Conversion of loan into preference shares

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

19 June 2014 Company wants to convert unsecured loan taken from group company into 0%preference shares redemable after 10-15 years. Any income tax implication in this regard. Section 269 T etc is hit or not.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
Follow

20 July 2024 Converting an unsecured loan into preference shares, particularly with specific terms such as being 0% dividend and redeemable after 10-15 years, raises considerations under the Companies Act, 2013 and also has implications for income tax. Here’s a detailed explanation on the procedure and tax implications:

### Procedure to Convert Loan into Preference Shares:

1. **Board Resolution**:
- Convene a Board Meeting and pass a resolution approving the conversion of the unsecured loan into preference shares.
- The resolution should specify the terms of the preference shares, including the dividend rate (in this case, 0%), redemption period (10-15 years), and any other relevant conditions.

2. **Shareholders’ Approval**:
- Depending on the company’s Articles of Association (AOA) and the amount involved, shareholders’ approval may be required through a special resolution.
- Hold a General Meeting and pass the necessary resolutions to approve the conversion.

3. **Allotment and Issuance**:
- Allot the preference shares to the group company from which the unsecured loan was received.
- Prepare the Allotment Letter and issue Share Certificates for the preference shares.

4. **Filing with ROC**:
- File Form PAS-3 (Return of Allotment) with the Registrar of Companies (ROC) within 30 days of allotment of preference shares.
- Attach the Board Resolution, Shareholders’ Resolution (if applicable), Allotment Letter, and other required documents with Form PAS-3.

5. **Update Registers**:
- Update the Register of Members and other statutory registers maintained by the company.

6. **Compliance**:
- Ensure compliance with all provisions of the Companies Act, 2013 and other applicable laws.

### Income Tax Implications:

1. **Section 269T**:
- Section 269T of the Income Tax Act, 1961, deals with loans and deposits. It prohibits repayment of loans or deposits of Rs. 20,000 or more otherwise than by an account payee cheque or draft.
- Since the loan is being converted into preference shares rather than being repaid, Section 269T is not directly applicable in this scenario.

2. **Tax Treatment for the Company**:
- The conversion of an unsecured loan into preference shares is treated as a capital transaction.
- There are no immediate tax implications at the time of conversion unless there is a significant difference between the fair market value of the preference shares issued and the value of the loan converted. In such cases, transfer pricing provisions may apply.

3. **Tax Treatment for the Group Company (Lender)**:
- For the group company providing the loan, there could be implications under transfer pricing regulations if the terms of the preference shares (such as the 0% dividend rate) are not at arm’s length or if there are other tax considerations related to funding arrangements.

### Conclusion:

Converting an unsecured loan into preference shares involves following the procedures outlined under the Companies Act, 2013 and ensuring compliance with relevant tax regulations. It’s advisable to consult with a tax advisor or chartered accountant to assess specific tax implications based on the company’s circumstances and to ensure proper compliance with all regulatory requirements. This approach will help mitigate risks and ensure a smooth conversion process.