RBI/2013-2014/449
A.P. (DIR Series) Circular No. 94
January 16, 2014
To
All Category - I Authorised Dealer banks
Madam/Sir,
Conversion of External Commercial Borrowing and Lumpsum Fee/Royalty into Equity
Attention of Authorised Dealer (AD) banks is invited to
A.P. (DIR Series)
Circular No. 15 dated October 1, 2004 on the captioned subject.
- In terms of the said circular, an Indian company can issue equity shares
against External Commercial Borrowings (ECB) subject to conditions mentioned
therein and pricing guidelines as prescribed by the Reserve Bank from time to
time regarding value of equity shares to be issued. Reserve Bank has received
some references regarding how the rupee amount against which equity shares are
to be issued shall be arrived at; in other words, what rate of exchange shall be
applied to the amount in foreign currency borrowed or owed by the resident
entity from/to the non-resident entity.
- It is clarified that where the liability sought to be converted by the
company is denominated in foreign currency as in case of ECB, import of capital
goods, etc. it will be in order to apply the exchange rate prevailing on the
date of the agreement between the parties concerned for such conversion. Reserve
Bank will have no objection if the borrower company wishes to issue equity
shares for a rupee amount less than that arrived at as mentioned above by a
mutual agreement with the ECB lender. It may be noted that the fair value of the
equity shares to be issued shall be worked out with reference to the date of
conversion only.
- It is further clarified that the principle of calculation of INR equivalent
for a liability denominated in foreign currency as mentioned at paragraph 3
above shall apply, mutatis mutandis, to all cases where any payables/liability
by an Indian company such as, lump sum fees/royalties, etc. are permitted to be
converted to equity shares or other securities to be issued to a non-resident
subject to the conditions stipulated under the respective Regulations.
- Authorised Dealers may bring the contents of this circular to the notice of
their constituents and customers concerned.
- The directions contained in this circular have been issued under Section
10(4) and Section 11(1) of the Foreign Exchange Management Act, 1999 (42 of
1999) and is without prejudice to permissions/approvals, if any, required under
any other law.
Yours faithfully,
Rudra Narayan Kar
Chief General Manager In-Charge