One of the Private Company obtained unsecured loans from its directors before 1 year. Now they want to convert it into equity. One Indian director and other is a foreign director. Please let me know, can we covert it into equity as per Companies Act, 2013. If yes please share the supproting or documentation.
20 July 2024
Yes, under the Companies Act, 2013, a private company can convert unsecured loans from its directors into equity shares subject to certain conditions and procedures. Here’s how it can be done:
### Conditions for Conversion:
1. **Approval in Articles of Association (AOA):** - The Articles of Association of the company must authorize the conversion of loans into equity shares. If not already authorized, the AOA may need to be amended through a special resolution of shareholders.
2. **Board Resolution:** - The board of directors must pass a resolution approving the conversion of the unsecured loans into equity shares.
3. **Shareholder Approval:** - Shareholder approval is required through a special resolution passed at a general meeting of the company. This resolution must specify: - The terms of conversion (such as the number of equity shares to be issued per rupee of loan converted). - Any other relevant details regarding the conversion.
4. **Valuation Report:** - Obtain a valuation report from a registered valuer determining the value of equity shares proposed to be issued against the unsecured loans. This report is required if the company does not have an internal or external auditor.
5. **Foreign Exchange Regulations (if applicable):** - Ensure compliance with Foreign Exchange Management Act (FEMA) regulations if the loan is from a foreign director.
### Procedure for Conversion:
1. **Board Meeting:** - Convene a board meeting to pass a resolution approving the conversion and authorizing the convening of a general meeting of shareholders.
2. **General Meeting:** - Hold a general meeting and pass a special resolution approving the conversion of the loans into equity shares.
3. **Filing with Registrar of Companies (ROC):** - File Form MGT-14 with the ROC within 30 days of passing the special resolution, along with: - Certified true copies of the special resolution. - Notice of the general meeting. - Explanatory statement to the resolution.
4. **Issue of Equity Shares:** - Issue equity shares to the directors in proportion to the amount of unsecured loans they have provided, based on the terms approved by the shareholders.
5. **Allotment of Shares:** - Allot the shares within 60 days from the date of receipt of the consideration for such shares (in this case, the conversion of unsecured loans).
6. **Update in Registers:** - Update the registers of members and directors accordingly.
### Documentation Required:
- **Board Resolution:** Approving the conversion and authorizing the convening of the general meeting. - **Special Resolution:** Passed at the general meeting approving the terms and conditions of conversion. - **Valuation Report:** From a registered valuer determining the value of equity shares to be issued. - **Form MGT-14:** Filed with the ROC along with necessary attachments. - **Share Certificates:** Issued to the directors upon allotment of equity shares.
### Conclusion:
Ensure that all procedures and compliance requirements under the Companies Act, 2013 are strictly followed to convert the unsecured loans into equity shares. It's advisable to engage a professional such as a company secretary or legal advisor to oversee and facilitate the process to ensure compliance and proper documentation.
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