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RBI’s clarification on the rate of exchange for conversion of External Commercial Borrowing and Lumpsum Fee/Royalty into Equity

In terms of the extant FDI Policy, Indian companies can convert external commercial borrowings and lump sum fee/royalty into equity, subject to compliance with certain conditions, including the pricing guidelines for issuance of equity shares.

In this regard, the RBI has vide A.P. (DIR Series) Circular No. 94 dated January 16, 2014 clarified that without prejudice to the extant conditions for conversion of external commercial borrowings or lump sum fee/royalty into equity:

(a) where the liability sought to be converted is denominated in foreign currency (as in case of external commercial borrowings, import of capital goods, etc.), the Indian companies will need to apply the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion;

(b) the above principle will also apply mutatis mutandis to all cases where any payables/liability of 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; and

(c) the RBI will have no objection if a borrower Indian company intends to issue equity shares for a rupee amount less than that arrived at as above, by a mutual agreement with the non-resident lender. The fair value of the equity shares to be issued will, however, be worked out with reference to the date of conversion only.

By: Ms. Seema Jhingan, Partner (sjhingan@lexcounsel.in) and Mr. Himanshu Chahar, Senior Associate (hchahar@lexcounsel.in).