Conversion of Loan into Equity Share Capital as per provision of Companies Act, 2013
Conversion of loan into equity share capital is 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 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 1st April, 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.
As per section 62(3) of companies act 2013 resolution, there is a procedure for conversion of loan into preference shares:
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.
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:
If any company accepted loan before 1st April 2014 (As per Companies Act, 1956) and wants to convert loan into Equity shares at 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.