Companies Act, 2013--Conversion of Loan

Conversion of Loan into Shares--Legal Framework

CA. Deepak Harwani

In the present article the learned author discusses about the compliance procedure outlined for conversion of loan into equity shares as per Companies Act, 2013, including procedural requirements prior to acceptance of Loan and at the time of actual conversion of loan into equity shares at a future and statutory filing to be made.

1. Introduction

Section 62(3) allows a company to increase its subscribed share capital by converting loans or debentures into equity shares, without following the usual procedure for a rights issue or employee stock option plan. However, this is allowed only if:

1. The option to convert the loan or debenture into shares is included in the original terms of the instrument; and

2. These terms were approved by shareholders through a special resolution passed in a general meeting before the issue of such debentures or raising of the loan.

In essence, conversion into equity is allowed as long as it was part of the original agreement and shareholders approved it in advance.