Conversion of Loan To Equity of a Company [Section 62(3)]

If the company is required to repay its loan as agreed in the loan agreement, it may choose to convert the loan to equity. Sometimes companies find themselves unable to pay their debt obligations and so they convert the loan into equity. This conversion allows company to raise capital without additional investments.

COMPANY SECTION 62(3) STATES ABOUT CONVERSION OF LOAN INTO EQUITY

Section 62(3) shall not apply to an increase in subscribed capital of a corporation caused by the exercise or term attached to a loan or debentures issued by the company in order to convert these debentures into shares. So long as the terms of such debentures and loans containing such an option are approved prior to the issue of such debt or the raising of loan through a special resolution of the company's general meeting.

For conversion of loan to equity, it is important to note that the company accepted the loan under such terms that the loan can be converted into share capital at any time in the future. The company has taken a special resolution to this effect at the time it accepted the loan.

PROCEDURE TO CONVERT LOAN INTO EQUITY OF COMPANY-

STEP 1. AS PER SECRETARIAL STRANDARD-1

To hold a board meeting, prepare notice and agenda items for the Directors.

STEP2: Organize a BOARD MEETING TO MAKE DISCISIONS AND SENDOUT NOTICES FOR A GENERAL MEETING

A company shall call a meeting of its board by giving seven days notice. The agenda must be approved for the conversion of loan into equity, and for notification of an Extra-ordinary General Meeting.

STEP 3 HOLDING EXTRAORDINARY GENERAL MEETING

Convene an extraordinary general meeting to pass resolution on loan conversion into equity after 21 days notice, or shorter notice if necessary.

STEP 4 - ACCEPTANCE OF LOAN AND COMPLETION LOAN AGREEMENT

The terms and conditions of the loan agreement between the Company and lender must be clearly stated. This should be signed on stamp paper.

STEP5: FILING OF FORMAT MGT-14 - 

The special resolution passed must be filed with Registrar within thirty days.

Attach the following documents to your MGT-14 form

1. Notice of EOGM

2. CTC EOGM Resolution

STEP 6 - EXECUTION LOAN AGREEMENT STEP5 : HOLDING A THIRD BOARD MEETING : 

A company shall call a board meeting and give 7 days notice to resolve the issue of allotment shares for equity conversion.

STEP7: FILING OF FORMAT PAS-3 - 

The board resolution to allot shares must be passed by the board. Within 30 days, the Registrar must receive e-form PAS-3. The company has the option to convert such loan into shares capital, which will reduce its liabilities.

Attach the following documents to your PAS-3 form

1. CTC BM Resolution for allotment

2. List of Allotee

3. Stamp paper loan agreement

4. Report on Valuation

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