Process of Conversion of Loan into Equity


Conversion of Loan into Equity Share Capital–
“NCLT ORDER”
Short Summary:

In this flash editorial author shall through some light on the provisions of Conversion of Loan into Equity Share Capital of the Company as per provisiosn of Companies Act, 2013 and recent NCLT Judgement on the same.

The provisions for conversion of loan into equity have been significantly amended under Companies Act, 2013 in comparison to Companies Act, 1956. The provision under this Act is stricter then earlier Act. The author shall try to clear the provision of conversion of loan into equity on the basis of Judgement of Hon’ble NCLT.

This is article no. 321 of the series of editorials written by the author on corporate laws {Including Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.
Legal Provision:
Companies Act, 2013- Section 62(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.


Companies Act, 1956- Section 81(3) Nothing in this section shall apply-
(a) to a Private Company; or
(b) to the increase of the subscribed capital of a Public Company caused by the exercise of an option attached to debentures issued or loans raised by the company-
(i) to convert such debentures or loans into shares in the company, or

Comparison of provisions of Companies Act, 2013 Vs.
 Companies Act, 1956
As per above mentioned provisiosn of Section 81 of Companies Act, 1956 ‘Section 81
    ·         not applicable on private limited Company at all and
    ·         shall not applicable on public Limited Company in respect of Conversion of Debenture or loan         into Share of the Company’.

Note: However, there was no need to obtain approval of Shareholders in General Meeting by passing of Special Resolution for conversion of loan or debentures into equity.

As per above mentioned provisiosn of Section 62 of Companies Act, 2013: Condition for conversion of Loan into Equity:-
                       i.            Term of conversion to be attached to issue letter of Debenture or Loan
                     ii.            Approval of shareholders by passing of special resolution in general meeting obtained at                 the time of issue of debenture or loan (i.e. prior approval in GM by SR)
                    iii.            Filing of MGT-14 within 30 days of passing of Special Resolution (Section 117)

PROCESS OF CONVERSION OF LOAN INTO EQUITY
W.e.f. 1st April, 2014 if a Company wants to convert its Loan or Debentures into equity share capital then it’s have to follow the below mentioned process:

STAGE – I: Steps Before Issue of Debenture or Acceptance of Loan

STEP- I- Holding of [1]Board Meeting
I.            To pass an resolution for Acceptance of Loan or issue of [2]debenture
II.            To pass board Resolution for conversion of such Loan / Debenture into Equity share Capital of the Company
III.            To issue Notice for holding of [3]Extra Ordinary General Meeting of Shareholders.

STEP- II- Holding of Extra Ordinary General Meeting:
IV.            Company shall pass Special resolution for conversion of such loan/ Debenture into Equity share capital of Company in Future.
V.            File e-form MGT-14 within 30 days of passing of Special Resolution with ROC.

STEP- III- Enter into Agreement:
VI.          Company shall enter into an agreement of Terms of Loan or Debenture.
VII.       Such Agreement should contain the term of conversion of such Loan or Debenture into           Equity share capital of Company in Future.

STAGE – II: Steps at the time of conversion of Debenture / Loan into share capital:

STEP- IV- Holding of Board Meeting
VIII.   Pass Board Resolution for Allotment of Equity Shares
IX.      Preparation of List of Allottees
X.        Filing of e-form PAS-3 for allotment of Shares within 30 days of passing of Board Resolution.
QUICK QUERY
There are many queries arise on the above mentioned issue. Here we will discuss the most common query for conversion of loan into equity.
I.  If a Company has accepted loan before 1st April, 2014 (i. e under Companies Act, 1956) and wants   to convert such loan into equity shares at present. Whether it is allowed?

a.  As per the provision under Companies Act, 1956 there was no requirement to pass prior Special resolution for conversion.
b.   As per provision of Companies Act, 2013 it is mandatory that company had passed special resolution at the time of acceptance of loan / debenture.

Therefore, if a Company wants to convert the loan accepted in Companies Act, 1956 and no Special resolution passed at that time for conversion of such loan in future then Company can’t convert such loan due to Section 62(3).


NCLT Judgement:
‘Recently on 4th September, 2017 one judgement has been passed by the Hon’ble NCLT Kolkata bench, in Company Petition No. 208/KB/17.

In the above mentioned case
The Company has allotted shares by conversion of loan into equity (i.e. loan accepted under Companies Act, 1956)

Ø  The arguments of the learned counsel for the Appellants is that this Section could not have been applied and if at all Section 81 of the Old Act would be relevant, as according to him, when the loans were raised, at that time the New Act was not in force.

Ø  NCLT finds that:

Ø  When the New Act is in force and conversion of loan has to be done, the conversion would be permissible only as per the new provisions [i.e. section 62(3)].

Ø  In view of sub-Section (3) of Section 62 when the question of issue of further share capital is taken up, conversion of loan into share capital would be permissible provided there was special resolution passed by the company in General Meeting which granted option as a term attached to the loan raised by the Company permitting conversion of such loan into shares of the company

Note:
Therefore one can opine that Loan taken under Companies Act, 1956 without passing of Special Resolution can’t convert into equity share capital u/s 62(3) of Companies Act, 2013.

However, it is mandatory to pass the special resolution at the time of acceptance of Loan or issue of debenture with the term of conversion into equity share capital in future.

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION.




[1] Follow the process of Section 173 and Secretarial Standard – 1 for holding of Board Meeting.
[2] Company shall also follow the provision of Section 71 for Issue of Debenture
[3] Follow the process of Section 100,101 and Secretarial Standard II for holding of Extra Ordinary General Meeting

Comments

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  2. pl provide citation of the order for reference.

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    Replies
    1. THERE IS NO SUCH ORDER NUMBER PASSED ON SUCH DATE

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  8. http://www.nclat.nic.in/final_orders/Court_II/2018/company/23012018AT3602017.pdf There is an order by the Appelant Tribunal with regard to the same. Please find the link - - Extract of the judgement -
    15. The arguments of the learned counsel for the Appellants is that this Section could not have been applied and if at all Section 81 of the Old Act would be relevant, as according to him, when the loans were raised, at that time the New Act was not in force. We find that there is no substance in this argument. When the New Act is in force and conversion of loan has to be done, the conversion would be permissible only as per the new provisions. In view of sub-Section (3) of Section 62 when the question of issue of further
    share capital is taken up, conversion of loan into share capital would be permissible provided there was special resolution passed by the company in General Meeting which granted option as a term attached to the loan raised by the Company permitting conversion of such loan into shares of the company.

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