Introduction.
Sub-section (1) of Section 62 of Companies act, 2013 [‘the Act’] provides for further issue of share capital and also prescribes procedure for the same. The procedure includes requirements relating to sending of notice for fund raising to shareholders and adhering to timelines etc. Sub-section 3 of section 62 provides an exemption from this lengthy process in a specific situation. In this article we shall try to understand in detail about this exemption and the condition to be fulfilled for availing this exemption. We shall also try to figure out the consequences of availing this exemption without fulfilling the required condition.
Situation giving exemption from sec 62(1) & pre-condition thereof.
Sub-section (3) of section 62 states that, no requirement prescribed in sec 62 shall apply for increasing the share capital if it is being increased due to conversion of convertible debenture/loan into equity. That means, process stated under sub-section (1) of section 62 need not be followed at the time of conversion of convertible securities or conversion of loan into equity.
However, there is one pre-condition applicable for availing this exemption. 1st proviso to sub-section (3) of section 62 states that, the exemption from the provisions of sec 62 (viz. shareholders’ approval) will be applicable only if the terms of issue of such debentures or loan containing such an option (viz. conversion of debenture/loan into equity) was approved by shareholders through a special resolution before issue of such debentures or raising of loan.
Registrar of Companies [‘ROC’] adjudication order
In August 2024 ROC Jaipur passed an adjudication order for the non-compliance of sub-section (3) of section 62 of the Act. In this case, the company had taken convertible loan from its directors and passed the required special resolution just before the conversion of loan amount into equity. The ROC Jaipur in this case imposed a penalty on the company and its officers in default for late passing of special resolution.
Correct consequence of late passing of special resolution.
As discussed above, the exemption provided in sub-section 3 will be applicable only if the special resolution by shareholders is passed before issue of debentures or raising of loan. If such resolution is not passed before issue of debentures or raising of loan, then the company will have to follow the process as prescribed under sub-section 1 for such conversion. If the company passes the resolution under sub-section 3, at the time of conversion, then it might result in circumvention of section 62(1).
If resolution is not passed, then the company must follow the process under sub-section 1, more specifically that under clause (c) of sub-section 1 since, the subscriber to the shares is already identified. In such a situation, the company is required to obtain valuation report before converting loan into equity and follow other process as specified in sections 62 and 42 of the Act.
Conclusion.
By looking at these provisions it is clear that, only undertaking all the procedural compliances is not enough. Following the correct sequence for these compliances is also necessary. Incorrect sequence in compliance of one sub-section may lead to non-compliance of other sub-sections in addition to that original sub-section itself. Hence the company should be cautious about the sequence of compliances.
1(3) Nothing in this section shall apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company:
Provided that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting.
This article is written by Rutuja Umadikar
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