Convertible loans: A new tool for investments in Russia

Evgenya Soldatkina

e.soldatkina@bellerage.com

Bellerage

www.bellerage.com

A law on convertible loans was adopted in June 2021. It facilitates investment processes in Russia, considering not only the interests of the recipient but also of the investor.

With the new regulation, an investor can contribute funds to a project at an early stage in the form of a loan while deciding later on whether to get it returned with interests or convert it into company shares. How it can be converted:

For a JSC

- Placement of additional shares by closed subscription

For a LLC

1. Making an additional contribution as participant-investor

2. Admission as a new participant to the company, unless prohibited by the company's charter

While this mechanism is quite often used internationally, until now in Russia, companies that needed financing at the initial stage had to: 

• either look for workarounds by attracting foreign investment (to rely on foreign legislation)
• or use existing mechanisms, taking more time to issue shares, restructure the company or change the charter.

The new law makes it possible to speed up investment processes within the framework of the Russian legislation.

To conclude a convertible loan agreement, unanimous approval by the general meeting of shareholders or participants of the company is required. Already at this stage, the borrower must decide about a capital increase, thereby reserving a place for the investor. When signing a contract for a convertible loan, you need to consider the following:

• If the borrower is an LLC, the contract must be notarized
• The contract must specify the terms or conditions under which the investor has the right to demand the conversion of the loan
• For a JSC it is necessary to set the price of placement of additional shares. For an LLC, the amount of increase in the authorized capital
• The investor can submit a request for conversion within 3 months from the date of the loan repayment period or fulfillment of the conditions for conversion.

Non-credit financial and credit organizations cannot attract a convertible loan.

A convertible loan is advantageous because it does not oblige you to immediately acquire a stake in a startup. Depending on the economic indicators, the business model and the current state of the company, the investor can choose ways of further interaction or return the invested funds.

For more information on financing a company in Russia, click here. 

Click here to download Bellerage’s Doing Business in Russia Guide.

XLNC ARCHIVE| 04 February 2022