CONVERSION OF ECB INTO EQUITY- IS IT ALLLOWABLE UNDER FEMA ?

As per  RBI Master Circular No. 8 /2010-11 dated July 01, 2010, an Indian company is eligible to convert its ECB INTO EQUITY if it satisfies the following conditions:

 (a) The activity of the company is covered under the Automatic Route for Foreign Direct Investment or Government (FIPB) approval for foreign equity participation has been obtained by the company, wherever applicable.

(b) The foreign equity holding after such conversion of debt into equity is within the sectoral cap, if any,

(c) Pricing of shares is as per the pricing guidelines issued under FEMA, 1999 in the case of listed/ unlisted companies.

(ii) Conversion of ECB may be reported to the Reserve Bank as follows :

(a) Borrowers are required to report full conversion of outstanding ECB into equity in the form FC-GPR to the Regional Office concerned of the Reserve Bank as well as in form ECB-2 submitted to the DSIM, RBI within seven working days from the close of month to which it relates. The words "ECB wholly converted to equity" should be clearly indicated on top of the ECB-2 form. Once reported, filing of ECB-2 in the subsequent months is not necessary.

(b) In case of partial conversion of outstanding ECB into equity, borrowers are required to report the converted portion in form FC-GPR to the Regional Office concerned as well as in form ECB-2 clearly differentiating the converted portion from the unconverted portion. The words "ECB partially converted to equity" should be indicated on top of the ECB-2 form. In subsequent months, the outstanding portion of ECB should be reported in ECB-2 form to DSIM.

(ii) General permission is also available for issue of shares/preference shares against lump sum technical know-how fee, royalty, under automatic route or SIA/FIPB route, subject to pricing guidelines of SEBI/CCI and compliance with applicable tax laws.

Illustrations :

• M/s Kerns Aero Products Private Limited was allowed by FIPB to issue shares for the value of machinery imported to the supplier .

• Issue of sweat equity shares by Quatrro BPO Solutions Private Limited was allowed under the rules ““Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003” and Regulation 8 of FEMA 20.

• FIPB allowed Actis Biologics Private Limited to issue equity share against transfer of technology.

• GIA India Laboratory Private Ltd was allowed by FIPB to issue shares against rent as a part of pro-incorporation expenses .

•  In case of Misuba Sical India P Ltd , FIPB allowed to issue of shares instead of redemption of preference shares.

•  In the case of MD Group Inc, Canada, issuance of shares was sought against Franchisee rights.  FIPB  viewed that the extant policy permits issuance of shares for consideration other than cash in the case of lump sum fees, royalty and ECB. Issuance of shares against internal accruals, import of second hand machinery etc. has also been allowed on a case to case basis, but it cannot be allowed against an intangible asset like Franchisee rights.

There are instances where FIPB has refused to accord its approval for issue of shares against trade payable .( Macroni Telecommunications (I)  Private Limited and in the case of Sun Technics Energy Systems Private Limited ).