Companies Unsecured Loan Into Equity [CS Hera Siddiqui]



If a company has taken any unsecured loan from its directors and wants to convert such unsecured loan into equity at some future period of time, then it has to ensure to enter into debt conversion agreement with such directors at the time of accepting such loan and also to pass a special resolution.

Further, the Company shall get any declaration from such director/relative of a director pursuant to Rule 2(c) (viii) of the Companies (Acceptance of Deposits) Rules, 2014 stating that such amount is not being given out of borrowed funds and the same is disclosed in the board report.

The procedure for conversion of unsecured loan into equity:

Compliance at the time of taking a loan

Hold a Board Meeting for accepting a loan with an option to convert it to equity in future.

To fix time, date and place of Extra Ordinary General Meeting.

To approve the draft notice along with Explanatory Statement of Extra Ordinary General Meeting.  

Hold Extra Ordinary General Meeting and pass a special resolution for accepting the loan with an option to convert it to equity in future and giving authority to enter into loan conversion agreement.

Execute a loan conversion agreement between the company and lenders.

File form MGT-14 within 30 days of passing the special resolution.

Compliance at the time of converting the loan to equity

Hold a Board Meeting and pass a resolution for allotment of shares by converting the loan to equity.

Finalize list of allotters to whom the allotment is to be made pursuant to such conversion.

File Form MGT-14 for filing board resolution.

File Return of Allotment in Form PAS-3 within 30 days of passing board resolution.

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