PROCEDURE FOR CONVERSION OF LOAN INTO EQUITY
The company may opt for the conversion of its loan into equity share as per the loan agreement. Where there is an obligation on part of the company to pay its debt.
Following are some advantages for conversion of loan into equity: –
- No cash exchange occurs in the debt-to-equity swap.
- Improve a company’s balance sheet by reducing its debts and increasing its shareholder funds.
With a debt-to-equity swap, the lender converts a loan amount or a loan amount represented by outstanding bonds into equity shares, thus converting debt to equity. No actual cash is exchanged in the debt-to-equity swap. Equity is money that is invested in a company by owners who are called shareholders.
RELEVANT SECTION- 62 (3) OF THE COMPANIES ACT, 2013
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.
Therefore, for conversion of loan into equity it must be noted that the company accepted has accepted the loan on such terms and condition that such loan will be converted into equity on future.
For this purpose, special resolution has been passed at the time of acceptance of such loan.
PROCEDURE FOR CONVERSION OF LOAN INTO EQUITY
- Hold a bord meeting—a company shall convene a board meeting by giving 7 days prior notice. For following agenda to be approved-
- Resolution for acceptance of loan
- Resolution for conversion of loan into Equity.
- Issuance of notice for Convening Extra Ordinary General Meeting.
Hold Extra Ordinary General Meeting
After giving 21 clear days’ notice or shorter notice as case may be, convene extra ordinary general meeting to approve the conversion of loan into equity.
- Filling of e- Form MGT-14 within 30 days of passing of special resolution.
- The company shall enter into a loan agreement with lender where the terms and condition for conversion of loan into equity is mentioned.
- Hold a second board meeting by giving 7 days’ notice for passing resolution for allotment on conversion of loan into equity.
- Filling of e-Form PAS-3 within 30 days of passing of the resolution.
FOLLOWING ATTACHMENTS SHOULD BE ATTACHED IN THE ABOVE-MENTIONED FORMS
- MGT-14
- Notice of Extra ordinary general meeting along explanatory statement.
- Certified true copy of the resolution passed in Extra-ordinary general meeting.
- Loan agreement (Optional)
- PAS-3
- Board resolution for allotment of equity for conversion of loan into equity.
- List Allotees.
Author Bio
not practical. Who would have mentioned this at the time of taking loan? (only directors can give loan)
If company is facing difficulty or to improve balance sheet, will think about this option.
Since the clause of before taking loan is not met, company will remain burdened with loan despite directors who have given loan have agreed to take equity from a stressed company.