Foreign investors who have previously invested in India through External Commercial Borrowings (ECB) may find it advantageous to gain ownership control over the investee company by converting their ECB into equity. This process can provide investors with a more significant stake in the Indian company and align their interests more closely with its operations. In this article, we will delve into the detailed procedure and conditions for converting ECB into equity in an Indian company as of September 11, 2023.
Procedure for Converting ECB into Equity:
1. Holding of Board Meeting and Obtaining Board Approval: The first step is to that the Company shall convene a board meeting by giving 7 days’ notice to obtain approval from the Board of Directors of the company. The board must approve the terms and conditions of the conversion and Issuance of notice for convening of Extra-ordinary general meeting.
2. Approach and coordinate with AD bank and RBI for their approval on modified ECB Agreement and accordingly new LRN number will be allotted
3. Holding of Extra-ordinary General Meeting and Obtaining Shareholder’s Approval: Special Resolution for conversion of ECB into equity & approval on ECB agreement to be passed.
4. Filing of Form MGT-14- After passing of special resolution, e-form MGT-14 needs to be filed with the Registrar within 30 days of the passing of the resolution.
5. Holding of Second Board Meeting- A Company shall convene second board meeting by giving 7 days’ notice for resolution for allotment of shares on conversion of loan into equity is to be passed.
6. Filing of few other forms as per Companies Act Regulations and RBI.
7. Conversion of ECBs into Equity Shares: Once the approvals are obtained and filings are completed, the company can proceed with the conversion of ECBs into equity shares. The company must issue the equity shares to the non-resident lender, and the lender must accept the shares.
Conditions for Conversion of ECB into Equity Shares
The Indian Companies have been granted general permission for conversion of ECB into Equity shares, subject to the following conditions and reporting requirements:
Automatic or Approval route: When the activity of the Indian company is covered under the Automatic Route of the Foreign Direct Investment (FDI Policy), there is no need for any prior approval but if the company is engaged in the sector that requires Government permission, permission will need to be obtained by the company seeking the conversion.
Sectoral cap: It should be verified that the foreign equity in the Indian Company, after conversion of ECB into equity, is within the sectoral cap of equity shares, if any, as defined under the FDI Policy.
Consent from Lender: Such conversion shall be with the lender’s consent and without any additional cost.
Pricing guidelines:
1. The price of equity instruments of an Indian company issued by it to a person resident outside India should not be less than the valuation of equity instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant, in case of an unlisted Indian Company.
2. The valuation certificate issued by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant must not be more than ninety days old as on the date of the transfer.
3. The fair valuation of shares done by a SEBI registered Category – I Merchant Banker or a Chartered Accountant as per the discounted free cash flow method, where the shares of the company is not listed on any recognised stock exchange in India.
Exchange rate: For the purpose of conversion of ECB into Equity, the exchange rate shall be taken at the rate prevailing on the date of agreement between the parties concerned for such conversion, or lesser rate as may be mutually agreed between the parties.
Period: The conversion facility is available for ECB whether or not such ECB is due for payment or not. Therefore, if the Indian Company has taken ECB for a period of say 5 years and if it wants to convert the ECB before the expiry of 5 years, the same is possible to be done.
Reporting requirements: For full conversion of ECB into Equity, the entire portion will have to be reported in Form FC-GPR as prescribed for reporting of FDI inflows. The form ECB-2 shall be filed with the suitable remarks of “ECB fully converted into Equity.” Subsequently the Company is not required to file ECB-2 return.
Conclusion:
Converting ECB into equity in an Indian company can offer foreign investors greater control and alignment with the company’s operations. Understanding the detailed procedure and conditions for this conversion is crucial for a smooth transition. As of September 11, 2023, the Indian government has made this process more accessible for investors, subject to sectoral caps, pricing guidelines, and reporting requirements. It’s essential for foreign investors and Indian companies to navigate these regulations carefully to ensure compliance and successful conversion.
Pls Note: This article contains update info till the date of publish of this article i.e. 11th Sept 2023.
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