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The Reserve Bank of India (RBI) clarified that the External Commercial Borrowings (ECB) conversion by an Indian company can be below its fair value. However, RBI also said 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 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. 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,” said RBI.
RBI also clarified that the principle of calculation of rupee equivalent for a liability denominated in foreign currency shall apply 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.
Indian companies are allowed to issue equity shares against ECBs subject to conditions mentioned therein and pricing guidelines as prescribed by RBI from time to time regarding value of equity shares to be issued. RBI 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.
