Conversion of loans into shares of a Company are a common practice in the market as many companies that had borrowed loans from its Directors, financial Institutions or from anybody corporate is under the obligation to pay such debt within the time prescribed as per the loan agreement or mutual terms, as may be decided between the Company and lender.
However, many times Companies end up facing financial difficulties in day to day working of the Company and hence are unable to repay its debt obligations to its lenders. Thus, Section 62(3) of the Companies Act, 2013 enables such loan to be converted into shares of that Company. Accordingly, in this article, we shall study about various aspects relating to conversion of loan into shares.
REGULATORY LAW: Section 62(3) of the Companies Act, 2013
PROCEDURE OF CONVERSION OF LOAN INTO EQUITY
Step 1: Sending notice and agenda items to the Directors to hold board meeting as per Secretarial Standard-1.
Step 2: – Holding Board Meeting to decide and for sending notice for convening general meeting.
- Pass a board resolution in meeting for acceptance of such loan that can be converted into shares.
- Issue notice for general meeting attaching explanatory statement thereto and in compliance to Secretarial Standards-2.
Step 3: – Holding general meeting
- Passing Special Resolution approving such terms and condition as mentioned in the loan agreement.
- File Eform MGT-14 within 30 days of passing special resolution.
Step 4: – Acceptance of loan and execution of loan agreement*.
Step 5: – Conversion of loan into shares
- Convene Board meeting approving conversion of loan into shares.
- Pass Board Resolution for allotment of shares to lender.
- File Eform PAS-3 within 30 days of passing of resolution of allotment by the board.
*Execution of loan agreement is completely optional, however preferable.
FREQUENTLY ASKED QUESTIONS (FAQs)
Q.1 Whether special resolution can be passed after acceptance of loan?
Ans: No, the basic intention of the law is that the right of existing shareholders should not be hindered and moreover, the Act specifically states that the special resolution should be passed before accepting any such loan that can be converted into shares later at any point of time.
Q.2 Whether on conversion of loan into shares, preference shares can also be issued or is that only equity shares need to be issued?
Ans: The Act states the word “shares” and not any particular category of shares is mentioned; accordingly, we can conclude that preference as well as equity shares both can be issued.
Q.3 Once the Company have passed special resolution for acceptance of loan into shares, then will it have to be compulsorily be converted into shares?
Ans: No. In case, the loan agreement has been executed then the procedural legal things will move accordingly but in case the loan agreement has not been executed, then there is no mandatory requirement on the part of the Company as well on lender to convert the loan amount into shares as per their mutual understanding.
Q.4 Is there any time period within which the Company has to convert the loan into equity shares?
Ans: No. Again, in case the loan agreement has been executed, then the conversion or repayment shall be in accordance to the agreement only but in the event the loan agreement has not been executed, things can be mutually closed by the Company and the lender.