Conversion of Loan into Share Capital

Conversion of loan into Share Capital as per the Provisions of CA, 2013

As per the provisions of Companies Act, 2013, Companies have option to convert its Loan into Share Capital Under Section 62(3) of CA, 2013.

Extract of Section 62(3) of Companies Act, 2013 :

Company has to follow the detailed procedure to convert the loan into Share Capital as discussed here below, but before conversion process, there is a specific condition needs to be complied with at the time of taking of  loan.

Mandatory Condition:

Loan can be converted only if Special Resolution is passed at the time of taking of loan for the terms of conversion of loan. Even in Loan Agreement, Terms relating to Conversion must be mentioned therein.

• Firstly Board is required to pass Resolution for the conversion of loan into Share Capital.
• Board will approve notice of EGM for members’ approval for conversion.
• At EGM, Special Resolution is required to be passed.
• At the last MGT-14 is to be filed with the Ministry within 30 days of passing of Special Resolution.

As per Section 117(3) of CA, 2013, MGT-14 is to be filed for Every Special Resolution passed by every Company. Consequent upon which, At the time of taking of loan, SR is required to be passed, therefore, Filing of MGT-14 is a mandatory compliance.

To conduct the Board Meeting and Extra-Ordinary General Meeting, SS-1 and SS-2 is to be complied simultaneously.

Process of Conversion of loan :

The next step is to incorporate the process of conversion as and when decided by the Board or as mentioned in the Loan Agreement:

• Board has to pass a resolution for the allotment of Shares and approve the list of allottees.
• PAS-3 i.e. form for allotment is required to be filed with the ministry within 30 days of passing of Board Resolution.
• Then after approval by Ministry, Share Certificates are to be issued within 2 months from the date of allotment.

Query : When can Company not convert loan into Share Capital ?

Solution : Company Can convert its loan into Share Capital only when it has taken Members’ approval by passing Special Resolution at the time of taking of loan. Otherwise, it can’t convert its loan into Capital.