There is no specific procedure for capital increase by way of setting off foreign loan repayment obligations. Instead, it shall follow the general procedure for a capital increase of a Company plus fulfill the obligation to register foreign loan changes with the State Bank of…
About this article
This article provides general information and does not replace legal advice for a specific case.
Vietnamese law has no specific procedure for increasing capital by setting off a foreign loan repayment obligation. Instead, the company follows the general procedure for a capital increase under the Law on Enterprises and also registers the change to the foreign loan with the State Bank of Vietnam ("SBV").
To convert a loan into contributed capital or shares, the parties take the following steps.
Step 1. Obtain approval from the Department of Planning and Investment ("DPI") for the capital contribution in Vietnam
A borrower can receive a loan from any lender. For a loan conversion, there are two cases:
Case 1. The lender is also an investor in the company, and converting the loan into capital does not change the borrower's ownership ratios
If a capital increase (from any source) does not increase the foreign ownership ratio, the company does not need approval for the capital contribution under the Law on Investment 2020 ("LOI 2020").
The SBV's regulations do not specifically require the borrower to obtain DPI approval when it converts a loan.
In practice, however, the SBV requires the approval for the capital contribution to the Vietnamese company as an essential document for the loan conversion.
Case 2. Converting the loan into capital changes the ownership ratio of each investor or member of the borrower
If an increase in foreign capital raises the foreign ownership ratio, the investor must obtain DPI approval for the capital contribution to the Vietnamese company.
The borrower and the lender prepare an application under LOI 2020 and obtain this approval before they apply to the SBV to change the purpose of the loan.
Step 2. Register the change to the foreign loan with the SBV if the loan is medium- or long-term
If any item in the SBV's loan registration confirmation changes, the borrower must register the change with the SBV, except in the following cases (Circular No. 03/2016/TT-NHNN guiding foreign exchange management for foreign borrowing and repayment by enterprises, "Circular 03/2016"):
- Case 1: the borrower only needs to notify the SBV of a change in the borrower's address, the lender's information or the trading name of the account service bank (Article 15.3 of Circular 03/2016); or
- Case 2: the borrower only needs to notify the bank that holds its drawdown and repayment account if the actual drawdown, repayment or payment of charges differs by no more than 10 days from the plan that the SBV previously confirmed (Article 15.2 of Circular 03/2016).
Converting a loan into equity (i) does not involve the changes in Case 1 but (ii) may change the principal repayment plan under Case 2. There are therefore two scenarios:
- if the repayment plan changes by no more than 10 days from the plan in the SBV's loan registration confirmation, the company does not need to register the change, but it must notify the bank that holds its drawdown and repayment account;
- otherwise, the company must register the change with the SBV.
Under Article 16.2.a of Circular 03/2016, the borrower must submit the application to register the loan change to the SBV within 30 days after signing the agreement on the change.
Step 3. Amend the Enterprise Registration Certificate with the Business Registration Office (BRO) of the DPI
Converting the loan into an equal amount of contributed capital changes the company's charter capital, the lender's capital contribution (where the lender is a member or shareholder) and the capital contribution ratios.
The company must register the increase in charter capital and the changes in capital contributions and contribution ratios with the business registration authority within 10 days of the change, under the Law on Enterprises 2020 ("LOE 2020").
The lender should note two points:
- The additional contributed capital (that is, the converted amount) is allocated to each member in proportion to its share of the borrower's charter capital. The lender should therefore agree with the other members that they will decline to subscribe for the increased capital. The minutes and resolutions of the Members' Council should record this, so that the lender can subscribe for the entire capital increase.
- Contributed assets other than Vietnamese dong, freely convertible foreign currency or gold must be valued. The Members' Council and the contributor may agree the value between them, or a valuation organisation may value the assets.
Step 4. Amend the Investment Registration Certificate ("IRC") with the DPI
The investor must apply to amend the IRC if a change to the investment project changes the content of the IRC.
Here, if the company decides to use the increased capital as additional capital for the project, both the capital contribution and the total investment stated in the IRC change. The company must therefore register the changes to the IRC.