Conversion of ECB in Equity

Hi Gargi,

Regarding your query on conversion of ECB (External Commercial Borrowing) into equity under Section 62(3) of the Companies Act, 2013:

Key points to note:

• Section 62(3) says:
  "Where a company issues shares to the persons other than existing shareholders on conversion of debentures or loans or any other securities, the terms of issue including the terms of conversion must be mentioned in the agreement at the time of issuing such debentures/loan/securities."

• So, ideally, the agreement at the time of raising the ECB should contain the conversion clause.

Your scenario:

• ECB agreement does not currently have any clause about conversion to equity.

• You want to amend the ECB agreement now to add the conversion clause and then convert ECB into equity.

Is this permissible?

• The law is strict on disclosure upfront, but practically, companies do amend agreements with lender consent.

• However, Section 62(3) is quite explicit on mentioning conversion terms in the original agreement.

• Amending the agreement now to add the clause may not strictly comply with the original requirement, but it could be argued that the parties have mutually agreed to conversion.

Recommendations:

1. Obtain explicit consent and formal amendment of ECB agreement with lender (Parent company).

2. Pass board resolution and shareholders resolution approving the amendment and conversion.

3. Comply with RBI / FEMA regulations relating to ECB conversion into equity.

4. File necessary forms with MCA (like PAS-3 for allotment) and maintain proper records.

5. Consider seeking legal opinion to support the position that the amendment satisfies Section 62(3).

Summary:

• Strictly speaking, Section 62(3) expects conversion terms to be in the original agreement.

• Amending the agreement now can be a practical solution but might require careful documentation and approvals.

• Ensure compliance with FEMA and RBI guidelines for ECB to equity conversion.

• Take professional legal advice before proceeding.