ECB conversion into Equity at Prevailing Exchange Rate

Under the current FDI regime, external commercial borrowings and lump sum fee/royalty denominated in foreign currencies payable by Indian companies (“Foreign Liability”) can be converted into equity shares of such company, subject to certain conditions which includes compliance with the ‘pricing’ guidelines prescribed by RBI for issuance of equity shares to foreign entities. However, from an operational point of view, it was not clear as to which ‘date’ should be used to determine the ‘exchange rate’ for conversion of such Foreign Liability into equity shares of the Indian company.

RBI has now in its circular dated January 16, 2014 clarified that conversion of any Foreign Liability into equity shares of an Indian company is to be done at the exchange rate prevailing on the date of the agreement whereby the parties have agreed to convert such Foreign Liability into equity shares of the Indian company.