Procedures for converting loans into contributed capital of foreign-invested enterprises

Converting the loan into contributed capital means that the lender, instead of recovering the debt that has lent the company in cash, will take that receivable debt to "buy" the company's shares/contributed capital. At that time, the lender will become the owner/shareholder/member holding those shares/contributed capital of the company.

Currently, the applicable law on enterprises and investment does not have any provisions prohibiting the conversion of loans into charter capital or investment capital nor does there be any specific guidance on this conversion process.

It can be understood that the conversion of the loan into contributed capital is a way to increase the company's charter capital to equal to the old charter capital plus the converted loan, the difference is that the transfer of money has been completed before the company makes a decision to increase capital.

In addition, pursuant to Point b, Clause 2, Article 34 of Circular 12/2022/TT-NHNN, there are regulations on the case of debt repayment not through a loan account, repayment of foreign debts through the form: "b) Debt repayment through the agreement between the lender and the borrower to convert the outstanding debt into shares or contributed capital in the borrower;"

From the above legal provisions, it can be understood that the parties can completely agree to convert the loan into contributed capital, the law does not prohibit this. This can be considered as a form of conversion agreement, specifically: The conversion agreement is a civil agreement, so the parties have the right to decide and take responsibility for themselves.

However, it should be noted that the conversion will lead to the formation of shareholders and capital contributors, so you need to complete certain works and procedures, including:

• The parties need to make a written agreement or contract on the conversion of debt into contributed capital. These documents need to specify the time of conversion, the amount of conversion, the handling of interest and principal or late payment penalty interest, etc., the ratio of capital that the investor will own in the enterprise after completing the conversion procedures.
• The parties need to approve the internal procedures of the enterprise to ratify and approve the supplementation of the charter capital of the enterprise, investment capital, total investment capital of the investment project, etc.
• The parties need to carry out procedures at competent authorities to update the increase in the charter capital of the enterprise, investment capital, total investment capital of the investment project, etc. Include the following steps:

Step 1: Carry out the procedures for applying for approval for capital contribution/purchase of shares/capital contributions of foreign investors at the Department of Planning and Investment where the Company is headquartered.

Note: If the lender is a Vietnamese individual or organization, there is no need to take this step.

Step 2: Notification of changes in the Company's business registration contents, including changes in charter capital, capital contribution ratio, information of members/shareholders.

Step 3: Notify the change in the content of the Company's Investment Registration Certificate (if any), including changes in the investment capital for project implementation, total investment capital or information of the investor. Enterprises and investors should pay more attention to the investment conditions and business investment conditions specified in the Law on Investment to ensure that foreign investors fully meet the conditions as prescribed.

Step 4: Notify the conversion of debts into contributed capital or repayment of debts with shares/contributed capital to the State Bank of Vietnam as prescribed.

The conversion of loans into contributed capital of enterprises is a right permitted by law.

However, with the traits of each different transaction, there may be different contents, so the method of converting debt into capital may be subject to many different domestic and foreign legal regulations. When converting loans into contributed capital, enterprises should consult lawyers, accountants, and banks to ensure that transactions are carried out in accordance with the law.