Compliance for conversion of ECB loan into Equity

This query is : Resolved

Hemant (Querist)
Follow

24 July 2022 Conversion of ECB, including those which are matured but unpaid, into equity is permitted subject to fulfilling certain conditions.

However I wanted to understand whether the same would be permissible under the companies act 2013 ? Companies act basically does not permit conversion of loan into equity unless there is a resolution is passed which has a provision to convert loan into equity.

Pls guide
Hemant

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
Follow

24 July 2022 In case of full conversion of ECB into equity, the company shall report the conversion in form FC-GPR to the concerned Regional Office of the Reserve Bank as well as in form ECB-2 submitted to the Department of Statistical Analysis and Computer Services (DESACS), Reserve Bank of India, Bandra-Kurla Complex, Mumbai .

See link for Companies Act provisions.

https://taxguru.in/company-law/procedure-conversion-loan-equity.html#:~:text=Through%20this%20conversion%2C%20company%20can,conversion%20of%20loan%20into%20equity.

Hemant

Hemant (Querist)
Follow

25 July 2022 Thank you Mr. Seetharaman for the response but as informed in my query I am well aware of RBI norms which permit me to convert ECB into equity. I also informed you that under the Compaies act 2013 it is not permissible to convert loan into equity unless special resolution is passed before acceptance of the loan.

You have basically sent me the same info. I would appreciate if you are aware about any other section under companies act which would permit me to convert the ECB into Equity for which special resolution was not passed before acceptance of such ECB.

Thank you

Upgrade to CAclubindia Pro. Subscribe Now!

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
Follow

25 July 2022 I am not aware of any other provisions.

Adv. Ravish Bhatt, ADIT, CIOT

Adv. Ravish Bhatt, ADIT, CIOT (Expert)
Follow

26 July 2022 You have already mentioned that companies act does not permit conversion of loan into equity unless there is a resolution passed in that regard. Your understanding is correct. I can only endeavour to further elaborate on the same. I believe, relevant section will be s.62(3). S.62 comes in play when a company proposes to increase subscribed capital. S.62(3) says that provisions of s.62 in general do not apply to increase of subscribed capital by exercise of an option as a term attached to the debentures issued or loan raised by company to convert the same into shares. Broadly, for conversion of any loan into equity, company must have had raised it on terms that it will be converted into equity in future and a special resolution must have been passed at time when loan was obtained. Absent a special resolution having been passed at time of availing loan, conversion may not be permissible. Conversion of an ECB will have to be checked for compliance to RBI regulations as you already stated.

Author: Advocate Ravish Bhatt
Gmail: ravishdbhatt@gmail.com
Link to Linkedln Profile: https://bit.ly/3IDGfsU

Hemant

Hemant (Querist)
Follow

26 July 2022 Thank you Mr. Ravish. So it seems that though RBI permits conversion of ECB into Equity, Companies Act prohibits such conversion unless a special resolution has been passed with such terms of conversion prior to taking of the loan.

Adv. Ravish Bhatt, ADIT, CIOT

Adv. Ravish Bhatt, ADIT, CIOT (Expert)
Follow

26 July 2022 Well, companies act is not and should not be per se concerned with conversion of loan into equity. Whether a given loan (even ECB) could or should be converted into equity is a matter of agreement between lender and borrower. Companies act is concerned with increase in subscribed capital and rights of existing members etc. All what s.62 envisages is that for further issue of share capital(which will result also from conversion of a loan into equity), such issuance must be made in due compliance to s.62(1) and s.62(3) says that s.62(1) not required to be complied with if there was a Special Resolution passed at time of availing the loan. So that way, there is not an absolute prohibition against conversion. Just that company needs to follow procedure as prescribed u/s.62(1). But that may be difficult and ultimately not permissible if process could not be rigorously followed.