RBI allows conversion of overseas loans into equity at prevailing exchange rates

The Reserve Bank of India (RBI) has permitted Indian companies to convert their overseas loans through the external commercial borrowing (ECB) route into equity shares by using the prevailing forex rate on the date of the swap agreement.

''An Indian company can issue equity shares against external commercial borrowings (ECB) subject to conditions mentioned therein and pricing guidelines as prescribed by the Reserve Bank from time to time regarding value of equity shares to be issued,'' RBI said.

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, the conversion should be at the exchange rate prevailing on the date of the agreement between the parties concerned.

In any case RBI said, the borrower company may issue equity shares for a rupee amount lower than the fair value of the ECB by mutual agreement. However, the fair value of the equity shares to be issued should be worked out with reference to the date of conversion only, it added.

This principle of calculation of rupee equivalent for a liability denominated in foreign currency 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, RBI said.