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Mandatory convertible debentures to foreign citizen

Swati Sharma (TRAINEE) (328 Points)

08 March 2018

Dear Members,

I have below questions pertaining to issue of fully convertible debenture to Foreign Citizen..

1.Is valuation required for issue of mandatory convertible debentures to Foreign Citizen?

2.In Debenture subscritption agreement, can we mentioned that shares will be allotted at a price valued after a fixed say 3 years tenure. or we have to specify the price in agreement itself??

3.After receipt of subscripttion money, ADR needs to file electronically, do we need to file FIRC and KYC of Debenture holder also??

Your advice will be really helpful..

Thanks

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6 Replies

Monika Gurung (68 Points)
Replied 09 March 2018

yes valuation need to be done...fema rules need to be complied

J. Manivannan (Advocate & IP) (242 Points)
Replied 09 March 2018

The valuation is must. The extract of the FEMA master circular is reproduced as below for your ready reference: In case of convertible capital instruments, the price/ conversion formula of the instrument is required to be determined upfront at the time of issue of the instrument. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations.

The Valuation details must be clearly mentioned in Resolution and Agreement wherever required.

Since, CCDs treated as Capital Instruments under FEMA; you have to file Advance Reporting within 30 days from the date of receipt of the application money and FC-GPR within 30days from the date of allotment of CCDs.

J. Manivannan (Advocate & IP) (242 Points)
Replied 09 March 2018

Pricing Method: When CCDS issued to Foreigners

Each CCDS can be converted into such number of equity shares at the higher of as follows:

a) Fair Market Value determined as on the date of the conversion or

b) Fair Market Value prevailing as on the date of issue of CCDS

c) Face value of the share;

Swati Sharma (TRAINEE) (328 Points)
Replied 09 March 2018

But valuation will be of what?? Debentures doesnot require valuation.. Hence I think valuation will be to determined current fair market value of shares..so that at time of conversion the share price should not be less than FMV at time of debenture issue.

Also can you please suggest what is the sectoral cap for FDI of a Software Company?