the construction-development conditions, including the lock-in on the foreign capital, apply to the buyer's position. A foreign lender enforcing over Indian shares is therefore enforcing into a regime that prices the sale and conditions the buyer, and the lender's counsel in India reads both before the pledge is taken. The exchange-control rules also govern whether a foreign lender may hold a pledge over Indian shares at all, on conditions the rules state.

The category and the registration

The share pledge meets the holder category question at enforcement: the buyer must be a person the state permits to own that company, and the registry records the transfer only to such a buyer. In the Kingdom the buyer registers under the 1446H law and holds land under the 2025 law's areas. In Qatar the buyer is approved under the 2019 law and holds land in the area. In Kuwait the buyer is within the company-law limit or holds a 2013 licence, and holds land only if it is a permitted holder under Decree 195. The enforcement memorandum names the buyer class, and a class that is empty is an enforcement that has no end.

By state · by pledge	Registry records a pledge over	Foreign ownership ceiling	Enforcement that survives	Better alternatives
The Kingdom	Shares as the movables regime and the Companies Law permit, by form	Excluded activities closed; otherwise registered foreign buyers on equal terms	Sale on the movables route to a registered or Saudi buyer	Movables security over receivables and accounts; mortgage over land
Qatar	Shares in State companies where the form permits; Centre shares in the Centre	Approval of a foreign investor under the 2019 law	Sale to an approved or Qatari buyer	Charge over the usufruct with the grantor's consent; Centre company pledge above
Kuwait	Shares in forms that permit it, with the articles read	Forty-nine per cent default; a 2013 licence raises it	Sale to a buyer within the limit or licensed	Security at the licensed scheme; a domestic holding company
India	Dematerialised shares by depository entry; charges by registration	Sectoral caps; construction-development conditions	Sale to a resident at or below certified value, or to a non-resident within the caps	Security over the company's assets; a guarantee from the foreign parent

A timeline, as a type

Month one: the term sheet asks for a pledge over the onshore company's shares; counsel in the state is instructed to read the registry, the articles and the ceiling. Month two: the reading returns: recordable with consents; the permitted class is domestic buyers and licensed foreign ones; the joint venture partner's pre-emption must be priced. Month three: the company's consent and the partner's priced waiver obtained by resolution and recorded; the pledge drafted for enforcement by sale to the class; the receivables charge and the centre pledge added; the memorandum names the class. Month four: the pledge recorded; the drawdown. Year four: default; the centre pledge enforced in a month for control; the receivables collected; the onshore shares marketed to the class, sold to a licensed foreign buyer, the transfer recorded with the buyer's licence evidenced; the partner's priced pre-emption not exercised because the price was the market's.

The structure paper's page

The structure paper's share security page carries, for each onshore company in the chain: the company's form; the registry's practice for a pledge over its shares; the articles' restrictions and the consents obtained; the ownership ceiling and the permitted class of buyers; the enforcement mechanics as a sale to the class; the alternatives added to the package; and the memorandum's confirmation that the class is not empty. The page is what the lender's counsel confirms and what the joint venture partner reads when it is asked to price its pre-emption.

The listed company's shares

Where the onshore company is listed, the shares are securities held through the exchange's depository, the pledge is recorded with the depository under the exchange's rules, and the enforcement is a sale on or off the exchange under the securities regulator's rules, with foreign-ownership limits on listed shares applying to the buyer. The Kingdom's opening of its main market to foreign investors, and the listed-company route under Kuwait's Decree 195, make listed shares a different and usually better collateral than shares in a private onshore company, because the class of buyers is the market and the registry is the depository. A platform whose onshore exposure is through a listed company has a pledge the lender prices on the market's liquidity.

The domestic holding company as the pledged layer

Where the ceiling is the problem, the cleanest answer is often a domestic holding company between the foreign chain and the asset company, owned to the extent the state permits by the foreign platform and to the rest by a domestic partner or nominee the state permits, with the pledge over the holding company's shares drafted so that the enforcement sale is of a company a domestic buyer can own outright. The holding company is a layer, and it passes the chain's test by answering the security question the layer above cannot: it is the company a permitted buyer can take. It costs what a layer costs, and the lender's advance rate for a pledge that can be enforced pays for it.

Reading the pledge with the register

The register reads the share security page for whether a default at an onshore company would cost the fund its stake or only its equity in it, and for whether the lender's enforcement could put the stake in the hands of a person the register would not want as a partner. A pledge whose permitted class is named is a pledge the register can read; one whose enforcement is a transfer to a foreign lender the state will not register is a pledge the register reads as a claim on the fund's equity that nobody has priced.

The pledge and the secondary market in the company

A pledge's permitted class is also the company's secondary market, and a company whose shares can pass only to a short list of permitted buyers is a company whose equity is illiquid in the same way its pledged shares are. The platform's own exit from the company runs into the same class at the same ceiling, and the exit test reads the ceiling for the platform's sale as the lender's memorandum reads it for the enforcement. A ceiling that makes the lender's recovery a single buyer's price makes the platform's exit the same buyer's price, and a structure that solved the ceiling for the lender, with a domestic holding company or a listed route, has solved it for itself.

