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Conversion of unsecured loan to share capital

Sudarshan (Chartered Accountant) (59 Points)

02 March 2015

Dear Member,

A private company had received unsecured loan from other companies around six month ago. That time company does not made any aggrement and had not passed special resolution.. Now company want to allot shares to those lender in lieu of their loans u/s 62(3) Compnies Act,2013. Pls tell such conversion is possible or not? As company had not passed special resolution and made aggreement with lender.

Thanks in advance.

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4 Replies

CS Divesh Goyal (Practicing Compnay Secretary) (50530 Points)
Replied 02 March 2015

Dear sudarshan, without sr and agreement, there is not possible to allot shares. From whom u took loan. Provate company can take pnly from director.

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Sudarshan (Chartered Accountant) (59 Points)
Replied 04 March 2015

Dear Divesh Goyal,

Thanks for reply.But a Company can accept loans from other body corporate where director of lending is not director of borrower company.

CS Ankur Srivastava (Company Secretary & Compliance Officer) (17853 Points)
Replied 05 March 2015

Yes.

Further, the Company need to pass special resolution to take permission form the shareholders for issuance of shares on private placement basis or under preferencial allotment under section 42 or 62.

Laxman Navale (Practicing Company Secretary) (31 Points)
Replied 09 March 2015

No u/s 62(3) but Yes u/s 62(1) (c) or u/s 42 .

Section 62(3) of CA 2013 is as below:

(3) Nothing in this section shall apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company:

Provided that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting.

It is clearly stated in above sub-section that provided that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting.

Hence according to my opinion, conversion is not possible under section 62(3) of CA 2013.

But it is possible to convert unsecured loan in to equity under section 62(1)(c) of CA 2013 as this sub-section says that to any person if it is authorised by a special resolution whether or not those persons include the persons i.e. existing shareholders or employees (ESO) and for cash or for consideration other than cash. But requirements are :