Introduction
In today’s dynamic business environment, companies often look for innovative strategies to sustain and strengthen their financial structure. Loan being the obligation of the company to be repaid, can be converted into equity shares, which will not only eradicate the obligation but also will fundamentally improve the financial structure of the company’s balance sheet.
There are many such ways to improve the financial strength of the company, Today in this article we will discuss and focus on one such way i.e. Conversion of Loan into Equity
Let us further discuss the intricacies as mentioned above:
Conversion of Loans to Equities:
This approach can offer multiple benefits including improved balance sheets, reduction in debt, and enhanced investor confidence This is the most simple and effortless way to improve the financial structure of the company, wherein the following are the steps:
1. As a first step, we had to analyze whether the company had executed any loan agreement wherein terms of the Loan Agreement had a condition to convert the loan into equity, if there is no specific loan agreement between both the companies, henceforth, first we have to reconstitute/restructure a loan agreement and make the point of loan to equity conversion.
2. This is governed under section 62(3) of Companies Act, 2013 wherein special resolution have to passed at the General Meeting of the company, e-form MGT-14 have to be filled within 30days from the date of passing of special resolution stating the execution of loan agreement.
3. Henceforth, after filing e-form MGT-14, the company within 30 days has to file e-form PAS-3 wherein the loan amount will be reconstituted as the equity share capital of the company and the company’s paid up capital will be increased with such loan amount.
Income Tax Implication on Conversion:
Conversion of loans into equity shares may have certain tax implications under Section 56(2)(viib) of the Income Tax Act, wherein under Section 56(2)(viib) of the Act provides that when the shares are issued at premium by closely held company for a consideration which exceeds the fair market value (‘FMV’) of the shares, the excess consideration shall be taxed as income from other sources in the hands of the company issuing the shares.
Conclusion
Henceforth, there are many ways to strengthen the financial structure of the company and to convert loans, out of which the most simplified and the best possible way is to convert loan to equity.
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Disclaimer: The entire contents of this document have been prepared based on 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 piece of professional advice and is subject to change without notice. I assume no responsibility for the consequences of the use of such information.
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