Conversion of unsecured loan to share capital

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.

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.

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 :

1. Price of such shares must be determined by the valuation report of a registered valuer(CA).
2. Shareholders approval by a special resolution.

Filing of Form MGT 14 (For special resolution) & Form PAS 3 (Allotment of shares) will be required.

According to my opinion, you can also convert unsecured loan in to equity u/s 42  of CA 2013.