RBI allows firms to convert overseas borrowing into equity via ECB

The Reserve Bank of India (RBI) has said companies can through external commercial borrowing (ECB) route convert their overseas borrowings into equity shares at the foreign exchange rate applicable on the date of swap agreement.

"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," the RBI said in a notification on conversion of ECB and lump sum fee/royalty into equity.

"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 added. 

The RBI also said that where the liability sought to be converted by the company is denominated in foreign currency as in case of ECB and import of capital goods, it will be in order to apply the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion.

The notification was issued after the apex bank received references regarding what rate of exchange should be applied to the amount in foreign currency borrowed or owed by the resident entity from/to the non-resident entity.