Loan given by a indian company to iits 100 % foreign subsidi

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

28 May 2013 Dear Members,

Pleas answer the below query that whether an Indian company who has given the loan to its 100 % foreign subsidiary mining company a year ago can convert the loan to share capital with the approval of RBI.
What are the formalities in relating to this since the subsidiary company cannot pay off the interest on loan since the revenue has not started and will not start in the next 2 years.

Thanks

Querist : Anonymous

Querist : Anonymous (Querist)

04 June 2013 Any good expert please reply on this ,, i request P B Srivatshan to reply on the same

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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03 August 2024 Yes, an Indian company can convert a loan given to its 100% foreign subsidiary into equity, but this requires compliance with various regulations and formalities under the Foreign Exchange Management Act (FEMA), administered by the Reserve Bank of India (RBI). Here’s a detailed process and considerations:

### **1. Conversion of Loan to Equity:**

**Approval Requirement:**
- **RBI Approval:** The conversion of a loan into equity requires approval from the Reserve Bank of India (RBI). The Indian company must obtain approval under FEMA regulations for such conversion.

### **2. Steps and Formalities:**

1. **Filing with RBI:**
- **Form FC-GPR:** The Indian company must file Form FC-GPR (Foreign Contribution – General Provisions Return) with the RBI. This form is used for reporting the issue of shares to a foreign entity. Ensure that the conversion complies with the pricing guidelines specified by the RBI.
- **Advance Approval:** Obtain prior approval from the RBI before the conversion process is completed. This is typically done through the Foreign Exchange Department of the RBI.

2. **Pricing Guidelines:**
- **Valuation:** Ensure that the valuation of shares to be issued in lieu of the loan adheres to the pricing guidelines set by the RBI. The conversion should be done at a fair market value determined by a registered valuer or as per the valuation norms provided by RBI.

3. **Documentation:**
- **Loan Agreement:** Provide details of the existing loan agreement and its terms.
- **Board Resolutions:** Obtain board resolutions from both the Indian company and the foreign subsidiary approving the conversion of the loan into equity.
- **Share Subscription Agreement:** Draft and sign a share subscription agreement outlining the terms of conversion and the number of shares to be issued.

4. **Regulatory Compliance:**
- **Filing with Registrar of Companies (RoC):** After the RBI's approval, file the necessary documents with the Registrar of Companies (RoC) in India to update the records regarding the issuance of shares.
- **Share Certificate Issuance:** Issue share certificates to the Indian company in accordance with the conversion agreement.

5. **Report to RBI:**
- **Form FC-GPR Filing:** Once the shares are issued, file the FC-GPR form with the RBI to report the issue of shares. This should be done within 30 days of issuance.

6. **Tax Considerations:**
- **Tax Implications:** Consult with a tax advisor to understand any tax implications related to the conversion. There may be tax consequences related to the conversion of debt to equity, including any impact on capital gains.

### **3. Compliance Check:**

1. **Foreign Investment Regulations:**
- Ensure that the conversion adheres to the foreign investment regulations and the Foreign Direct Investment (FDI) policy in force.

2. **Corporate Governance:**
- Comply with corporate governance requirements, including the approval from the board of directors and any necessary disclosures to shareholders.

### **4. Key Points to Note:**

- **Legal Framework:** Ensure compliance with FEMA regulations, the Companies Act, and other applicable laws.
- **Approval Process:** The RBI’s approval is crucial, and the process involves detailed documentation and adherence to regulatory guidelines.

By following the above steps and ensuring compliance with regulatory requirements, the Indian company can successfully convert the loan into equity with the approval of the RBI. Consulting with legal and financial advisors throughout this process is advisable to ensure proper adherence to all legal and regulatory requirements.

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