Short Summary:
In this flash editorial author shall through some light on the provisions of Conversion of Loan into Equity Share Capital of the Company as per provisions of Companies Act, 2013 .
The provisions for conversion of loan into equity have been significantly amended under Companies Act, 2013 in comparison to Companies Act, 1956. The provision under this Act is stricter then earlier Act. The author shall try to clear the provision of conversion of loan into equity on the basis of Judgement of Hon’ble NCLT.
Legal Provision:
Companies Act, 2013- Section 62(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.
Companies Act, 1956- Section 81(3) Nothing in this section shall apply-
(a) to a Private Company; or
(b) to the increase of the subscribed capital of a Public Company caused by the exercise of an option attached to debentures issued or loans raised by the company-
(i) to convert such debentures or loans into shares in the company, or
Comparison of provisions of Companies Act, 2013 Vs. Companies Act, 1956
As per above mentioned provisiosn of Section 81 of Companies Act, 1956 ‘Section 81
- not applicable on private limited Company at all and
- shall not applicable on public Limited Company in respect of Conversion of Debenture or loan into Share of the Company’.
Note: However, there was no need to obtain approval of Shareholders in General Meeting by passing of Special Resolution for conversion of loan or debentures into equity.
As per above mentioned provisiosn of Section 62 of Companies Act, 2013: Condition for conversion of Loan into Equity:-
i. Term of conversion to be attached to issue letter of Debenture or Loan
ii. Approval of shareholders by passing of special resolution in general meeting obtained at the time of issue of debenture or loan (i.e. prior approval in GM by SR)
iii. Filing of MGT-14 within 30 days of passing of Special Resolution (Section 117)
PROCESS OF CONVERSION OF LOAN INTO EQUITY
W.e.f. 1st April, 2014 if a Company wants to convert its Loan or Debentures into equity share capital then it’s have to follow the below mentioned process:
STAGE – I: Steps Before Issue of Debenture or Acceptance of Loan
STEP- I- Holding of [1]Board Meeting
I. To pass an resolution for Acceptance of Loan or issue of [2]debenture
II. To pass board Resolution for conversion of such Loan / Debenture into Equity share Capital of the Company
III. To issue Notice for holding of [3]Extra Ordinary General Meeting of Shareholders.
STEP- II- Holding of Extra Ordinary General Meeting:
IV. Company shall pass Special resolution for conversion of such loan/ Debenture into Equity share capital of Company in Future.
V. File e-form MGT-14 within 30 days of passing of Special Resolution with ROC.
STEP- III- Enter into Agreement:
VI. Company shall enter into an agreement of Terms of Loan or Debenture.
VII. Such Agreement should contain the term of conversion of such Loan or Debenture into Equity share capital of Company in Future.
STAGE – II: Steps at the time of conversion of Debenture / Loan into share capital:
STEP- IV- Holding of Board Meeting
VIII. Pass Board Resolution for Allotment of Equity Shares
IX. Preparation of List of Allottees
X. Filing of e-form PAS-3 for allotment of Shares within 30 days of passing of Board Resolution.
QUICK QUERY
There are many queries arise on the above mentioned issue. Here we will discuss the most common query for conversion of loan into equity.
I. If a Company has accepted loan before 1st April, 2014 (i. e under Companies Act, 1956) and wants to convert such loan into equity shares at present. Whether it is allowed?
a. As per the provision under Companies Act, 1956 there was no requirement to pass prior Special resolution for conversion.
b. As per provision of Companies Act, 2013 it is mandatory that company had passed special resolution at the time of acceptance of loan / debenture.
Therefore, if a Company wants to convert the loan accepted in Companies Act, 1956 and no Special resolution passed at that time for conversion of such loan in future then Company can’t convert such loan due to Section 62(3).
Note:
Therefore one can opine that Loan taken under Companies Act, 1956 without passing of Special Resolution can’t convert into equity share capital u/s 62(3) of Companies Act, 2013.
However, it is mandatory to pass the special resolution at the time of acceptance of Loan or issue of debenture with the term of conversion into equity share capital in future.
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION.
[1] Follow the process of Section 173 and Secretarial Standard – 1 for holding of Board Meeting.
[2] Company shall also follow the provision of Section 71 for Issue of Debenture
[3] Follow the process of Section 100,101 and Secretarial Standard II for holding of Extra Ordinary General Meeting
(Author can be reached at csdiveshgoyal@gmail.com )
Author Bio
At the time of conversion of loan to shares, Can company issue preference shares u/s 42 instead of Equity shares u/s 62(3) ???
If loan was taken when it was a partnership firm and after getting converted into company it want to convert its loan into equity. What can be done in this situation.
my query is that a company B hold the shares of Company A and company B took loan from third party on May 2018 now in respect of settlement of that loan company B wants to give shares of Company A……is it possible???
Can u tell me the citation of the NCLT judgement?
Dear Sir,
Is it mandatory to execute the contract in case of conversion of loan into equity.
Section 81 Further issue of share capital:
The existing requirement of section 81 of the 1956 Act in regard to further issue of capital would no longer be restricted to public companies and would be applicable to private companies also, since sub-section 3 of section 81 of the 1956 Act has not been acknowledged in the 2013 Act.
Section 81 of the 1956 Act has been repealed to the extent of its overlap with the notified provisions of Section 62(1) to (3) of the 2013Act, w.e.f. 01-04-2014. Since Section 62(4) to (6) of the 2013 Act are yet to be notified, the corresponding section 81(3) provision 81(4) and section 94A(3) are still in force.
The provisions for conversion of loan into equity have been significantly amended under Companies Act, 2013 in comparison to Companies Act, 1956. By plane reading the ‘Section 81(3)(a) or (b) not applicable on Private Company in respect of Conversion of Debenture or loan into Share of the Company’, but Section 81(4) of 1956 Act applies to private companies unconditionally ‘Notwithstanding Clause to subsection (3)(a) section 81 inter alia for the reason stated below:
(i) Sub-section (4), (5), (6) and (7) of section 81 were added by section 5 of the Companies (Amendment) Act, 1963 (53 of 1963). It is obvious therefrom that section 81(3)(a) which was in the status before the introduction of sub-section (4).
(ii) It is well known that “if two sections of the same statute are repugnant, the rule is that the last must prevail. Subsection (4),
(iii) “Section 81(3) Nothing in this section shall apply – (a) private company; or” (b) to the increase of the subscribed capital of a public company caused in the circumstances specified in the said clause.
Sub-section (4) of Section 81 deals with an entirely different subject. It is a well-known principle in interpretation of statutes that one way in which repugnancy can be avoided is by regarding two apparently conflicting provisions as dealing with distinct matters or situations.
(iiii) The opening words of sub-section (4) section 81, viz., ‘notwithstanding anything contained in forgoing provisions of this section refer to sub-sections (1), (2) and (3) of section 81 and as such sub section (4) section 81 prevails over sub-section (3)(a) section 81 and in premises, an order under section 81(4) can be made by central govt even in respect of private company.
Dear Sir,
please provide me draft of special resolution of acceptance of laon and convert into equity in future
Can the valuation of shares be done at the time of conversion of loan into equity?? Or it is required to do valuation of shares when approval from shareholders will be taken??
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