A package, as a type

A lender finances a Kuwaiti operating company held sixty per cent by a foreign platform under a 2013 licence and forty per cent by a Kuwaiti partner. The lender asks for a pledge over the platform's sixty per cent. Kuwaiti counsel reads the registry's practice for the company's form, the articles' restriction on pledges, and the ownership ceiling: the pledge is recordable with the company's consent and the partner's waiver, and the enforcement sale is to a buyer within the company-law limit or holding a 2013 licence, which the Kuwaiti partner and a short list of licensed foreign buyers are. The pledge is drafted for enforcement by sale to that class, with the partner's pre-emption priced for an enforcement. The package adds a charge over the company's receivables and accounts, and a pledge over the shares of the centre holding company above, in the centre's registry. The lender's memorandum names the buyer class for each item, and the facility is priced on the centre pledge's speed and the receivables' reach, with the onshore share pledge as control.

Four cases, as types

A foreign lender takes a pledge over the shares of a Kuwaiti limited liability company under a document governed by its home law, unrecorded in Kuwait, providing for transfer to the lender on default. The registry records no such pledge; the company is one the lender may not own above forty-nine per cent; the pledge is a contract, and the lender's package is the unsecured claim it was priced as secured.

A lender takes a recorded pledge over shares in a Saudi company whose activity is on the excluded list for foreign investors. The enforcement sale can be to a Saudi buyer only; the Saudi buyers are few and know the lender must sell; the recovery is the buyer's price.

A lender to an Indian company takes a pledge over its shares held by the foreign platform. On default the only buyers are resident; the pricing rules cap the sale at the certified value, which a falling business has reduced; the lender's recovery is the valuation, and the valuer's methodology is the recovery's ceiling.

A lender reads the registry and the ceiling in each state before the term sheet, drafts the pledges for enforcement by sale to the permitted class, weights the package to the asset-level security and the centre pledge above, and names the buyer class in the memorandum. On default the centre pledge delivers control in a month, the receivables and the accounts deliver cash, and the onshore shares are sold to a permitted buyer on the route the state provides.

What each party holds

The lender holds the two tests answered before the term sheet, the pledge drafted for a sale to the permitted class, and the package weighted to what delivers.

Counsel in each state holds the registry's practice for each form, the ownership ceiling, the buyer class and the enforcement mechanics.

The company holds its consent to the pledge and to the enforcement transfer, given in advance in its articles or by resolution.

The other shareholders hold their pre-emption, waived or priced for an enforcement.

The registry holds the record and the transfer on enforcement.

The buyer at enforcement holds its own standing under the state's ownership rules.

The sequence

1. Counsel in each state reads the registry's practice for a pledge over shares in the company's form, and the ownership ceiling for the lender and its likely buyers.
2. The pledge is drafted to be recordable, with the company's consent and the other shareholders' position settled for an enforcement sale.
3. The enforcement is drafted as a sale to the permitted class, with the mechanics the registry and the state's route require.
4. The package is weighted to the asset-level security, the receivables and the centre pledge above, with the onshore share pledge as control.
5. The enforcement memorandum names the buyer class for each item and confirms it is not empty.
6. The pledge is recorded in the registry's form before drawdown.

Questions a manager asks

Is a share pledge worthless onshore. It is worth what the registry records and what a permitted buyer would pay; drafted for a sale to that buyer and recorded, it is control and some recovery; drafted for transfer to a foreign lender, it is a contract.

Why does the lender want the centre pledge as well. Because the centre's registry records it, the centre's court enforces it in a month, and any buyer may own a centre company; it delivers the chain while the onshore route runs.

What about the Kuwaiti partner's pre-emption. It is priced for an enforcement sale in the articles or waived, because a pre-emption that operates at the lender's sale makes the partner the only buyer.

Does the 1446H registration help. A Saudi buyer or a registered foreign buyer may take the shares on equal terms, which widens the class; the excluded list closes some companies to foreign buyers entirely.

What caps the recovery in India. The certified fair value on a sale to a resident, and the sectoral caps on a sale to a non-resident; the lender's counsel in India reads both.

Can the lender take the shares itself. Where the state's ownership rules permit the lender to own the company, with any licence the sector requires; otherwise by sale to a permitted buyer.

Terms used

The two tests: whether the registry records the pledge, and whether the enforcement can deliver the shares to anyone the lender can find.

Ownership ceiling: the state's limit on foreign ownership of a company of that kind, by percentage, by licence or by sector.

Permitted class: the buyers the state's rules allow to take the shares on enforcement.

Enforcement by sale: the pledge's mechanism for realising the shares through a sale to the permitted class rather than a transfer to the lender.

Control: security that holds the chain still while the route to the asset runs.

Pricing rules: India's requirement that transfers between residents and non-residents be at or around certified fair value.

What to read

Each state's companies law and registry rules on pledges over shares by form; the ownership laws and sectoral caps; the Kingdom's movables regime and 1446H law; Qatar's 2019 law; Kuwait's Companies Law and 2013 law; India's depository rules, companies charges rules, sectoral caps and pricing rules; each company's articles. On this site, the security room under Structures, Kuwait's holding room in the onshore interfaces and the India family's room on holding Indian land.