The Companies Act, 2013 provides the provision for conversion of debts owned by a Company into shares of the Company.
Regulatory Law: Section 62 of The Companies Act, 2013
This section enables loan borrowed by a Company to be converted into shares of that Company.
The relevant provisions of Section 62 of the Act are reproduced herein.
Section 62: –
(1) ———-
(2) ———-
(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 (GM).
Interpretation of section 62(3) of the Act: –
This sub-section has provided two conditions which are as follows;
1st – There shall be an option attached to issuance of debentures or raising of loan that such debenture or loan would be converted into shares in the company and
2nd- Such option of conversion shall be approved by passing of Special Resolution (SR) in General Meeting before issuance of debenture or raising of loan.
PROCESS FOR RAISING OF LOAN WITH AN OPTION TO CONVERT IT INTO SHARES OF THE COMPANY:
Step 1. Convene a Meeting of Board of Directors as per Chapter XII of Act and Secretarial Standard-1
- to consider and approve issuing of Debentures or raising of Loan with an option to convert it into shares of the Company in future;
- to fix the day, date, time and venue of the General Meeting and to approve the draft notice convening the General Meeting along with explanatory statement annexed to the notice as per requirement of the Section 102 of the Companies Act, 2013.
Step 2. Convene a General Meeting as per Chapter VII and Secretarial Standard-2
- to pass Special Resolution for approval of option as attached to the terms of issuance of debentures or raising of loan.
Step-3. As per Section 117 of the Act, file Form MGT-14 within 30 days of the passing of SR.
Step-4 At the time of conversion of loan into shares
- Convene a Board Meeting
- Pass Board resolution (BR) for: –
a) Approval of Conversion of loan into shares;
b) Allotment of shares to lender.
- File form PAS-3 within 30 days of passing of BR;
- Issue share certificate as per section 56 and 46 of the Act,
- Pay stamp duty on such shares within 30 days of issuance of shares certificate as per Indian Stamp Act.
P.s. – Before allotment of shares, first check whether such allotment is within the limit of authorized share capital of the Company. If not, then-
a) Pursuant to Section 13 of the Act read with Section 61, increase authorized share capital of the Company by passing of Ordinary Resolution (OR) and
b) As per Section 64 of the Act, file form SH-7 within 30 days of passing of resolution.
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Disclaimer: Please note that information contained herein is author’s personal view. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation and provisions applicable at that point of time.
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