The Loan Conversion Agreement is a crucial document in Indian corporate finance, typically employed when a lender agrees to convert their debt into equity ownership in the borrower company. This arrangement is common in startup funding, corporate restructuring, and financial distress scenarios. The agreement must comply with Indian corporate law, particularly the Companies Act, 2013, SEBI regulations, and foreign exchange laws if international parties are involved. The document outlines the conversion mechanism, valuation methodology, and resulting shareholding structure, while addressing corporate governance requirements, shareholder approvals, and regulatory filings. It's particularly relevant when companies seek to improve their debt-to-equity ratio, preserve cash flow, or when lenders see greater value in equity participation than debt repayment.
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1. Parties: Identification of the Lender and Borrower, including their registered addresses and company registration details
2. Background: Recitals describing the existing loan agreement, outstanding amount, and parties' intention to convert the loan into equity
3. Definitions and Interpretation: Definitions of key terms and interpretation rules for the agreement
4. Loan Conversion: Core terms of conversion including conversion price, timing, and mechanism
5. Conversion Procedure: Step-by-step process for implementing the conversion, including documentation requirements
6. Conditions Precedent: Conditions that must be satisfied before conversion can occur
7. Representations and Warranties: Statements of fact and assurances from both parties
8. Corporate Actions: Required corporate approvals and actions to effect the conversion
9. Covenants: Ongoing obligations of the parties before and after conversion
10. Termination: Circumstances under which the agreement can be terminated
11. Governing Law and Jurisdiction: Specification of Indian law as governing law and jurisdiction for disputes
12. Notices: Process for formal communications between parties
13. Miscellaneous: Standard boilerplate provisions including amendments, waivers, and severability
1. Tax Provisions: Specific provisions dealing with tax implications of the conversion, included when tax considerations are material
2. Foreign Exchange Compliance: Required when one party is non-Indian or foreign exchange regulations apply
3. Post-Conversion Rights: Specific rights attached to the shares post-conversion, included when special rights are negotiated
4. Tag-Along Rights: Included when minority shareholder protection is negotiated as part of the conversion
5. Board Nomination Rights: Included when the lender negotiates board representation post-conversion
6. Lock-in Period: Restrictions on transfer of converted shares, included when required by parties or regulations
1. Existing Loan Details: Schedule containing details of the original loan agreement and outstanding amounts
2. Conversion Formula: Detailed calculation method for converting loan amount to number of shares
3. Form of Conversion Notice: Template notice to be issued to trigger the conversion
4. Corporate Authorizations: List of required corporate approvals and resolutions
5. New Shareholding Structure: Post-conversion shareholding pattern of the company
6. Share Certificate Template: Format of share certificates to be issued post-conversion
7. Compliance Checklist: List of regulatory compliances required for the conversion
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