Conversion of ECB to Equity Shares
Understanding the Process of Converting External Commercial Borrowings (ECB) into Equity Shares
Table of Content
External Commercial Borrowings (ECBs) are loans in foreign currency obtained by Indian corporations from non-resident entities. As they give access to more affordable money from international markets, ECBs are an increasingly popular form of funding for Indian businesses. However, the Reserve Bank of India (RBI) additionally lays down some limitations and rules on ECBs. The conversion of ECBs into equity shares of the borrowing business is one of the important regulations the RBI recently imposed on ECBs. For businesses looking to strengthen their balance sheets, improve their capital structure, and decrease debt, converting ECB into equity shares can be a beneficial instrument. In this article, we will explore the process of converting ECB into equity shares and their impact on companies.
What are External Commercial Borrowings (ECB)?
The process of converting External Commercial Borrowings (ECBs) into equity shares of a corporation is referred to as “ECB into equity shares.” Through this procedure, a non-resident firm that has made an ECB loan to an Indian company may convert the remaining balance into equity shares of the business. By doing this, the company makes the lender a shareholder and pays the lender additional shares in exchange for the outstanding loan.
Process of Conversion of ECB into Equity Shares
The process of converting ECB into equity shares is a multi-step procedure that includes multiple stakeholders and regulatory bodies. The steps that typically make up the process are as follows:
Step 1: Approval from the Reserve Bank of India (RBI): Getting the RBI’s consent is the first step in the conversion of ECBs into equity shares. Companies must follow specific regulations and guidelines established by the RBI when converting their ECBs into equity shares.
Step 2: Board Approval: The next step is to obtain approval from the Board of Directors of the company. The board must approve the terms and conditions of the conversion, including the conversion price, the number of shares to be issued, and the terms of the issue.
Step 3: Shareholder’s Approval: The company also needs the shareholders’ consent to convert ECBs into equity shares. The conversion’s terms and conditions, including the conversion price and the number of shares to be issued, must be approved by the shareholders.
Step 4: Conversion of ECBs into Equity Shares: Once the approvals are obtained, the company can proceed with the conversion of ECBs into equity shares. The company must issue the equity shares to the non-resident lender, and the lender must accept the shares.
Impact of the Conversion of ECB into Equity Shares
The conversion of ECB into equity shares can have several significant impacts on companies. A few of the most noticeable effects include:
Improved Capital Structure: By lowering their debt loads and raising their equity bases, organizations that convert ECB into Equity Shares can strengthen their capital structures. Companies’ balance sheets can be strengthened, and credit ratings can rise as a result.
Reduced Interest Costs: Companies can also lower their interest costs by converting ECBs into equity shares. Unlike ECBs, which often have hefty interest costs, equity shares are interest-free.
Dilution of Equity: As additional shares are issued to the non-resident lender as a result of the conversion of ECB into equity shares, there may be a dilution of equity. The earnings per share and return on equity for current owners may decline as a result.
Impact on Foreign Ownership: The conversion of ECBs into equity shares may affect the company’s foreign ownership. The non-resident lender who receives the equity shares also becomes a shareholder of the business, which may result in a rise in the proportion of foreign investors in the enterprise.
The conversion of ECB into equity shares can be a useful tool for companies to improve their capital structure, reduce debt levels, and strengthen their balance sheets. However, the process of conversion is subject to various regulatory requirements and guidelines by the Reserve Bank of India. Companies must obtain approval from the RBI, Board of Directors, and shareholders before proceeding with the conversion.
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