Conversion of Loan into Share Capital of a company is a common practice in the market because many companies that have borrowed money from their directors, financial institutions, or any other entity are obligated to repay the debt within the time frame set forth in the loan agreement or on mutual terms agreed upon by the company and the lender. Such loan can be converted into share capital. This article highlights the provisions and procedure of acceptance of loan and conversion of loan into share capital.
Section 62(3) of the Companies Act, 2013 deals with the conversion of loan into share capital. In order to convert loan into share capital, the Company take loan with the condition to convert such loan into shares in future.
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Compliance before acceptance of loan-
Step 1: Hold Board Meeting
– Pass resolution for acceptance of loan and approve terms of loan upon the conversion of such loan into the share capital
– To fix the day, date and venue of Extraordinary General Meeting (EGM) and approve notice of EGM
Step 2: Hold Extraordinary General Meeting:
Hold EGM for approving terms of loan by passing a special resolution before receipt of amount of loan.
Step 3: Filing Resolution passed at the General meeting:
File MGT-14 with ROC within 30 days of passing special Resolution at the General Meeting.
Step 4: Enter into Agreement:
The Company shall enter into an agreement containing terms of converting loan into share capital of the Company.
Part A:- Pursuant to section u/s 62(1) (c) & u/s 42- Preferential allotment/ Private Placement
Step 1: Dispatch notice of Board Meeting (At least 7 Days prior to Board Meeting) to pass following resolution:
i. Hold Board Meeting and pass resolution for conversion of loan into share capital subject to shareholder’s approval at the General Meeting.
ii. To fix the day, date and venue of Extra Ordinary General Meeting (EGM) and approve notice of EGM
Step 2: Hold Extraordinary General Meeting:
Hold EGM and pass special resolution for approving terms and conditions for the proposed conversion of loan into share capital.
Step 3: Filing Resolution passed at the General meeting:
File MGT-14 with ROC within 30 days of passing special Resolution at the General Meeting.
Step 4: Hold Board Meeting:
Hold the Board meeting to pass following resolution:
i. To allot the Shares.
ii. To authorize 2 Directors or 1 Director and CS, if any for the issue of share certificates.
Step 5: Filling Form PAS-3:
File Form PAS‐3 with ROC within 30 days from the date of allotment.
Attachments for Form PAS-3:
-List of allottees.
-Copy of Board or shareholders’ resolution.
-Valuation Report from the valuer.
-Copy of contract where securities have been allotted for consideration other than cash or attachment wherein the details of contract reduced in writing by the company.
Step 6: To issue Share Certificate:
Pursuant to section 56(4)(b) Issue Share Certificates to the security holders within two months from the date of Allotment.
Step 7: Payment of Stamp Duty:
Pay stamp duty on the share certificates on the value of shares.
Step 1: Dispatch notice of Board Meeting (At least 7 Days prior to Board Meeting) and hold Board Meeting-
Hold Board Meeting and pass resolution for conversion of loan into Share Capital.
Step 2: File Form MGT-14 (Filing Resolution passed at the Board meeting)
File MGT-14 with ROC within 30 days of passing of board resolution for issue of shares [section 117(3)(g)].
Step 3: Filling Form PAS-3:
File Form PAS‐3 with ROC within 30 days from the date of allotment.
Attachments for Form PAS-3:
-
- List of allottees.
- Copy of Board resolution.
Step 4: To issue Share Certificate:
Pursuant to section 56(4)(b) Issue Share Certificates to the Security holders within two months from the date of Allotment
Step 5: Payment of Stamp Duty:
Pay stamp duty on the share certificates on the value of shares.
Important Notes:
1. To check if the conversion requires the change in authorized Share capital, if yes then the alteration of Memorandum process to be done.
2. Authority for making issue on Preferential allotment/Private placement basis / Right issue of Shares should be in the Articles of Association of the Company.
3. To check whether the terms of Loan grant permission to convert the Loan into Share Capital.
4. The explanatory statement under Section 102 for passing special resolution at the general meeting should state the following-
Applicable if Preferential allotment/ Private Placement :
(i) the objects of the issue;
(ii) the total number of shares or other securities to be issued;
(iii) the price or price band at/within which the allotment is proposed;
(iv) basis on which the price has been arrived at along with report of the registered valuer;
(v) relevant date with reference to which the price has been arrived at;
(vi) the class or classes of persons to whom the allotment is proposed to be made;
(vii) intention of promoters, directors or key managerial personnel to subscribe to the offer;
(viii) the proposed time within which the allotment shall be completed;
(ix) the names of the proposed allottees and the percentage of post preferential offer capital that may be held by them;
(x) the change in control, if any, in the company that would occur consequent to the preferential offer;
(xi) the number of persons to whom allotment on preferential basis have already Been made during the year, in terms of number of securities as well as price;
(xii) the justification for the allotment proposed to be made for consideration other than cash together with valuation report of the registered valuer.
(xiii) The pre issue and post issue shareholding pattern of the company in the format prescribed in Rule 13 of Chapter IV.
Quick Question:
Q- If the Company has raised loan under Companies Act, 1956 and want to convert such loan into share capital, can company do this?
Ans- Yes, at present the Company can convert the loan accepted before 1st April 2014 (As per Companies Act, 1956) according to Section 62 of Companies Act, 2013 if the Company passed the special resolution at the time of acceptance of loan.
Author Bio
If company did not pass a Special Resolution at the time of Accepting the Loan (the 2013 Act is applicable). And now can that company convert Loans into shares ???
Any possibility??