What changed
RBI issued a clarification on how to compute the rupee equivalent when converting foreign-currency liabilities like ECB or lump-sum fees/royalties into equity shares. The exchange rate on the date of the agreement between the parties is to be used, not the conversion date. Additionally, the borrower can issue equity for a lower rupee amount if mutually agreed with the lender.
What it means for you
Banks and lenders now have a clear rule for pricing equity conversions: use the agreement date exchange rate for the INR equivalent, but fair value of shares must be as of the conversion date. This reduces ambiguity in structuring such deals. It also allows flexibility for borrowers to negotiate a lower conversion amount, which could impact loan recovery or equity dilution calculations.
What you must do
- Update internal guidelines to use the agreement date exchange rate for converting foreign-currency liabilities into equity.
- Ensure fair valuation of equity shares is done with reference to the conversion date only.
- Advise clients that a lower rupee amount than the computed equivalent is permissible if mutually agreed with the lender.
- Apply the same principle to all permitted conversions, including lump-sum fees and royalties.
Who it affects
Category-I Authorised Dealer banks, Indian companies with ECB or foreign-currency liabilities, Non-resident lenders and investors, AD bank customers involved in equity conversions
What exchange rate should be used for converting ECB into equity?
The exchange rate prevailing on the date of the agreement between the parties for conversion should be applied.
Can the rupee amount for equity issuance be lower than the computed equivalent?
Yes, RBI has no objection if the borrower and lender mutually agree to a lower rupee amount.
Does this circular apply to conversions of lump-sum fees or royalties?
Yes, the same principle applies to all permitted conversions of foreign-currency payables or liabilities into equity or other securities.