The Loan Conversion To Equity Agreement is a crucial instrument in corporate finance and restructuring under Indian law, commonly utilized in scenarios where companies seek to strengthen their balance sheet by reducing debt obligations or when lenders aim to take an equity position in promising ventures. This document becomes particularly relevant in startup funding rounds, debt restructuring situations, or strategic investments where the initial debt financing was intended to convert to equity upon reaching certain milestones or triggers. The agreement must comply with Indian regulatory requirements, including the Companies Act, 2013, SEBI regulations (for listed companies), and RBI guidelines (particularly for foreign lenders). It typically includes detailed provisions on conversion mechanics, valuation methodologies, regulatory compliance requirements, and post-conversion rights and obligations of the parties involved.
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1. Parties: Identification of the Lender and the Borrower company, including their complete legal names, registration details, and addresses
2. Background: Recitals detailing the existing loan agreement, its key terms, and the parties' intention to convert the loan to equity
3. Definitions: Definitions of key terms used throughout the agreement, including Conversion Price, Conversion Date, Conversion Shares, etc.
4. Loan Details: Summary of the existing loan amount, interest accrued, and any other amounts to be converted
5. Conversion Terms: Detailed terms of the conversion, including conversion ratio/price, timing, and mechanism
6. Conversion Process: Step-by-step process for implementing the conversion, including corporate actions required
7. Representations and Warranties: Statements of fact and assurances from both parties regarding their capacity, authority, and compliance
8. Conditions Precedent: Prerequisites that must be satisfied before the conversion can take place
9. Post-Conversion Rights: Rights of the Lender as a shareholder following conversion, including any special rights
10. Regulatory Compliance: Obligations of both parties to comply with applicable laws and regulations
11. Costs and Taxes: Allocation of expenses and tax liabilities related to the conversion
12. Governing Law and Jurisdiction: Specification of applicable law and courts having jurisdiction
13. Notices: Process and contact details for formal communications between parties
14. General Provisions: Standard boilerplate clauses including severability, entire agreement, amendments, etc.
1. Tag-Along Rights: Include when the converting lender needs protection in case of future sale by existing shareholders
2. Board Nomination Rights: Include when the converting lender is to receive board representation rights
3. Anti-Dilution Protection: Include when the converting lender requires protection against future dilution
4. Information Rights: Include when specific information access rights are needed post-conversion
5. Put Option: Include when the converting lender requires an exit mechanism
6. Foreign Investment Compliance: Include when the lender is a foreign entity
7. Drag-Along Rights: Include when majority shareholders need the ability to force minority shareholders to join in a sale
8. Non-Compete and Non-Solicit: Include when restrictions on business activities are required post-conversion
1. Original Loan Agreement: Copy or summary of the original loan agreement being converted
2. Conversion Calculation: Detailed calculation of the conversion ratio/price and resulting number of shares
3. Form of Board Resolution: Template of corporate resolutions required to implement the conversion
4. Shareholder Resolution: Draft of special resolution for shareholder approval of the conversion
5. New Share Certificate: Template of share certificate to be issued post-conversion
6. Amended Articles of Association: If required, amendments to company's articles to accommodate new rights
7. Regulatory Filings: Templates of required regulatory forms and filings
8. Completion Checklist: List of actions and documents required to complete the conversion
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