In the course of implementing investment projects, many investors need to mobilize capital from abroad through foreign loans. Due to operational needs, investors may want to convert borrowed capital into contributed capital of the business. When a business in Vietnam borrows a loan from an overseas company, they often choose the option to convert the loan into contributed capital. Here are some notes that describe the major regulations of this option:
1. Legal basis for turning an overseas debt into a contributed capital
According to existing investment laws, foreign investors have the ability to form an economic organization (a subsidiary in Vietnam), and the parent business can provide additional capital to this subsidiary.
Under current Enterprise rules, the parent firm, as the owner of a single-member Limited Liability Company (LLC), can increase the charter capital of its subsidiary by contributing additional capital. The parent company may decide on the type and amount of charter capital increase.
According to Clause 2, Article 34 of Circular 02/2022/TT-NHNN, which provides guidance on foreign exchange management for foreign borrowing and repayment of enterprises, foreign investors can fully convert borrowed debts into capital contributions in enterprises.
Currently, Vietnamese laws do not comprehensively restrict the process of transforming a loan into contributed capital, nor do they provide specific instructions for this conversion. Essentially, converting a loan into contributed capital increases a company’s charter capital to the sum of the old charter capital and the converted loan. However, the difference is that the money transfer has already taken place before the company decides to raise capital.
2. The procedure of implementation when converting loans into contributed capital
When progressing between a company and investors, the following notices should be taken:
First, the parties must make a written agreement or contract on converting debt into contributed capital. These documents should clearly state the time and amount of conversion, handling of interest, and principal or interest on late payment penalties. They should also state the percentage of capital that the capital investor will own in the enterprise after the conversion is complete.
Second, if the foreign loan is for a medium or long period of time, the business must register it with the State Bank (“SBV”). For short-term loans, businesses need to report to the SBV.
Third, the parties must approve the internal procedures of the enterprise for approving and changing the holding ratio of the contributed capital.
Finally, the foreign company’s capital contribution ratio must comply with the relevant legislation.
3. Steps for the conversion into contributed capital
The parties involved need to complete certain procedures with the competent agency to record the conversion. These procedures involve the following steps:
Step 1: Register the transfer of the foreign loan to the SBV.
The subsidiary is required by law to submit the application dossier for Step 1 within 30 days of signing an agreement to convert the loan into contributed capital with the parent company. The business can only proceed to Step 2 after completing Step 1 and receiving clearance from the SBV.
Step 2: Notify the modification in the substance of the company’s business registration, including changes in charter capital, capital contribution ratio, and member/shareholder information.
When the charter capital changes, the business must follow the procedure for notifying changes in the contents of the firm’s registration according to Enterprises legislation. The company must inform the business registration agency within 10 days of implementing the change.
Step 3: Notify the change of contents of the company’s Investment Registration Certificate (if applicable), including changes in investment capital for project implementation and investor information.
If there are changes in investment capital, specifically an increase in the contributed capital of the subsidiary, the subsidiary must conduct procedures for amending the investment project with the investment registration management agency for a new investment registration certificate.
Step 4: Notify the debt payment by shares/contribution to the State Bank.
For short-term foreign loans, the company needs to report to the SBV on the conversion of the loan into investment capital through traditional or electronic forms as prescribed.
For medium and long-term foreign loans, the company needs to notify the account service provider bank in writing to repay the loan according to the change plan – convert the loan into capital contribution – without having to register the change of loans with the SBV.
4. Conclusion
The conversion of a loan into contributed capital of a foreign invested firm is supervised by at least two agencies: the SBV and the corporate/investment management agency. However, the methods used by these agencies are inconsistent, and the documentation supplied is incoherent.
These restrictions on the order and methods, as well as the difficulties to be mindful of, highlight the challenges of converting loans into contributed capital. Moreover, businesses must navigate a plethora of regulatory rules in specialized industries when conducting conversion procedures. To mitigate risks, it is advisable for businesses to seek assistance and guidance from legal firms skilled in this subject when negotiating and conducting conversion procedures.
HMLF is a law firm that provides legal services to enterprises, especially foreign direct investment companies that want to invest in Vietnam. Our team of experts and enthusiastic staff strives to provide optimal solutions that bring customer satisfaction when experiencing our legal services.
Harley Miller Law Firm “HMLF”
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