A Company may opt for conversion of loan to equity where there is an obligation on the part of the company to pay its debt as per the loan agreement within the time limit. At times companies are not in a position to satisfy its debt obligations, they exercise for conversion of such loan into equity. Through this conversion, company can raise its capital without any additional investments made by it.
RELEVANT SECTIONS OF THE COMPANIES ACT, 2013: Section 62(3) states about the provisions of conversion of loan into equity.
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.
Therefore, for conversion of loan into equity it must be noted that the company has accepted the loan on such terms and conditions that the loan will be converted into share capital anytime in future. For this purpose, special resolution has been passed by the company at the time of acceptance of such loan.
PROCEDURE FOR CONVERSION OF LOAN INTO EQUITY-
STEP 1: HOLDING OF BOARD MEETING: A Company shall convene a board meeting by giving 7 days’ notice where following agenda to be approved-
STEP 2:HOLDING OF EXTRA-ORDINARY GENERAL MEETING: After giving 21 days notice or shorter notice as the case may be, convene an extra-ordinary general meeting where resolution for conversion of loan into equity to be passed.
STEP 3: FILING OF FORM MGT-14– After passing of special resolution, e-form MGT-14 needs to be filed with the Registrar within 30 days of the passing of the resolution.
STEP 4: EXECUTION OF LOAN AGREEMENT: The company shall enter into loan agreement where the terms and conditions for conversion of loan into equity is to be mentioned.
STEP 5: HOLDING OF SECOND BOARD MEETING: A Company shall convene second board meeting by giving 7 days notice for resolution for allotment of shares on conversion of loan into equity is to be passed.
STEP 6: FILING OF FORM PAS-3– After passing of board resolution for allotment of shares, e-form PAS-3 needs to be filed with the Registrar within 30 days of passing of the resolution.
We can say that company can decrease its liabilities without any outflow of funds by the option of conversion of such loan into share capital.