During project implementation, in addition to investors’ capital contributions to the project, investors also mobilize loans from many other sources. In fact, for some reasons, many projects do not want to repay the debt, so they choose to convert the loan capital into capital contribution to the project. Through today’s article, let’s learn more about this issue with Pham Consult!
1. Concept of converting loan into contributed capital?
Converting a loan into contributed capital means that instead of recovering the money owed to the Company by the Lender, the Lender will use that receivable debt to “buy” the Company’s capital contribution. At that time, the Lender will become a member-owner of the Company.
Currently, current legal regulations do not have any regulations prohibiting the conversion of loans into contributed capital as well as no specific instructions on this conversion process. In essence, converting a loan into contributed capital is a way to increase the company’s charter capital to equal the old charter capital plus the converted loan, the difference is that the money transfer has been done. completed before the Company makes a decision to increase capital.
At the same time, in case the Lender is not a current capital contributing member of the Company, this conversion will cause the Company to have new capital contributing members and the capital ratio of existing capital contributing members will be can be changed. Therefore, depending on the type of business being operated, the Company needs to have the approval/approval of the Board of Members and the Owner before proceeding with the conversion.
On the other hand, loan repayment with capital contribution is clearly stipulated in Clause 2, Article 34 of Circular 03/2016/TT-NHNN, one of the forms of debt repayment not through the loan account, foreign debt repayment. is “Repayment of debt with shares or capital contribution of the borrower in accordance with the provisions of law”. This regulation clearly confirms and creates an important legal basis for the conversion of foreign loans into contributed capital. Therefore, the Lender who is a foreign investor can completely convert the borrowed debt into capital contribution in the Company.
2. Conditions for converting foreign loans into contributed capital
• Prove the legality of the Loan Contract and the Contract appendix that the parties have signed;
• If the foreign loan is a medium or long-term loan, the Borrower must register the loan with the State Bank (“SBV”). If the loan is short-term, it must be reported to the State Bank;
• The amount of the Loan has been properly transferred to the Company’s Direct Investment Capital Account (“DICA”) or Foreign Loan Account in accordance with the provisions of law;
• After conversion, the Lender’s equity ratio must comply with the legal limit.
3. What procedures need to be followed to convert foreign loans into contributed capital?
The Company needs to carry out procedures related to investment, enterprise and foreign exchange laws to convert foreign loans into contributed capital. Things to note when converting foreign loans into Company’s contributed capital are as follows:
Firstly, for Companies receiving capital with foreign elements, it is necessary to pay attention to the investment conditions and business conditions in bilateral and multilateral international agreements that Vietnam participates in (WTO, EVFTA ,…) and specialized laws to ensure that foreign investors fully meet the conditions according to regulations on capital ownership as well as that the Company meets all conditions for business operations.
Second: the parties draw up a written agreement or contract appendix on converting this loan into contributed capital. This document must clearly state the following content: conversion time, conversion amount, plan for handling interest and principal or late payment interest, and percentage of capital that the Lender will own in the Company. After completing the conversion procedure,…
Third: the parties need to go through the Company’s internal procedures (organize meetings, issue minutes, decisions, resolutions) to approve and approve the conversion of loans into contributed capital. increase charter capital, add new members (if any), change the capital contribution ratio,…
Fourth, the parties need to carry out administrative procedures at the competent State agency to increase charter capital and record new shareholders/capital contributing members (if any):
• Step 1: Carry out procedures for approval of capital contribution/share purchase/capital contribution from foreign investors at the Department of Planning and Investment where the Company is headquartered
After receiving and reviewing the application, if the Company and the Lender meet the conditions according to the law, the Department of Planning and Investment will issue a Document on meeting the conditions for capital contribution/stock purchase. The foreign investor’s capital contribution/portion clearly states the expected charter capital after the increase, the capital contribution portion and the capital contribution ratio of the Lender.
• Step 2: Announce changes to the Company’s Business Registration Certificate with contents including changes to charter capital, capital contribution ratio, information of members/shareholders of foreign investors.
Within 10 working days from the date of completing the conversion of the loan into contributed capital and increasing charter capital, the Company must carry out this procedure at the Department of Planning and Investment where the company is headquartered (Clause 2, Article 30 Enterprise Law 2020)
• Step 3: Register to change the content of the Company’s Investment Registration Certificate (if any) including changing investment capital to implement the project, information of foreign investors (if there are additional shareholders/ new capital contributing member)
A change in investment capital that leads to a change in the content of the Investment Registration Certificate is subject to registration with the Department of Planning and Investment (Clause 2, Article 41 of the Investment Law 2020)
• Step 4: Notify the State Bank of debt repayment by shares/capital contribution
For short-term foreign loans: The Company needs to report to the State Bank on converting the loan into investment capital through traditional or electronic forms according to regulations.
For medium and long-term foreign loans: The Company needs to notify the bank providing account services in writing to repay the debt according to the change plan – converting the loan into capital contribution, without having to register. Change loan with SBV.
Above are some regulations on procedures and issues to note related to converting loans into contributed capital, but in reality state agencies may have different requirements depending on each province. become different. In addition, the activity of converting loans into contributed capital is also governed by many legal regulations in specialized fields. Therefore, during the process of negotiating and implementing conversion procedures, businesses should seek support and advice from consulting units knowledgeable in this field to receive support and minimize risks.