Understanding Section 62(4) of Companies Act with Practical Example

Introduction

Do companies take loans? Of course ,yes , But do companies take loans from government as well? Probably, Yes!

However a question come  in your mind as to which loans should be considered as government loans while it can’t be exhaustively defined and the list may include: loans under Pradhan Mantri Mudra Yojna, Credit Guarantee Fund Scheme for micro and small enterprises, NABARD loans, NSIC loans etc. However, taking loans might seem a difficult task, but repaying them sometimes becomes a more difficult one mainly when the company doesn’t have enough resources to repay and as a result these situations may also take the company at the verge of distress.

Brief Legal Overview

The sub section (4) of section 62 of companies act 2013, also talks about conversion of loans, debentures raised from government into equity of the company  when it may be necessary in public interest however it doesn’t specifically mention conversion only when the company is in distress and covers a broad horizon encompassing many possibilities which may arise as there being specific mention of word “public interest”.

In This Article

To Give a bit understanding on  what this article is going to be then  I’ll share a small analysis of a case where  loan taken by a company was subsequently converted into the shares by the order of government, and the company is no other than one of India’s largest telecom operator Vi(Vodafone Idea), and there are also chances that  you might be reading this article using Vi’s Internet itself!

Analysis Of Section

The bare act reading of sub section goes like :

“Notwithstanding anything contained in sub-section (3), where any debentures have been issued, or loan has been obtained from any Government by a company, and if that Government considers it necessary in the public interest so to do, it may, by order, direct that such debentures or loans or any part thereof shall be converted into shares in the company on such terms and conditions as appear to the Government to be reasonable in the circumstances of the case even if terms of the issue of such debentures or the raising of such loans do not include a term for providing for an option for such conversion”.

• The key points of the provision can be discussed as:

1. It only covers loan and debentures and any part thereof (which means it covers any loan wholly/partly or interest wholly/partly  within its purview)
2. Loan debentures can be raised from “Any” government i.e. state and central or any other government.
3. The decision to convert lies with government, either Suo moto or on request of company
4. The decision can only be taken in public interest(thus encompassing a broad array within its purview).
5. “Shall be converted” conveys the mandatory compliance of order by company, not at the whims of company.
6. Terms and conditions shall be specified by government.
7. Conversion can be done even if there was no such mention in the original terms.

Analysis Of The Case

1. So, here In our example Vi received govt’s order(ministry of communication) for conversion of interest related to spectrum and AGR Dues on 3^rd Feb 2023, and relevant part of their stock exchange submission can be read as:-

“Pursuant to Regulation 30 of the SEBI LODR Regulations, it is hereby informed that Ministry of Communications, Government of India has, in line with the Reforms and Support Package for Telecom Sector communicated earlier and the conversion option exercised by the Company as provided for therein, passed an order today i.e. 3 February, 2023 under section 62(4) of the Companies Act, 2013, directing the Company to convert the NPV of the interest related to deferment of spectrum auction instalments and AGR Dues into equity shares to be issued to the Government of India”.

~ In simple words, the company had exercised an option for conversion under section 62(4) of companies act, 2013 in accordance with reforms and support package for telecom sector.

2. However, one thing to note is that the interest amount was never raised from govt. directly but it accrued over the period of time for non payment of dues. Thus one thing to note here is that the money need not be raised directly in form of loan, it can also be any other dues, interest on those dues which can be converted into equity shares.

3. In the above example the conversion was done under the reform package which the government had announced to provide a relief to telecom  sector.

Commentary

Thus, As a result of above debt conversion of over 16,100 crores, government became the largest shareholder of Vi with its shareholding going over 33%.

Also, the above conversion came as a sigh of relief for debt ridden telecom operator to compete with its rivals Jio, Airtel, to infuse more capital into the next phase of internet revolution viz. 5G infrastructure, maintaining the existing customer base among others.