Conversion of unsecured loan into equity in a public company

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Querist : Anonymous

Querist : Anonymous (Querist)

29 August 2013 Dear Experts,

kindly let me know the complete procedure for conversion of unsecured loan (taken from Director cum shareholder) in Equity share Capital in a public Company.Also provide the draft resolution for the same.

Please also clarify whether it will be treated allotment for cash or other than cash.

whether any agreement is required for that conversion or only resolution is sufficient.

Ajay Mishra

Ajay Mishra (Expert)
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29 August 2013 Hi

As per Section 41 of the Companies Act, 1956, a person can not be a member unless he has given a written consent for becoming member.

So, a director who has given unsecured loan to the company will give written consent to become a member of the company and for this he will made an agreement (Share subscription/purchase Agreement) with company and in this agreement he will give intention to convert the loan amount in to equity shares at fair value.

The company will call a Board meeting before executing this agreement and discussed about unsecured loan and availability of share capital for further issue or proposed shareholding pattern, intention of director to become a member of company.

Then the company call another board meeting to execute share purchase agreement with director and calling of general meeting for issue of shares to the director in cash at fair value as derived in accordance with Unlisted Public Companies (Preferential Allotment) Rules, 2003 and the number of shares to be issued in accordance with provision of section 81(1A) of the Companies Act, 1956.
At general meeting special resolution will be passed under section 81(1A) with Unlisted Public Companies (Preferential Allotment) Rules, 2003. The explanatory statement will be made in accordance Rule 6 of such Rules.
The Following Forms will be filed with ROC:
Form-23, within 30 days from the date of passing of special resolution, and
Form-2 for allotment of shares against unsecured loan with in 30- days from the date of allotment.

Querist : Anonymous

Querist : Anonymous (Querist)

30 August 2013 Thanks Sir...

Loan provider is already a member in the Company and he is also a Director.Whether agreement is required for conversion the loan into Equity or Request letter from the person is sufficient.

whether form 3 is also required to file for this conversion?

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Querist : Anonymous

Querist : Anonymous (Querist)

30 August 2013 Please provide the draft resolution for the same...