Reserve Bank of India (RBI) vide A.P. (DIR Series) Circular No. 94 January 16, 2014 has reviewed its circular on Conversion of External Commercial Borrowing and Lumpsum Fee/Royalty into Equity.The circular provides that an Indian company can issue equity shares against External Commercial Borrowings (ECB) subject to conditions and pricing guidelines as prescribed by the Reserve Bank from time to time regarding value of equity shares to be issued.
With respect to the issue relating to how the rupee amount against which equity shares are to be issued shall be arrived at, RBI has 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.
Moreover, RBI 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.
The circular provides that the fair value of the equity shares to be issued shall be worked out with reference to the date of conversion only.
Further, it has been clarified that the above mentioned principle of calculation of INR equivalent 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.