Many businesses seek to convert their foreign loans into capital contributions as a strategy to strengthen their financial position. This practice raises important questions about legal compliance and financial regulations. Before undertaking such a conversion, companies must understand both the requirements and implications of transforming debt into equity capital.
1. The legal basis for converting foreign loans into capital contributions
According to Clause 2, Article 34 of Circular 12/2022/TT-NHNN:
“2. Cases in which loan repayment is not made through a foreign loan borrowing and repayment account:
a/ Loan repayment in the form of providing goods and services to the lender;
b/ Loan repayment under an agreement between the lender and the borrower on conversion of the outstanding balance of the loan into shares or contributed capital amounts at the borrower;
c/ Loan repayment under an agreement between the lender and the borrower on swap of the outstanding balance of the loan into shares or contributed capital amounts of the borrower;
d/ Repayment of a medium- or long-term foreign loan through clearing against receivables directly with the lender;
dd/ Loan repayment through the borrower’s overseas account (in case the borrower is allowed to open an overseas account to take out the foreign loan).”
Based on Points b and c of the above article, it can be concluded that foreign loans can be converted into capital contributions for businesses if both the lender and borrower have an agreement to convert that debt into capital contribution for the business. Converting a loan into capital contribution is regarded as an investment, resulting in an increase in the enterprise’s charter capital. This happens because the lender becomes a shareholder or member, thereby raising their capital contribution ratio in the company.
Another scenario involves the company acquiring new shareholders or members. This takes place when the lender, who was not previously a shareholder or member, attains that status through the loan-to-capital conversion. Depending on the company’s current business model, additional steps may be necessary to update its registration with the relevant authorities.
Under existing investment and corporate laws, there are no legal barriers preventing a company from increasing its capital by converting debt from a loan agreement into equity. However, in specific cases, businesses should take into account the permitted business sectors and the foreign ownership limits applicable to investors in Vietnam.
2. Which loans need to be registered with the State Bank?
According to Article 11 of Circular 12/2022/TT-NHNN
“1. Medium- and long-term foreign loans.
2. Short-term loans eligible for extension of the principal repayment period, with the total term of the loans longer than 1 year.
3. Short-term loans not accompanied by extension agreements but having outstanding loan principals (including also loan interests aggregated in loan principals) on the date which is full 1 year from the first drawdown date, unless the borrower completes the payment of the above outstanding loan principals within 30 working days from the date which is full 1 year from the first drawdown date.”
In summary, foreign loans that are medium- or long-term, short-term loans with extended repayment periods exceeding one year, and short-term loans with outstanding principals beyond one year without an extension agreement must be registered with the State Bank.
3. Procedure for Converting Loans into Capital Contributions for Enterprises
Currently, there are no specific legal provisions outlining the process of converting loans into capital contributions for enterprises. This is because, in essence, such a conversion is considered an increase in the enterprise’s charter capital.
Therefore, the method for converting loans into capital contributions follows the same procedures as increasing an enterprise’s capital, as outlined below:
Procedures with State Authorities
| Step | Procedure | Responsible Authority |
|---|---|---|
| Step 1 | Apply for approval of capital contribution/share purchase by foreign investors | Department of Planning and Investment where the company is headquartered |
| Step 2 | Notify changes in business registration details (charter capital, ownership structure, member/shareholder information) | Business Registration Office |
| Step 3 | Notify changes in the Investment Registration Certificate (if applicable), including adjustments in investment capital and investor information | Investment Registration Authority |
| Step 4 | Notify the State Bank about debt repayment through share/capital contribution | State Bank of Vietnam |
By following these steps, enterprises can legally and effectively convert loans into capital contributions.
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