CONVERSION OF ECB INTO EQUITY
Company Law applicability:
Section 62(3) of the Companies Act,2013
Nothing in this section shall apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company:
Provided that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting.
Mandatory provisions to be follow:
1. For Conversion of ECB into Equity it is mandatory that company had entered into agreement at time of raising loan and it is mentioned in any clause that company can convert loan into Equity/Preference shares in future.
2. Before entering into agreement company had to pass SR for entering into agreement.
Steps by steps for before raising of loan:
1. Hold BM for acceptance of ECB and issuance of notice of EGM for in principal approval for conversion of loan.
2. In EGM pass SR for approval of conversion of loan into Equity.
3. File MGT-14 within 30 days of passing the SR.
4. Execution of loan agreement with party.
Steps to be followed at time of conversion:
1. Issue of notice for convening a BM, send agenda along with notice for allotment of shares by conversion of ECB.
2. Authorise any director to file PAS-3 and for making entry in the register of members.
3. Prepare list of allottees
4. Valuation Report is mandatory for filing PAS-3
5. File form PAS-3 in 30days after allotment of shares and pay stamp duty for the same.
6. Issuance of share certificates
7. File MGT-14 within 30 days
8. Make necessary entry in register of members.
Guidelines to be followed while filing ECB-2 Return
While filing ECB-2 return it must mention that there is conversion of loan into equity (Whether partial or full).
RBI Compliances:
File FCGPR with 30 days if case falls under this category and get it approved within 30 days also otherwise it leads to penalty.
Query regarding the matter:
1. If any company entered into the agreement and did not mention clause for conversion then what happened?
Ans: In this scenario company can not entered into further agreement for conversion as it should be done before entering into agreement. If company pass SR in EGM afterwards for conversion and then follow the rules then it will be considered as non-compliance.
2. Is Valuation Report Required?
Ans: Yes
Note: Checklist is for only Conversion of ECB into Equity
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