Conversion of Loan into Equity Share Capital of the Company

Conversion of loan into equity share capital is most credible method to raise capital without immediate investments. To carry out effortless and smooth business, at times, loan is converted into share capital.

The new provisions of Companies Act, 2013 says that the conversion of loan into equity shares and the same are contained in section 62(3) of the said Act. The new provisions are effective from 1st April 2014. Current article highlights the provisions and procedure for conversion of loan into equity shares.

According to provisions of section 62(3) of the Companies Act, the company has taken loan on the terms that the loan will be converted into share capital & such option has been approved by special resolution before taking of loan then in such case subscribed capital can be enhanced.

It must be noted that it is at most important to pass the special resolution at the time of acceptance of the loan without passing of special resolution; loan cannot be converted into share capital.

Benefits of  conversion of loan into equity share capital of the Company:

  1. No cash exchange occurs in the debt-to-equity swap.
  2. Increasing cash flow by decreasing liabilities.
  3. Avoidance to paucity of financial resources.

What are Provisions of Companies Act, 2013 for Conversion of Loan into Equity Share Capital?

There is no need to fulfil any requirements as per the Companies Act, 1956. You need to only passed Special Resolution in general meeting for approval of Shareholders.

The procedure of Conversion of Loan into Equity Shares

According to the  section 62(3) of companies act 2013 resolution, there is a procedure for conversion of loan into preference shares:

Approve terms of the loan by passing a special resolution before taking of loan & file special resolution in E-Form MGT 14 within 30 days.

Convert loan into shares by passing a resolution in Board Meeting & File E-form PAS3 for allotment of shares Companies Act 2013 within 30 days

Also, issue share certificate by passing Board resolution & file e-form MGT 14 within 30 days for the procedure for issue of shares by the private limited company.

As per the provisions of Companies Act, 2013 you cannot take a loan from shareholder to private company or public company. However, a Director and his relatives can give a loan.

Obtain approval by shareholders in the General Meeting for the option of conversion of loan into equity as mentioned in the agreement: 

Hold an EGM of members by giving notice not less than 21 clear days;

Pass a special resolution in the Extra Ordinary General Meeting for approval of such option of conversion;

File E-form MGT-14 within 30 days of passing the special resolution with the ROC;

Conversion of Loan:

Pass a Board Resolution for allotment of equity shares.

Prepare a list of allottees to whom the equity shares in lieu of such convertible loan have to be issued.

File e-form PAS-3 with the ROC within 30 days of passing the Resolution by the Board of Directors of the Company.

Conversion of Loan into Equity share Capital usually helps a company in increasing cash flow by decreasing liabilities. This move ensures that the company does not face an insufficiency of financial resources. This process is beneficial especially for small and medium-sized companies.

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