PROCEDURE FOR CONVERTING A LOAN INTO EQUITY 

Procedure for Converting a Loan into Equity

APPLICABLE SECTION : SECTION 62(3)

CONVERTING A LOAN INTO EQUITY of a company is a common practice because many companies that have borrowed money from their directors, financial institutions, or any other entity are obligated to repay the debt within the time frame set forth in the loan agreement or on mutual terms agreed upon by the company and the lender. However, many companies have financial challenges in their day-to-day operations and are unable to satisfy their debt commitments to their lenders. As a result, under Section 62(3) of the Companies Act of 2013, such a loan can be converted into shares in the company.

Step 1: As per Secretarial Standard-1, provide notice and agenda items to the Directors in order to hold a board meeting.

Step 2: Hold a Board Meeting to make decisions and send out notices for a general meeting.

Approve a loan that may be converted into shares by passing a board resolution in a meeting.

Issue a general meeting notice with an explanatory statement, in accordance with Secretarial Standards-2.

Step 3: Organize a general meeting.

  • Approval of a Special Resolution approving the loan agreement’s terms and conditions.
  • Within 30 days of passing a Resolution, file e-Form MGT-14.

Step 4: Acceptance of the loan and completion of the loan agreement

 

Step 5: Hold a Board Meeting for loan being converted into equity

  • Hold a meeting a Board meeting to approve the loan’s conversion to equity.
  • Pass a board resolution authorizing the lender to receive shares.

Step 6: Filing of Form PAS 3 

  • Within 30 days following the board’s allocation resolution, submit e-Form PAS-3 for allotment of share.

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