Conversion of Loan into Equity Share Capital Under Companies Act, 2013 By Kajal Govani

Conversion of the loan into equity share capital is the most reliable mode to raise capital without immediate investments. In order to carry out smooth business, at times, debt is converted into share capital.

The Companies Act, 2013 has come up with new provisions for the conversion of loan into equity shares and the same are contained in section 62(3) of the said Act. The new provisions are effective from April 1, 2014. Current article highlight the provisions and procedure for conversion of loan into equity shares.

In order to convert loan into share capital, as per provisions of section 62(3) of the Companies Act, the company has taken loan on the terms that the loan will be converted into share capital and such option has been approved by special resolution before taking of loan then in such case subscribed capital can be increased.

It must be noted that it is at most important to pass the special resolution at the time of acceptance of the loan without passing of special resolution; loan cannot be converted into share capital.

Provisions of Companies Act, 2013 for Conversion of Loan into Equity Share Capital

  • No need to fulfill any requirements as stated in The Companies Act, 1956
  • Only passed Special Resolution in general meeting for approval of Shareholders.
Procedure of Conversion of Loan into Equity Shares

As per section 62(3) of companies act 2013 resolution, there is a procedure for conversion of loan into preference shares:

  • Approve terms of the loan by passing a special resolution before taking of loan & file special resolution in E-Form MGT 14 within 30 days.
  • Convert loan into shares by passing a resolution in Board Meeting & File E-form PAS3 for allotment of shares Companies Act 2013 within 30 days
  • Also, issue share certificate by passing Board resolution & file e-form MGT 14 within 30 days for the procedure for issue of shares by the private limited company.
As per the provisions of Companies Act, 2013 you can't take a loan from shareholder to private company or public company. However, a Director and his relatives are allowed to give a loan.

Stepwise Process of Loan Conversion to Equity

If the loan conversion of the private company into a public company, companies act 2013 gives it the provision to do so by following the below-mentioned process:
STAGE 1: Steps before Issue of Acceptance of Loan

Ø  Holding a Board Meeting

  • To pass a resolution for acceptance of the loan
  • To pass board resolution for conversion of loan into equity shares of the company
  • Issue a notice for holding extraordinary general meetings of shareholders.
Ø  Holding Extraordinary General Meeting

  • A company needs to pass a special resolution for conversion of loan into Equity share capital.
  • Filing e-form MGT-14 within 30 days of the passing of Special Resolution with ROC.
Enter into an agreement for the conversion of loan into equity

  • Company shall enter into an agreement of terms of Loan
  • This agreement should contain the terms of converting loans into the equity share capital of the company.
STAGE 2: Steps at the time of conversion Loan into share capital

Ø  Hold a Board Meeting

  • Pass board resolution for allotment of equity shares
  • Prepare a list of all those who have got an allotment.
  • Filing the E-form PAS-3 for allotment of shares within 30 days of Board Resolution has passed.
If any company accepted loan before 1st April 2014 (As per Companies Act, 1956) and wants to convert the loan into Equity shares at the present company then Company can’t convert such loan into shares according to section-62 of Companies Act, 2013 except if company passed the special resolution at the time of acceptance of loan.

This usually helps a company in increasing cash flow by decreasing liabilities. This move ensures that the company does not face a paucity of financial resources. This procedure is beneficial especially for small and medium-sized companies.

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